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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. 

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