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[IMAGE] The most comprehensive, up-to-date map of the North American Power System by RDI/FT Energy is now available from SCIENTECH. The Wall Map measures 42" x 72"; the Executive Map Set consists of 18 11" x 17" maps. Visit our website at www.scientech.com for a detailed description of these valuable maps and complete ordering instructions. [IMAGE] [IMAGE] May 24, 2001 Southern Company: A National Competitor, or Master of Its Domain? By Will McNamara Director, Electric Industry Analysis [IMAGE]At an annual meeting of shareholders on May 22, Southern Company's (NYSE: SO) new CEO Allen Franklin said the company will become a dynamic, growing, "super-regional" energy company that emphasizes customer service and shareholder value. In addition to maintaining and improving its annual dividend of $1.34 per share, Franklin disclosed that, moving forward, Southern Company will implement a new business strategy, which focuses geographically on serving 10 states in the so-called "super Southeast." Franklin also noted that the new strategy concentrates on Southern Company's regulated retail business, which represents 90 percent of the company's business. Analysis: Two recent and significant events at Southern Company set the stage for this pronouncement of a "new" strategy for the energy company based in Atlanta. The spin-off of its highly successful Mirant Corp. (NYSE: MIR) six weeks ago and the simultaneous retirement of former CEO Bill Dahlberg (which led to the appointment of new CEO Franklin) make the timing right for Southern to re-establish its vision in the industry. However, it seems to me that there is not much that is new about Southern Company's recently unveiled business strategy, which primarily focuses on growth within 10 Southeast U.S. states. In fact, for the last decade Southern has kept its regulated operations squarely focused on its service territory, put little emphasis on U.S. expansion and contributed to the Southeast region's general reluctance to deregulate. Yet now, even as national energy competitors grow larger and larger, Southern Company's strong local presence and vertical integration approach may ultimately prove to be the smartest strategy of all. It was only four years ago, as the first group of deregulated markets began to operate, that Southern Company billed itself as a "900-pound gorilla," implying that its number of customers and generation assets represented a formidable challenge to any other electric operation in the nation. This was a view that was shared by most observers. Before consolidation and mergers and acquisitions began to accelerate, it was generally thought that Southern Company was the energy operation to beat in terms of scale and market prominence. However, the energy industry's playing field has changed dramatically since that time. Now, Southern's stats (32,000 MW of generation, 4 million customers and market capitalization of $15 billion) are trumped or rivaled by the likes of AEP and Exelon, companies that also span a much wider operational base than Southern Company. Granted, Southern Company has not sat around idly over the last four years and let competitive opportunities pass it by. Mirant Corp. (formerly Southern Energy) has been quite aggressive on a global and national scale. Yet, this formerly unregulated subsidiary of Southern Company is now a $13 billion, stand-alone company that is still riding on the glory of a strong IPO (current MIR shares are priced at $45 as of May 24 following its October 2000 IPO price of $21). Now, Southern Company proceeds on its own with a strategy that is in many ways a recycling of what has been a slow growth (but successful) formula for its regulated operations. The company says it will focus on its five regulated utilities (Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric) and unregulated power generation and energy products in the "Super Southeast." The focus on unregulated power generation, through which Southern reportedly plans to add another 6,000 MW by 2003, most likely refers to subsidiary operations such as Southern Nuclear and Southern Company Energy Solutions. Moreover, Southern appears perfectly content to maintain a strong local presence, gain a healthy dividend on its regional utility operations and hold uncontested market power throughout its service territory. Who could blame them? This has been a lucrative business model for the company for some time. Southern's 1Q 2001 earnings, excluding contributions from Mirant, were $180 million, or 26 cents per share, compared with $151 million, or 23 cents per share, in 1Q 2000. Further, the company holds an exemplary relationship with customers (receiving the highest ranking in overall customer satisfaction, according to a recent study) and local regulatory commissions. However, this business model should not be referred to as a "new strategy." Southern Company has always been a "super-regional" operation with its own profitable niche that remains clearly defined. The difference now-in addition to expanding from four to 10 states in the same region-is that Southern may very well be on the right track and positioned to have the last laugh as the deregulation game continues to unfold. As noted, one of the consistent criticisms of Southern is that it has remained too focused on its service territory of the Southeastern United States and, through this prominence in the region, has