Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Southern Co. (NYSE:SO)

Q3 2007 Earnings Call

Oct 25, 2007, 1:00 pm ET

Executives

Mr. David Ratcliffe - Chief Executive Officer

Mr. Tom Fanning - Chief Financial Officer

Analysts

Greg Gordon - Citigroup

Jonathan Arnold - Merrill Lynch

Andrew Levi - Brent Corp

Scott Ingstrom - Glenheim Capital Management

Adam Cohen- Credit Suisse

Danielle Styte – BellMonroe

Paul Ridzon - Keybanc Capital Markets

Rody Tolentino - Morgan Stanley

Felisa Gray - Dwight Asset Management

Dan Jenkins - Wisconsin Investment Board

Operator

Good afternoon, my name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the Southern Company Third Quarter 2007 Earnings Conference Call.

I would now like to turn the call over to David Ratcliffe, Chairman, President, and Chief Executive Officer of Southern Company, Mr. Ratcliffe.

David Ratcliffe

Thank you, Jennifer. Good afternoon and thank you for joining us. I’m pleased to be with you for our Third Quarter Earnings Call. Joining me today is Tom Fanning, our Chief Financial Officer, let me remind you that we will be making 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 10K and subsequent SEC filings. As you can see from the materials that we have released this morning, we had a good quarter and our businesses are performing well.

Before Tom discusses our financial highlights for the quarter, I’d like to begin today by recognizing the outstanding performance of our generation and transmission and customer service employees.

During the unprecedented heat wave we experienced in August and the ongoing drought, during an 18-day period from August six through August 23rd, the southeast experienced average high temperatures in excess of 100 degrees. During that heat wave we had 14 consecutive business days where our peak demand was higher than our 2006 peak.

With the total of 13 hours above 40,000 megawatts, and 76 hours above our 2006 peak hour record, we set a new peak on August 22nd of 40,870 megawatts, some 7.4% higher than the previous year’s peak set on August 10th 2006.

Despite the prolonged stress that was placed on our system, as well as hydro production that was some 65% below normal, our customers did not experience a single major disruption or outage.

While utility customers in other parts of the country experienced brownouts that are caused by voluntary load reduction, service to our customers continued uninterrupted during some of the most challenging operational conditions we’ve experienced.

Our ability to provide a reliable service during adverse conditions is a testament to not only our highly skilled and experienced personnel, but also to the inherent benefits of our integrated system. Four operating companies working together with coordinated planning and clear lines of communication and a strong logistical support, our customers benefit from the operational advantages of an integrated utility in all types of adverse weather conditions, from heat waves and droughts to major storms and hurricanes. At this point, I’ll turn things over to Tom Fanning for a discussion of our financial highlights for the third quarter and our earnings guidance.

Tom Fanning

Thank you, David. Our third quarter results were consistent with our business plan to provide regular, predictable and sustainable performance over the long term. We are at $1.00 a share in the third quarter of this year. This compares to $0.99 a share in the third quarter of 2006. Excluding our synthetic fuel investment, we are $0.99 a share in the third quarter of this year compared to $0.99 a share in the third quarter of ’06. For the first nine months of this year, we are in $2.03 per share compared to $1.86 per share in the same period last year.

Excluding our syntheric fuel investments, our earnings for the first nine months of this year are $1.96 per share. That’s an increase of $0.10 per share over the earnings we reported for the first nine months of 2006, excluding syn fuel.

Here’s the breakdown of our earnings for the third quarter compared with the same period last year.

First, the negative factors, non-fuel O&M primarily related to year over year scheduling differences and increased cost for maintenance projects at some of fossil and nuclear plants had a negative impact of $0.05 a share on our earnings in the third quarter. Appreciation and amortization, as well as interest expense and taxes other than income taxes primarily revenue taxes reduced our earnings by $0.03 a share. The additional depreciation in interest expense is due primarily to an increasing capital expenditure to support our environmental program and to invest in our transmission and distribution system in order to meet the needs of our growing south-eastern economy.

