An analysis of the Southern Company.

THE SOUTHERN COMPANY - A RURAL ELECTRIC COOPERATIVE THREAT?

In the uncertain world of deregulation of the electric industry, competition to the not-for-profit rural electric cooperatives of America will certainly come from many different companies. One such company that will surely pose a competitive threat to the rural electric cooperatives (REC's) of America is the Southern Company.

The Southern Company is a for-profit, investor owned electric utility company and the largest producer of electricity in the United States. In 1995 the Southern Company had 234,927 stockholders owning the company's preferred stock. The Southern Company is based out of Atlanta, Georgia and supplies electricity to more than 11 million people in a four-state area, a region including 120,000 square miles of the southeastern United States. The company also operates facilities that provide electricity to customers in England, Argentina, Chile, Trinidad and Tobago, and the Bahamas.

The Southern Company (NYSE: SO) is the parent company of five electric utilities: Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric. These five utilities serve a territory that includes 71 rural electric not-for-profit cooperative organizations and 65 municipally-owned electric distribution systems providing electricity to consumers.

Alabama Power Facts:

* Serves 1.2 million customers over some 68,787 miles of electric lines throughout 44,500 square miles. The company directly serves 1,018 communities and indirectly serves 260 other communities.

* Assets of $8.7 billion.

* Paid $58 million in state and local property taxes in 1995.

* Provided electricity to their customers an average of 99.61% of the time in 1995.

* Owns 76 electric generating units with total nameplate capacity of 10.9 million kilowatts, located at 22 power plants.

* Generated 74% of its electricity at its six coal-fueled power plants in 1995. Its one nuclear power plant generated 18% of its electricity, and 14 hydroelectric plants generated 7% of its electricity in 1995.

* Employs 7,261 people with a total payroll in 1995 of over $373 million.

* Directly supplies wholesale power to two rural electric cooperatives in Alabama.

Gulf Power Facts:

* Serves 334,832 residential, commercial and industrial customers. Some 8,511 miles of electric lines deliver power to 71 towns and communities in northwest Florida throughout 1,064 square miles.

* Has a generating capacity of 2174 megawatts using 100% coal mix.

* Had a net income of $57.8 million in 1995.

* Employed 1,501 people in 1995.

* There are no rural electric cooperatives that purchase wholesale power from Gulf Power.

Georgia Power Facts:

* Serves 1.7 million residential, commercial and industrial customers. Some 75,000 miles of electric lines deliver power to 57,000 of Georgia's 59,000 square miles. Georgia Power provides service in all but six of the state's 159 counties.

* Had a net plant investment of $10.75 billion in 1995, and is the largest of the Southern Company's five operating companies.

* Employed 11,061 people in 1995.

* Until 1991 supplied wholesale power to Oglethorpe Power Corporation, supplier of wholesale power to 39 rural electric cooperatives in Georgia.

Mississippi Power Facts:

* Serves 183,000 residential, commercial and industrial customers. Some 6,600 miles of electric lines deliver power to 11,500 square miles from Meridian Mississippi to the Gulf of Mexico.

* Had more than $1 billion investment in plant in 1995.

* Supplies wholesale power to six rural electric cooperatives in Mississippi.

* Generating facilities total more than 2,000 megawatts capacity in 21 generating units fueled by coal and natural gas.

* Employed 1,421 people in 1995.

Savannah Electric:

* Serves more than 250,000 residential, commercial and industrial customers. Some 3,000 miles of electric lines deliver power to a 2,000 square-mile area in southeast Georgia.

* In 1995 Savannah Electric employed more than 600 people.

* Merged with the Southern Company in 1988.

* Employed 584 people in 1995.

The Southern Company also markets energy-related services and mobile radio services under the Southern name. Their Southern Energy Inc. subsidiary develops, builds, owns, and operates power production and delivery facilities and provides a broad range of services to utilities and industrial companies in the U.S. and international markets. The Southern Company's stock is one of the 20 most widely held corporate stocks in America.

In October 1995, they made their first entry into the European marketplace. The Southern Company acquired South Western Electricity (SWEB). At that time, the electric distribution utility served 1.3 million customers in southwestern England. Bill Dahlberg, Chairman, President, and Chief Executive Officer of the Southern Company stated, "We bought SWEB because it was a successful company and will provide growth to our bottom line more rapidly than some of our other investments."

