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The Finance Forum: Growth in a Back-to-Basics World

Thomas Fanning, executive vice president and CFO, Southern Co.
Fortnightly Magazine - October 15 2003

combat, Sun Tzu's, .

Fanning says that Southern's corporate philosophy spearheaded by the company's CEO, "is to know ourselves. We are who we are. We like to say we're genetically conservative. We like the low-risk end of the spectrum. We talk about our strategy in the super Southeast being the business we know, with the customers we know, in the place we know." Fanning says Southern plans to grow by 5 percent every year. Three of the 5 percent will come from the regulated retail business and the remainder of that 5 percent will come largely through the company's competitive wholesale generation business.

Furthermore, true to the company's risk-averse nature, even Southern's wholesale business will be low risk, he says. "I think one of the hallmarks of Southern is not only that we get attractive returns, but that we are arguably the lowest risk investment in the industry. And in fact the character of our competitive wholesale business is that we invest exclusively in assets that have long-term, bilateral, wholesale contracts with credit-worthy parties. All of them are investment grade, 90 percent are A-rated or above. And the weighted average duration of those contracts is over 10 years. As you look at it, it's a very sustainable profit picture. … We don't take fuel risks, we don't lay awake at night and worry about spark spreads, it's a very kind of safe, conservative, regular, predictable, sustainable business model."

Meanwhile, Fanning says Southern feels it has reached an economy of scale in its business that it needs to be successful and does not feel it would pursue growth through merger or acquisition. But Fanning does acknowledge the growth challenge when interest rates begin to rise. "Certainly the utility industry has historically benefited from rates that are declining rather than increasing. From an investment standpoint, when you go to this total return proposition of 5 percent yield, 5 percent share growth, you can compare the 5 percent yield state of investment in a long term treasury bond, and what we can say is that we'll give you the same with a little bit better yield that you would get buying a U.S. treasury and you get a growth option with our interest share growth." But he admits that, "to the extent rates go up, then that certainly would have a negative consequence to our ability to replicate an investment in U.S. treasuries as a yield investment."

Nevertheless, he doesn't think that Southern will respond to pressures to show significant differences in the company's growth strategy and he doesn't feel that there is any momentum for deregulation in the energy market in the Southeast that would change the company's core business plan. But curiously, Southern does have a small gas company competing in Georgia's deregulated gas markets. Is Southern planning for a day that it too must compete against others in the marketplace? Fanning says no. "The integrated electricity model will stay in that manner for a period of time. However, we want to keep kind of our finger on the pulse, on a real