Increased expenses primarily at the parent company and in our leasing business decreased our earnings by $0.02 a share.

Finally, an increase in the number of shares outstanding due to additional equity issue through our employee savings plan and dividend reinvestment plan reduced our earnings by $0.02 a share.

Now turning to the positive factors. Top line revenue growth for our traditional business including changes in market-based rates and rate adjustments in Alabama added $0.07 a share to our earnings in the third quarter of 2007 compared to the same period in 2006. Weather contributed $0.02 a share to our earnings in the third quarter of 2007 compared to the same period in 2006. Weather in the third quarter of 2007 was actually $0.06 above normal, however, weather in the third quarter of 2006 was $0.04 above normal.

We had other contributions to earnings from our traditional business that added $0.02 a share in the third quarter of 2007 compared to the same period in 2006. These contributors included increased transmission revenues and allowance for equity funds used during construction or EFUDC.

Finally, our Southern Power Unit added $0.01 a share to our earnings in the third quarter of this year compared to the prior year. This increase is due primarily to new contracts, increased revenue from existing contracts and optimization activities.

So we had $0.12 of positive items and overall, our quarter came in at $0.99 per share excluding syn fuels, $0.05 a share above our estimate.

Now before I discuss our earnings estimate for the fourth quarter, I would like to provide a brief update on our operational performance during the summer peak load period.

As David mentioned, we face an extremely challenging period during the third quarter with the extreme heat during the month of August. However, even before that August heat wave, the southeast was experiencing a severe drought, what some experts have called a hundred-year event.

Over 30% of the southeast is now deemed to be in an exceptional drought condition including 27% of Georgia and 59% of Alabama.

During a year of normal rainfall, we produce between 3% and 4% of our electricity from hydroelectric facilities, however, the drought conditions reduced the hydro portion of our production to approximately 1% requiring us to run our gas-fired units longer to help make up the difference. While the continuing drought has had a major impact on the performance of our hydro units, our fossil and nuclear facilities performed extremely well during this critical period. Our fossil fleet had an equivalent forced outage rate of 1.6% during the peak season compared with an industry average of nearly 6.5%.

Our nuclear units also performed very well with an equivalent forced outage rate of 0.94% during the peak season. In fact, the capacity factor of our nuclear fleet in the third quarter was 99.3%.

Finally, as David said earlier our transmission and distribution assets also performed extremely well during the summer peak periods. For the first time, we exceeded 48,000 mega watts of load on our transmission network surpassing our forecast by over 8% or 3000 mega watts. We were able to meet this demand with no emergency event and no major interruptions to retail customers or wholesale transaction.

One of the major reasons for this excellent performance is our commitment to maintain an efficient reliable network. Over the past decade, we have spent 80% more intensively on transmission and the industry average which translates into a network that performs exceedingly well, and our year-to-date performance indicates that 2007 could be another excellent year for transmission reliability.

Turning now to our guidance for 2007, it’s clear we are executing our strategy and that our businesses are performing according to plan.

In formulating our estimate for the fourth quarter, we are expecting additional O&M spending during this period. Part of the reason for this increased spending is the shifting of outages from spring to fall, as well as an assumption of normal weather and a normal level of off-system sales.

As a result, our fourth quarter estimate is $0.22 per share excluding syn fuels. Again, our estimate for the fourth quarter is $0.22 per share excluding syn fuels. Including syn fuels, our estimate for the fourth quarter is $0.23 per share. This fourth quarter implies an earnings estimate for 2007 of $2.18 per share, which represents performance at the very top of our guidance range. Again, this estimate of $2.18 per share for 2007 excludes any syn fuel earnings. Including syn fuels, our estimate for the full year is $2.26 per share.

At this point, I’ll turn things back over to David.