In 1997, Southern Company acquired Consolidated Electric Power Asia (CEPA) for $2.1 billion. CEPA has two generating plants in China, three in the Philippines, and two more under development.

With these and other acquisitions in Europe, South America, and the Caribbean, the Southern Company significantly increased the size of their company in international business. "Privatization of utilities remains an ongoing trend in many countries, and the Pacific Rim countries need significant new generation. The Southern Company will continue to seek attractive projects with the potential for superior financial returns", according to Dahlberg.

[TABULAR DATA FOR TABLE 1 OMITTED]

In 1995, the Southern Company had an outstanding year with a record net income of $1.1 billion, an increase of 5.4% over 1994. Earnings per share were $1.66 and return on common equity was 13.01 percent. With these record results, the board of the Southern Company increased their dividend in January 1996 for the fifth time in as many years. Earnings for 1996 were a record $1.13 billion, with a dividend per share of $1.30. For 1997, the goal of the Southern Company is to achieve an approximate 75% payout ratio.

The Southern Company's supply of electricity is derived predominantly from coal. The sources of generation for the years 1993 through 1996 are as follows:

The all-time maximum demand on the Southern Company's system was 27,419,700 kWh, occurring in August 1995. The reserve margin for the Southern Company's electric system at that time was 9.4%. This is a true indication that the Southern Company has excess generating capacity, therefore, they have plenty of electricity to sell to somebody else's consumers.

TABLE 2

(In millions of dollars)      ASSETS      NET INCOME      KWH SALES

Alabama Power                  8,734          371           65,473
Georgia Power                 13,071          580           74,426
Gulf Power                     1,308           58           11,038
Mississippi Power              1,142           53           11,816
Savannah Electric                542           24            3,696
YEAR         COAL          NUCLEAR          HYDRO          OIL&GAS

1993          78%            17%             4%               1%
1994          75%            19%             5%               1%
1995          77%            17%             4%               2%
1996          78%            17%             4%               1%

The Southern Company's financial condition continues to remain strong. The following is some detailed financial data about the Southern Company in 1994 and 1995: (See table 1)

Following is the 1996 core business financial overview for the Southern Company, broken down by individual holding company: (See table 2)

The Southern Company boasts of one of the lowest electric rates in the U.S. The following is the cost for their electricity, by individual holding company, and the number of consumers each holding company serves per mile of electric line. Baldwin County EMC, located in the middle of their service territory, is shown for comparison. (See table 3)

[TABULAR DATA FOR TABLE 3 OMITTED]

The Southern Company refers to themselves as "Americas Best Diversified Utility--Strengthening Our Core Business". To help everyone in the United States and the world know their message, they launched the first major national television campaign for a U.S. utility. The ad campaign debuted on national TV January 20, 1997 during the Super Bowl. These ads have been running in print since November 1996.

The Southern Company budgeted $10 million for their 1997 advertising campaign. The ad campaign is designed to highlight the Southern Company's competitive strength and experience in nine countries on four continents, as well as its superior performance, its success at keeping electricity cost among the lowest in the nation, and its 97% customer satisfaction rating, one of the best in the industry. "The ad campaign demonstrates the Southern Company's leadership in the rapidly changing industry and introduces the company to potential new customers and business partners outside the company's traditional service territory", according to Dahlberg. It is interesting that all of the ads for their individual holding companies use the corporate Southern Company logo. This concept helps to create one identity instead of five separate ones.

The Southern Company is not waiting to see if competition in the electric utility industry will be allowed. Instead, they are taking steps now to prepare themselves for the most competitive environment imaginable. The Southern Company is planning for a deregulated electric industry and planning to be "America's Best Diversified Utility" by implementing the following goals:

THE SOUTHERN COMPANY'S STRATEGIC GOALS

* Goal One: Reduce cost by $780 million by the year 2003.

* Goal Two: Reduce overhead cost by 20% by the end of 1998.

* Goal Three: Continue to achieve a kilowatt-hour cost at or below market price.

* Goal Four: Grow revenue while maintaining competitive pricing.

* Goal Five: Generate positive cash flow above capital investment and dividend requirements.