prevented other companies from penetrating Southern's region. (This is a criticism that has also been leveled at Duke Energy, Southern's neighbor to the north, which has a lock on the Carolinas.) FERC recently rejected Southern's proposed SeTrans Gridco (the company's proposal for a regional transmission organization) and told the energy company not to re-apply until it had explored joining neighboring utilities in an RTO (such as GridSouth and GridFlorida, which have already been conditionally approved by FERC). This was a clear message to Southern that it would not be allowed to operate as its own electric island. Of course, FERC's policy is that transmission-owning utilities should "voluntarily" participate in an RTO, but at the same time the commission would have control over Southern's market power in the region should the energy company ever want to merge with or acquire another utility. Ironically, just as Southern has maintained market power in the Southeast, it has taken advantage of opportunities from deregulation in other states. On the wholesale side, Mirant is one company that has witnessed a financial windfall from California. In addition, Southern Company is now moving into Florida (its first expansion outside of its service area) after receiving preliminary approval to build a 633-MW natural-gas generation facility in Orlando. Further, Southern Company's dominance in the Southeast has often been cited as one of the causes of the region's general sense of lethargy when it comes to electric competition. None of the four states in which Southern is currently active (Alabama, Georgia, Florida and Mississippi) has formally adopted any sort of restructuring plan. Generally, these states have decided to take "wait-and-see" approach, although this philosophy actually pre-dated the California energy crisis. Granted, insufficient transmission lines leading to the Southeast and the uncertainties about whether or not regulators will allow the costs associated with transmission construction to be recovered also have contributed to the lack of competition in the Southeast. However, regardless of the causal factors, the end result is that Southern Company holds what is perhaps the largest uncontested market share in the country. Consequently, after being criticized and questioned for its rather conservative and restricted approach, Southern Company now sits on the sidelines of a growing energy crisis from which it is remarkably immune. As a growing number of states consider a return to regulation and industry analysts debate the prudence of deregulating the energy industry at all, the trend may be returning full circle to a market structure that Southern Company has consistently exemplified. In hindsight, the business model that Southern has steadfastly pursued is now hard to criticize, considering the uncertainty of many other national markets. For instance: Southern retains a solid customer base that is in little danger of being penetrated by competitors. Mirant has successfully spun off as its own stand-alone company with the ability to attract investors based on its strong capital appreciation. Southern Company also remains a strong operation with a solid rate-of-return and dividend for shareholders, attracting its own set of investors. The company's vertically integrated model has been retained and there have been no indications that Southern Company faces a supply shortage. Expansion into other markets such as Florida and California has expanded Southern's base, while at the same time the company has held on to its market share in its own region. For all of these factors, Southern Company may prove to have one of the smartest strategies across the electric utility market. Southern probably won't become a national player, as utility operations of comparable size clearly aspire toward. However, it arguably has never been part of Southern's strategy to be a national player (beyond what it achieved through Mirant, when the company was still a subsidiary). Focusing exclusively on the "super region" of the Southeast appears to be providing a remarkable rate-of-return for Southern. In closing, the company's strategy reminds me of the tortoise and the hare story. While other companies have rushed to merge, grow bigger and expand across the country, Southern has taken a more methodical approach, which may also get it across the "finish line" before many other competitors. An archive list of previous IssueAlerts is available at www.scientech.com Reach thousands of utility analysts and decision makers every day. Your company can schedule a sponsorship of IssueAlert by contacting Nancy Spring via e-mail or calling (505)244-7613. Advertising opportunities are also available on our website. SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH information products. If you would like to refer a colleague to receive our free, daily IssueAlerts, please reply to this email and include their full name and email address or register directly on our site. If you no longer wish to receive this daily email, send a message to IssueAlert, and include the word "delete" in the subject line. SCIENTECH's IssueAlerts(SM) are compiled based on the independent analysis of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. SCIENTECH's sole purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. Copyright 2001. SCIENTECH, Inc. All rights reserved.
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