David Ratcliffe

As you can see from my report this afternoon, we’re on track to meet our operational and financial goals for 2007. Our next major event this year will be the outcome of the Georgia Power Retail rate case which we expect to occur on or about December the 20th. Following the conclusion of the rate case, we plan to conduct a conference call with you to discuss the outcome.

At this point in time, I’ll be happy to answer any questions that you might have, so Jennifer will now take the first question.

Question-and-Answer Session

Operator

Your first question comes from Greg Gordon with Citigroup.

Greg Gordon - Citigroup

Thanks, good afternoon gentlemen. There are two questions, first relative to the water conditions, it sounds like so far you’ve done an exceptional job managing the dispatch of the fleet, what are the next steps under the scenario where we continue to have the deteriorating water conditions for the company. Is there a point at which you have to reduce capacity factors at your base loads at coal plants because you have to conserve water? Explain to us what the steps are from here if we continue to see degradation in our conditions and how that affects dispatch and your ability to serve your customers?

David Ratcliffe

Greg, what we have tried to do is to make it clear to the Governors in these three states exactly what the current operating requirements are for the two primary facilities on this river system.

There are numerous facilities and all of the facilities are important to our operations so to the extent that drought continues and flows are reduced further, we would simply have to look at each and every situation as it occurs, what we’ve tried to do as I said is to make it clear to the Governors what the current operating requirements are. The decision about future flows is obviously one that is being debated in a lot of different forums. The core of engineers will have to make a determination, the Governor of State of Georgia has asked for emergency relief, all of that is the topic of a great deal of debate and discussion. We will simply have to see what the decisions are about ongoing flows.

As those flows are reduced, we will simply have to see how we need to change our operations and what we can do. It’s pretty difficult to say what units would be affected until we see exactly how the flows are reduced. Hopefully, we’ll get back into the normal rainfall period between now and next spring that would allow us not to have to do extraordinary things.

Greg Gordon - Citigroup

You said, there were two major facilities, which two facilities are those?

David Ratcliffe

Well, the two that had been most discussed have been a plant at Gulf Power Companies territory called Plant Schultz which we need to operate for transmission reliability purposes. The other major facility over the Chatahoochee River in Alabama is Plant Farley which is a base-load nuclear plant, but there are as I said, numerous other facilities for example, Georgia Power Company has at least three major fossil plants on the Chatahoochee River closer to Atlanta and then there’s a whole series of hydro facilities along that river basin.

Tom Fanning

And I would just add that we just passed through our peak season, and even during our peak season, during those days where we had the highest level of temperature variance and inspite of the drought, we still had a reserve margin of around 8% and that includes some of them from purchases, but still, we performed very well, no interruptions, didn’t cause any interruptible load, so we performed very well this summer. And so really, we feel like we’re in good shape up until next summer sometime, the next peak season.

Greg Gordon - Citigroup

Thanks, and then the second question was about the staff position out of the adversary staff in the case, what are the next series or milestones that lead up to the settlement period window? When is the settlement period window and lacking a settlement, when will we expect the final decision?

Tom Fanning

As we’ve mentioned before, this is part of a normal process as it has been in place, these accounting orders have really been in place since 1995, so this is just another part of a normal process that everybody should expect.

In terms of the forward schedule, we should see hearings, staff that intervene in our hearings between November 5th and 8. The company will file rebuttal testimony around the middle of November around the 16th. Rebuttal hearing is at the end of November through early December, and we expect to have the order approved by no later than say December 20.

David Ratcliffe

I think the legal requirement is end of year if I remember correctly since we’ve filed persons with liability, but the Christmas holidays are likely to get us a decision in that first week in December.

Tom Fanning

Yes, this is the calendar that has been set.

Greg Gordon - Citigroup

And you wouldn’t expect that at this point, you should just think about that calendar as being fairly straightforward? Do we have a settlement proposal before that?