* Goal Six: Continue to achieve kWh sales in the core business better than the industry average.

* Goal Seven: Become the number one power marketer in the Southeast by the year 1998.

* Goal Eight: Be among the top 10 power marketers nationally by the end of 1997 and among the top 5 nationally by the end of 2003.

* Goal Nine: Generate 30% of the Southern Company's net income from non-core businesses by the year 2003, while earning a higher return on equity than in their core business.

* Goal Ten: Grow earnings per share an average of 5%to 6% annually.

* Goal Eleven: Rank in the best quartile of the top companies as a great place to work.

* Goal Twelve: Rank in the best quartile of top utilities in customer satisfaction.

The Southern Company is pursuing these strategies for one simple reason. They want to ensure they are positioned to compete in a deregulated energy market. This is indicated by their cost reduction and power marketing goals and strategies. By reducing costs, they are taking the steps necessary to compete in a deregulated electric industry based solely upon price. Also, by implementing a power marketing division, they are preparing themselves to compete for customers outside of their traditional service territory.

The power marketing business is an area that will allow the Southern Company to compete for power sales to electric providers in territories other than their own. With a $10 million ad campaign, their objective to compete with other electric utilities is clear, and has begun even before deregulation is a reality.

The threat to rural electric cooperatives by the Southern Company's strategic goals and objectives is very real and should serve as a wake-up call. Southern Company plans to grow their business by acquisitions of other utilities, and by retail wheeling in a deregulated electric market. Southern Company is a very large, very wealthy and healthy company. They have been able to accumulate a large sum of profits throughout their history, keeping them financially sound in the uncertain up-coming deregulated utility market. Their density per mile of line allows them to keep their cost very competitive, while at the same allowing them to earn a very good rate of return.

Through the implementation of deregulation in the electric industry, their aggressive nature, and their ability to quickly utilize power marketers, they are ensuring they will have the best wholesale rates of electricity in very competitive world. Because they will generate, buy, and market, at wholesale and retail, their own power, Southern Company will not be forced to rely on some other entity to supply them with their electric power needs. Most rural electric cooperatives do not have this luxury.

The concern for many rural electric, not-for-profit cooperatives is the fact that the Southern Company could potentially offer a retail rate to the cooperative's member/ owners that is cheaper than the cooperative's current wholesale rate for electricity. In a deregulated electric industry, where territorial boundaries do not exist, the Southern Company would be allowed to compete for rural electric cooperative's customers across the nation without even buying the company. In a deregulated world, all the Southern Company would have to do is simply make one phone call to any rural electric cooperative member/owner and ask them to switch. If the cooperative's electricity rates are higher than the Southern Company's, the consumer may just do it. How do rural electric cooperatives overcome their smallness and lack of power marketing presence for the best wholesale rates in a deregulated utility industry compared to a Southern Company?

Relationship marketing to large national accounts should be a very real concern for all rural electric cooperatives. Within two years (my guess) one will not see five separate holding companies within the Southern Company. Instead, one will see just - The Southern Company. In fact, the move in that direction has already started. Look at the national advertising campaign of the Southern Company and their strategy is clear. All of their current ads plainly state, Alabama Power (or any one of their five companies) is part of the Southern Company.

To illustrate this point, Baldwin County EMC (my cooperative) serves a super center Wal-Mart store with a monthly electric bill averaging around $33,000. Baldwin County EMC just serves one. How many Wal-Mart stores does the Southern Company serve? Certainly more than one. Would Wal-Mart be interested in paying one electric bill for all of their stores nationwide, and maybe receiving some tremendous economies of scale/volume discount? Even if the price of electricity was the same, just the fact of only writing one check to one company, instead of hundreds to different companies, could be a significant cost savings to a national account such as Wal-Mart. Can or will we at Baldwin County EMC or any rural electric cooperative ever be able to offer such a program? With power marketers and a large territory, the Southern Company can. They have already started doing so in their territory, and when deregulation happens will certainly do so outside of their service territory. In Georgia, where since 1973 Georgia's customer-choice rules have allowed new, large customers to choose their electricity provider, the Southern Company has won over 80% of the business in which they have competed. Relationship marketing, through the deregulation of the electric utility industry, will allow this very thing to happen on a national level.