Tom Fanning

Greg, as in all of these other past discussions, there’s always the possibility, but their calendar is as I described, it’s always a possibility to settle early, but I think also, we should view as in the past results, that it’s actually a helpful process to go through these discussions with all concerned parties and achieve a mutually agreeable result for the benefit of our customers. That’s the way it’s worked in the past, so we’ll see how it goes.

Greg Gordon - Citigroup

Thank you, gentlemen.

Tom Fanning

Sure, thank you.

Operator

Your next question comes from Jonathan Arnold with Merrill Lynch.

Jonathan Arnold - Merrill Lynch

Good afternoon.

Tom Fanning

Hey, Jonathan, how are you?

Jonathan Arnold - Merrill Lynch

Good, thanks. Just one thing, you mentioned that the weather in the third quarter, I think $0.06 above normal, where do we stand on weather through the nine months versus normal?

Tom Fanning

Oh sure, piece of cake. For 2007, $0.09 above normal, year-to-date.

Jonathan Arnold - Merrill Lynch

I guess its early days forth quarter, but is October tracking warmer than normal?

Tom Fanning

So far, it’s been slightly warmer than normal in October, but remember October is a month of fairly low load anyway.

Jonathan Arnold - Merrill Lynch

And then I had one other thing which was just relating to the recent cancellation of this IGCC project in Tampa, and general kind of sense of the Florida getting much less favourable towards coal in general in some of the governor’s comments, is there any reason to be concerned about your project where you’ve already broken ground, whether that could somehow not move forward and could you just give us an update on how things are down there?

David Ratcliffe

We’re certainly well aware of where to go there as proposed in the State of Florida in terms of the executive orders and there is a lot of analysis going on, but certainly, our power subsidiaries, Southern Power, our customers in the State of Florida, as well as all the other investor-owned and coops in the State of Florida to try to understand what those requirement will portend for future generation and how they might be actually implemented.

We’re doing an analysis, we’re trying to make sure that we provide information to all of the decision makers and the policy makers.

At this point in time, as you know, we had the groundbreaking. We’re moving forward on the project. We have no other reason but to continue that project.

Jonathan Arnold - Merrill Lynch

Are there any permitting issues, are there any that could be re-visited or is that a wait and see kind of process, David?

David Ratcliffe

We’re in good shape from a permitting standpoint, but I suspect that there will always be, from time to time as you design these things, and actually begin to construct, a need for modifications to permit. You should not presume that you have a carte-blance authority without being reviewed and I think, in that light, it is important that all of the parties continue to evaluate what the current reality is in trying to make the best decisions they can.

Jonathan Arnold - Merrill Lynch

Thank you.

Tom Fanning

Thank you.

Operator

Your next question comes from the line of Andrew Levi with Brent Corp.

Andrew Levi - Brent Corp

Actually, I’m all set guys. Thank you very much. Have a great thanksgiving.

Tom Fanning

Thanks, you too.

Operator

Your next question comes from the line of Scott Ingstrom with Glenheim Capital Management.

Scott Ingstrom - Glenheim Capital Management

Good morning. I have this question for you, I think on the fourth quarter last year was $0.25 and I think less than a penny of syn fuel is that correct?

Tom Fanning

Yes, I think that’s right.

Scott Ingstrom - Glenheim Capital Management

So anything going in year over year leading to kind of guiding for a down quarter, are there outages? Are there issues like that?

Tom Fanning

Really, what we’re looking for in the fourth quarter is a couple of things, number one is I imagine that we shifted, you may remember we had pretty strong sales in the first part of the year. We shifted some outages from the spring to the fall, and so we’re going to see a pickup in some of the outages, that’s really related to the O&M that I mentioned and the maintenance issues that I mentioned, okay.

The second thing, you may remember from the very end of last year, there was a transmission difficulty outside of our system which caused us to make a great deal of off systems sales in December. We assume that there will be a normal level of off system sales. And as well, we always project to look forward on the basis of normal weather, so those are kind of the reasons why we’re projecting forward at 22 versus last year’s 25.

Scott Ingstrom - Glenheim Capital Management

Okay, and then just a question, overall and thinking about the way you guys manage business, I know when you have a good year like this $0.09 of weather, I at least, I think I do, you kind of managed expenses relative to revenues, and I’m thinking that I think your guidance the $2.13 to $2.18 was based on normal weather, so if you took your $2.18 less $0.09 of weather, you’re kind of the outside the range, but is it fair to say that maybe you pulled some expenses in this year as well as you might pick up on next year or how should I think about that?

Tom Fanning

I would say that the spending levels that we’re talking about this year within our normal planning range. We did move expenses around within the year from spring to fall in terms of outages, but other than that, this was within our normal planning criteria.

Scott Ingstrom - Glenheim Capital Management

Okay, it is easier to think of your initial guidance as $2.13 to $2.18 being based on normal weather?

Tom Fanning

Yes.

Scott Ingstrom - Glenheim Capital Management

And then if we took the $0.09 out, are there other factors then that are leading you to kind of come in below that?

Tom Fanning

No, we always provide a plan that has a range of non fuel O&M in the plant. And so, all we’re doing is just kind of following through on the plan, I mean, to the extent there is the opportunity to take advantage of some outages especially following a pretty strong summer run at our facilities, then it’s prudent to do so.

Scott Ingstrom - Glenheim Capital Management

Right, okay. Great, thanks guys.

Operator

Your next question comes from Adam Cohen with Credit Site.

Adam Cohen - Credit Suisse

Yes good afternoon, would you just comment on industrial demands for the quarter and any trends you’re seeing there?

Tom Fanning

Yes, industrial sales, we’re down a bit, but it’s been kind of a continuing trend that we have seen now for some time. What we’re particularly saying is that when you consider there are 19 different SIC Code industries that we follow, Standard Industrial Classification Code, 18 of the 19 have been and continue to do well. The only one that has been a drag and really this has been an industry that we’ve always talked about rebasing, but really since 9/11 we have seen a withdrawal from the southeast of a good bit of activity related to textile manufacturing. And we’ve talked in the past about how that has been particularly clear in the low end of the textile’s industry, particularly apparel manufacturing, yarn manufacturing and those types of things and we would go on to say that the higher end of textiles particularly polymer related textile and carpet manufacturing polymer related or associated with automobile manufacture, the carpet related to housing has been quite strong. The only thing I guess I would update from past commentary would be that the southeast typically has a more robust economy than what you see elsewhere in the United States particularly underpinned by a kind of macro economic migration of people from the Midwest and the northeast in to our area that continues and we continue to benefit from that kind of organic growth.

What we have seen is our housing industry slow down a bit to approaching more national levels, and as a result because of the bit of a housing slow down here, you have seen a bit of a slow down correspondingly in the carpet side of textiles.

So that’s kind of that update. I would say beyond that, there are some very good brave thoughts; I think we’ve talked about but it bears repeating. We’ve talked in the past about the new Kia plant in Georgia. The automotive sector has always been a bright side at least in recent history with Honda, Hyundai and Mercedez Benz plants in Alabama. We announced, last call, of the Thiessen Krupp steel mill being built near Mobile, Alabama which right now we believe maybe when its finished, our largest single site customer that’s particularly significant to us.

And then in Mississippi, what we’ve seen announced this quarter is an expansion of our current largest single site customer that’s the Chevron Refinery near Pascagoula, Mississippi. So we are seeing a lot of bright spots.

There’s one other interesting positive development in the manufacturing sector that we see developing that’s kind of interesting and it goes with this, with the recent economic changes that we’ve seen during this third quarter and the resultant drop in the value of the dollar currency relative to especially things like the Euro, we have seen the opportunity for exports in the United States to be in hand. And in fact when we look over the economics, the exporting industries in the southeast are probably poised to benefit from this more than other places in the United States in a relative sense, so we see that in the automotive sector, in the steel sector, chemicals and paper, so that we think is a reason to be bullish going forward.