What happens when this occurs? Will rural electric cooperatives begin to lose their major customers? If so, will rural electric cooperatives begin to lose revenues? Probably, and probably enough revenues that a price increase will be necessary just to continue to operate and stay in business. What happens if rural electric cooperatives have uncompetitive rates in a competitive world? Could someone such as the Southern Company win away rural electric cooperatives' customers? Probably, and could do so very easily.

The Southern Company is certainly an aggressive leader in the changing world of the electric industry. They are working to be the dominant player in the electricity marketplace, regardless of how it evolves. The Southern Company's vision is to be the biggest, the strongest, and the smartest in the electric utility industry and has certainly taken a leadership role in the products and services offered to their consumers.

The following are some of the products and services the Southern Company offer their customers today:

1. A billing option that reduces the impact of extreme weather on the customer's monthly electric bill by billing them 1/12 of their past 12 months electric usage.

2. A service that provides a programmable thermostat to help control the customer's heating and cooling energy use in exchange for allowing them to control their customer's air conditioner and electric water heater during critical summer peak periods.

3. A service that provides a customer-controlled energy management system that can take advantage of lower electric prices for most of the year and which can reduce their customer's air conditioner and electric water heater usage during higher priced critical summer peak periods.

4. Provide national accounts (Wal-Mart, McDonald's) with the option of dealing with only one company for all of their energy needs.

5. A source for customers to purchase any electric appliance and provide them the option of monthly payments on their energy bill.

6. Involvement in their local communities by participating in school programs, donating money and time, developing charity programs, and having a large presence with their customer base.

7. Active involvement in the political arena to ensure their issues and agendas are being represented, heard, and carried out.

8. Provide and install interactive advanced energy management systems in their customers homes and businesses.

9. A billing option that allows them to automatically draft their customers checking account for the amount of their bill every month.

10. Provide a free in-home evaluation of the customer's home insulation and energy systems to identify potential energy-saving options.

11. Low interest rate financing to install high efficiency electric heating and cooling equipment.

12. Appliance protection contracts that insure appliances and electronics from lightning surges and the convenience of including the monthly payment on their energy bill.

13. A service called the LINC which combines four separate functions - two-way radio, phone service, paging/short messaging, and mobile data transmission, all in digital quality.

14. In selected markets, offer to their consumers a green (environmentally friendly) electricity rate.

15. Special services to customers with special needs, such as telecommunications for the deaf and monthly bills printed in braille.

16. The convenience of payment by credit card.

17. The convenience of applying for electric service over the phone.

18. Free electrical safety presentations to civic groups and elementary schools.

The following products and services may be offered by the Southern Company in the future:

1. Natural gas and/or propane service.

2. Become one company, instead of five different holding/operating companies

3. Home security service with the convenience of the monitoring fee included on the customer's monthly energy bill.

4. Service contracts for appliance repair with the convenience of including the payment on their customer's monthly energy bill.

5. A single point of contact for their customers utility needs offering the convenience of one monthly bill, including, but not limited to, electricity, natural/propane gas, local and long distance telephone service, home security monitoring, Internet access, water and sewer service, appliance financing, and cable or satellite TV.

6. Provide and manage a waste collection service.

7. Group rate insurance coverage, with the option to put monthly premiums on their energy bill.

8. Real estate sales and development for residential, commercial and industrial customers. By having control of the real estate market, economic development for their service areas will be greatly enhanced.

9. A customer credit union with the option of debiting and crediting their customers accounts. They could offer their customers low interest rates in exchange for debiting their accounts for monthly energy or services payments, and also help eliminate bad debt.

10. Buy or attempt to buy the Power Marketing Agency's (PMA's).

By reviewing the products and services the Southern Company either offers now or is planning to offer in the near future, it is obvious that the Southern Company doesn't plan to be satisfied with the accomplishments and successes it has enjoyed and achieved in the past.

While rural electric cooperatives offer some of the products and services the Southern Company offers; such as the DIRECTV/Digital Satellite System program, the Good Cents marketing program, project share, bank draft payments, surge protection program, security lights, free energy audits and advice, capital credit payments, 24-hour emergency outage response, natural/propane gas, community charity programs, and rural water/sewer systems, it is apparent that rural electric cooperatives can and need to do more to compete service for service with the Southern Company.