Adam Cohen- Credit Suisse

Terrific. Thank you very much for that comment.

Tom Fanning

You bet, thank you.

Operator

Your next question is from Danielle Styte with Bell Monroe.

Danielle Styte – Bell Monroe

Thank you, I am just sort of wondering, when is the next major capacity to your addition that you anticipate given the productivity and small reserves you have.

Tom Fanning

Well those small reserves I’ve mentioned, let me repeat, we are doing the very --

Danielle Styte – Bell Monroe

Unusual, unusual.

Tom Fanning

Yes, but during those few days where we set the new peaks that we mentioned, okay. In a normal season, our reserve margin is just fine in the 15% range or a little bit better. Now going forward, we completed , July 22nd, approved by the commission, Georgia’s regular integrated resource planning process. There were essentially four trenches of new resources available to meet the demands that we mutually agreed upon between the commission and the company.

The first resource I mentioned is the fact that we are promoting even stronger now in our territories energy efficiency and so we expect to see some pickups if you will from that. Secondly, the next nearest term capacity additions involve the McDonough facility. If you remember, Atlanta is a city that has a highway around it I285, inside the northern portion of I285 is a relatively older coal facility, plant McDonough. It has about 500 mega watts there. What we have agreed to with the Commission as a result of the IRP, the Integrated Resource Planning process completed in July is to replace that capacity with three 840 mega watt combined cycle gas units. Those should be complete in about the 2010 timeframe.

Danielle Styte – Bell Monroe

Okay, thank you.

Operator

Your next question comes from Paul Ridzon with Keybanc.

Paul Ridzon - Keybanc Capital Markets

Good afternoon, how are you?

Tom Fanning

Hello, Paul.

Paul Ridzon - Keybanc Capital Markets

How about those Red Sox, Tom?

Tom Fanning

Unbelievable, baby. If that was a fight, they would have stopped it.

Paul Ridzon - Keybanc Capital Markets

Just on the adversary staff, I noticed that they are 100 basis above where they were last time which seemed pretty positive, was there anything in reading that order that kind of stuck on your?

Tom Fanning

Rather than commenting on any specific part of the process or any specific item within that part, I would rather just say that their submittal of testimony is a normal part of the process that everyone works together to achieve a constructive result for our customers. I think I’ll just leave it there.

Paul Ridzon - Keybanc Capital Markets

And just on the drought and on the hydro output, that doesn’t have any impact on retail margins, but it’s kind of just lost opportunity as the stack gets pushed higher for wholesale margins, is t that the right way of looking at it?

Tom Fanning

You’ve got it, exactly right. It essentially becomes a fuel issue.

Paul Ridzon - Keybanc Capital Markets

Okay, thank you.

Tom Fanning

Yes, sir. Thank you.

Operator

Your next question comes from Rody Tolentino with Morgan Stanley.

Rody Tolentino - Morgan Stanley

Hi, just to follow up on what Daniel questioned, I guess you talked about four parts. You mentioned two out of the four. I was just kind of wondering if you could complete it and especially with regards to the opportunities with the plant going forward.

Tom Fanning

I’d be delighTom. So I mentioned the first part is essentially conservation, taking hold. We estimate that to be about 70 mega watt per year going forward. I’d mentioned the three 840 mega watt units, okay, the third tranch if you will will largely be comprised of somewhere between a thousand and 1300 mega watts, a bid probably that will be comprised of some combination in any and all CTs and CCs probably in the 2012 – 2013 timeframe, and then the four tranch would be the proposed addition to our nuclear facility that currently exists in Augusta, Georgia, the boggle units, one and two. Georgia is a 46% owner along with other co-owners of the Thorpe MEAG and the City of Dahl. We are proposing to build two new thousand mega watt units. So 2000 gross, it is proposed that we would be a pro rata owner of those 2000 mega watt, so kind of net to Georgia would be about 1000 mega watts there.

Remember there is a process for the commission to evaluate other competing alternatives. The Commission has been very interested in reducing our exposure to volatile fuel sources and so, they have requested alternatives to be brought forward in the form of base load capacity and capacity which has low fuel volatility. We expect to receive any alternative proposals in February. We will use our own boggle estimates as the benchmark and the Commission will make a decision later that year as to whether to go forward.

Rody Tolentino - Morgan Stanley

And so you’re looking to make a decision some time next year?

Tom Fanning

Yes.

Rody Tolentino - Morgan Stanley

Okay. Thank you very much.

Tom Fanning

Sure, thank you.

Operator

Your next question comes from Felisa Gray with Dwight Asset Management.

Felisa Gray - Dwight Asset Management

Good afternoon.

Tom Fanning

Good afternoon.

Felisa Gray - Dwight Asset Management

Could you remind us what regulatory treatment you received for your energy efficiency programs?

Tom Fanning

We essentially get to recover the cost of those energy efficiency programs and then there is a small component on which and it’s a very small component on which the company can earn the difference between the cost of those programs and the avoided energy incapacity, but it’s a very small portion like 15% of the present value.

Felisa Gray - Dwight Asset Management

Is that portion in rate pays or how is that treated?

Tom Fanning

It is treated as an offset to a revenue requirement in the calculation.

Felisa Gray - Dwight Asset Management

I see. Thank you.

Tom Fanning

Sure, thank you.

Operator

Your next question comes from Dan Jenkins with Wisconsin Investment Board.

Dan Jenkins - Wisconsin Investment Board

Hi, good afternoon.

Tom Fanning

Hello Dan, how are you?

Dan Jenkins - Wisconsin Investment Board

Pretty good. First, I just want to follow up when you were talking about the industrial sales, you mentioned the Kia plant and the new steel mill which might be fairly large customers, do you have that timeframe for when that demand might come on line?

Tom Fanning

Yes, sure. Actually, I think the Thiessen Krupp plant is 2010. I think Kia is kind of late in the decade also, 2009 or so.

Dan Jenkins - Wisconsin Investment Board

Okay. It won’t impact next year at all?

Tom Fanning

Oh no. No. But you know what though, Dan? It won’t impact except that with both of these plants, you see some economic activity with construction workers being drawn to the area, pick up in population, first, second, third tier suppliers, vendors that kind of thing, so you see some activity, but certainly, it won’t be to the degree once the plants are operational.

Dan Jenkins - Wisconsin Investment Board

Okay, and I was wondering if you could update us kind of on where you’re at, what the constructions projects, the Franklin, Oleander and Stanton?

Tom Fanning

Well, let’s see. Franklin 3 is due to be completed 2008. Oleander likewise is around ’08. What was the other one? Franklin 3, Oleander and Stanton. Okay, well Stanton is the IDCC that’s kind of a 2010-2011 timeframe.

Dan Jenkins - Wisconsin Investment Board

And your projection seven changed or still on budget and on time and so forth?

Tom Fanning

Thankfully, everybody is under budget and on time.

Dan Jenkins - Wisconsin Investment Board

Okay, and one thing I was wondering, just kind of philosophically, you’ve always had one of your goals or one of your expectations as this 2% annual growth in territorial demand?

Tom Fanning

Right.

Dan Jenkins - Wisconsin Investment Board

In a given kind of the environmental and you mentioned the demand-side management and so forth and you’re seeing some programs in places like North Carolina and whatever where they’re given more focus on that, are you seeing any of that in any of your states or do you see changing the focus on demand growth to maybe more managing the demand?

Tom Fanning

Yes, I believe Dan that there will be an increased emphasis on the more efficiency and/or demand side management to your point. Were you seeing a little bit of that in the Georgia rop process, and we would expect that to increase.

Dan Jenkins - Wisconsin Investment Board

Okay, and then finally, I was just wondering, I’m looking at your page five where you have the forecast for cap expenditure, so I was wondering if you could give me an update on the year-to-date of ’07 cap expenditures versus the three-year forecast there?