The Southern Company's size and the huge annual profits they enjoy is one of their biggest assets. Again, this is clear to see by the vast array of products and services available to their consumers. Again, it is also evident in the $10 million advertising campaign for 1997 geared to persuade consumers to choose them, when given a choice. However, their largeness may also be somewhat of a liability. For example:

Rural electric cooperatives are local, caring, and personable businesses that are owned by the customers they serve. There isn't one member/customer of a rural electric cooperative that can't get in touch personally with the CEO of the company or anybody else who is employed at that cooperative. The Southern Company can't truthfully make that claim. In a day when large corporations are closing the local/branch offices to cut costs, such as the Southern Company, the fact that a consumer can have a voice and a say in their utility company, hopefully will make a difference for rural electric cooperatives.

The Southern Company's huge size and lower level of commitment to the less dense, rural areas they serve was very evident in the 1995 hurricanes ERIN and OPAL. While the bigger cities received plenty of attention to restoration efforts, (Pensacola, Mobile, Atlanta), it was reported that the customers not living in heavily populated areas didn't receive that same quality attention from the Southern Company. If they have a weakness, this is where it shows. But isn't that historically true of a for-profit, investor-owned utility company? "Taking care of the people who make the most rate of return for their stockholders first", then worrying about the rest.

If the Southern Company makes the commitment they say they will to their customer service efforts, and continue to offer and add to their services and products, all without increasing their retail prices, they will be a very tough/competitive threat to any rural electric cooperative, or any other utility company in the world.

The Southern Company is very well managed and their intelligent management staff and work force appear to be committed to the deregulated electric industry challenge. Money is something they have an abundance of, and if the Southern Company continues to satisfy their customers, they will indeed expand and grow their company, possibly taking over many utility companies in the future. Rural electric cooperatives can't afford to be less than the best in all aspects of the electric business if they hope to compete or survive in a competitive, deregulated world. Rural electric cooperatives must continue to put the member/customer first in every decision made.

The Southern Company expects to be the utility of choice in the United States and the world, and will pursue any venture, product, or service that will accomplish that goal. The Southern Company wants to provide every possible service to everyone possible, providing the service builds customer loyalty and makes an acceptable rate of return for their company's stockholders.

One thing is for sure, the electric industry is about to go on a fast roller-coaster ride. The Southern Company, through their ingenuity, resources, strategic initiatives, and products and services, will raise the level of the electric/energy playing field.

Rural electric cooperatives must manage better, plan better, and give better customer service than ever before if they hope to be a player in the deregulated energy industry. Rural electric cooperatives have some very attractive service territories that the Southern Company, or any energy provider, would certainly love to have. Because of this fact, customer satisfaction must continue to be excellent and the cooperative must continue to provide and look to provide affordable electric rates, needed and wanted customer products and services, and provide world class customer service to have a chance of survival. With the younger generation in today's market, the loyalty rural electric cooperatives have enjoyed from the customers who could remember the days without electricity are slowly but surely dying out. Because of this, no rural electric cooperative can assume its customers care about the history of the REA/RUS program.

The future, while uncertain, can be bright for all rural electric cooperatives. If cooperatives unite and join together, they will become the largest provider of electricity in the United States. This means that rural electric cooperatives nation-wide need to start thinking outside the box and look and search for different ways to conduct business that 10 years ago would have been unthinkable. Shared services, mergers, and joint economies of scale will certainly be areas for serious consideration. Rural electric cooperatives are certainly in the ball game and have some very good teammates in their generation and transmission cooperatives, rural electric statewide associations, the National Rural Electric Cooperative Association, CFC, and the National Rural Telecommunications Cooperative.

Rural electric cooperatives will have to compete on the same level in all aspects of the energy business with the Southern Company. Individually this will be difficult. United with the nations other rural electric cooperatives, however, competition becomes possible, though not easy. A united presence will strengthen every rural electric cooperative's competitive position in the energy industry and may define the key to survival. There is strength in numbers. The survival of not-for-profit rural electric cooperatives in the United States may depend upon it

Brad Kimbro is Director of Public Relations and Telecommunications for Baldwin County Electric Membership Corporation in Summerdale, Alabama. He holds a bachelors degree in Marketing from Troy State University and is a recent graduate of NRECA's Management Internship program.