Tom Fanning

How about this? One of the interesting things that capex translate to is the growth and rate base. When I think about property plant, the PPE account, Property Plant, I think we’ve increased year over year $2 billion from third quarter ’06 to third quarter ’07. In terms of year-to-date capex I would just say that we’re on budget and it is about $2.5 billion year-to-date capex.

Dan Jenkins - Wisconsin Investment Board

Okay.

Tom Fanning

And we continue to see the consistent trends we’ve talked about. That is if you want to look at the majority of that, it’s tied up in transmission and distribution required to support the growth that we see and kind of going back to your other question, there’s kind of organic growth that people coming into the southeast continues to show itself, so I think that’s always going to be there, so I think, anything we see on energy conservation, it’s going to have it as an underpinning, this organic growth and of course the second issue relates to environmental spending. And it’s clear the environmental capex is required by law. It is good for systems in our state and it certainly protects and enhances this super efficient, super economic, generating fleet we have and in fact, largely its our generating fleet that gives us the reason why we’re 17.6% as of the end of 2006 anyway below the national average, so I think all of those things make sense for us and we’ll continue in that vein.

Dan Jenkins - Wisconsin Investment Board

Okay, last thing, I was wondering, you mentioned higher impair expenses, and I was wondering if you could talk about what was driving that and if that’s something that they expect to continue or is it kind of a one-time thing or what’s going on there?

Tom Fanning

Yes, well, there were kind of two things, one just had to do with property insurance. We’ve seen the property insurance increase a bit, and the second thing had to do with an accounting adjustment that we put into place that had to do with the passage of FST 13-2 that related to our silo investment and that was about a penny also, so it was kind of a penny on the insurance in the amount of a penny on the accounting adjustment related to the silo leases we have.

Dan Jenkins - Wisconsin Investment Board

Okay, so would it be reasonable to expect the property insurance would continue, but is that accounting adjustment a one time impact or not?

Tom Fanning

Yes, we don’t know on the insurance, I can say that on the silo and you’re right on that one. I just can’t say that about insurance.

Dan Jenkins - Wisconsin Investment Board

Okay, thank you.

Tom Fanning

Thank you.

Operator

And I show your last question is a follow up from Paul Ridzon with Keybanc.

Paul Ridzon- Keybanc Capital Markets

I was just wondering if you had any update on Washington Activity and renewable standards and how successfully you’ve been in voicing your opinion there?

David Ratcliffe

Paul, I think we’ve been very successful in voicing our opinion whether it has any impact remains to be seen. As you know, it continues to be the subject that you’ve got a lot of controversy and a lot of conversation with the Speaker and the Majority Leader trying to decide how to move the bill forward without a conference and a lot of discussions behind the scenes about compromises and I think there are three major points in the bill, the CAFE standards, the RPS standards and the tax increases. I don’t know who caved first in those. We’ve made it clear that our opposition to the RPS standard is based on the increase cost it will be to our customers and that’s what’s driving us. It’s not an opposition of renewable energy by any traction.

I think people are beginning to understand that is good editorial in Wall Street Journal about the resulting tax that would actually occur on our customer based in the southeast if it actually passes as it exists, so I’m confident that as we have informed that debate, people are beginning to understand why it doesn’t make sense.

That doesn’t mean that the bill won’t get passed because there’s tremendous desire to pass something that they could call an Energy bill as you know, but I really can’t handicap it much beyond that.

Paul Ridzon- Keybanc Capital Markets

Thanks for the update.

Operator

There are no further questions. Mr. Radcliffe, any closing remarks?

David Ratcliffe

No, Jennifer, thanks again to everybody for being with us today. We appreciate and look forward to seeing you after the first year, everybody have a good holidays.

Operator

Ladies and gentlemen, this concludes the Southern Company Third Quarter 2007 Earnings call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Southern Co. Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts