Frustrated by its inability to attract investors because theyview it as a stodgy utility, Southern Company last week announced amakeover in the form of a spin-off and IPO to create a separatecompany for most of its non-utility businesses.

Atlanta-based Southern said it will sell 19.9% of the newcompany to the public and spin off the rest to shareholders.

Southern, along with other energy companies, has taken a beatingin the stock market as investors have flocked to technology anddot-com stocks. The company’s shares fell 19% last year. Southernalso said it is planning to spin off to holders of Southern Companycommon stock the remaining ownership of Southern Energy within 12months of the initial public offering. The spin-off would besubject to a number of market and other conditions.

These transactions would create two large stand-alone publiclytraded energy companies: Southern Company, the leading electricutility in the southeastern United States, and Southern Energy, oneof the largest independent power producers and energy marketers inthe world.

Within a few weeks, Southern Energy expects to file aregistration statement with the Securities and Exchange Commissionfor the initial public offering of Southern Energy shares. Theoffering is expected to take place in late summer or early fall.

“The initial public offering and the subsequent spin-off willprovide a clean separation of our traditional southeasternoperations and our global unregulated energy business,” saidSouthern CEO A.W. Dahlberg. “The transactions will give theinvestment community the opportunity to assign more appropriatestand-alone valuations to each company and make more focusedinvestment decisions. The separation also will enable each companyto focus on its core strengths.

Dahlberg said Southern is committed to maintaining its currentannual dividend of $1.34/share and to grow the dividend over timeconsistent with earnings expectations. Following the spin-off,Southern’s target will be to grow earnings per share at an averageannual rate of 3 to 5%.

In response to the news, Duff & Phelps Credit Rating Co.(DCR) placed its ratings of Southern Energy and Southern EnergyNorth America Generating on Rating Watch-Down. “The rating actionsreflect the elimination of the implicit financial support ofSouthern upon completion of the pending IPO and spin-off. Thecredit quality of SEI and Generating has to date benefited fromSouthern’s implied support via significant capital investment aswell as SEI’s strategic significance to Southern’s growthinitiative.” DCR said will undertake a more complete review of SEIshortly and noted Generating’s credit quality would be lessimpacted by the transaction than that of SEI.

Southern also reported a 9% increase in first-quarter earnings,reflecting growth in both its regulated electricity business in theSoutheast and in its Asian business units. Southern reportedearnings of $245 million in the first quarter compared with $224million during the same period last year. Revenues for firstquarter 2000 were $2.6 billion compared with $2.4 billion in 1999’sfirst quarter.

Southern’s five integrated utilities in the Southeast reported$176 million in first quarter 2000 net income, compared with $168million for the same period last year. Higher energy demand, anincreased customer base and a growing wholesale energy supplybusiness in the Southeast contributed to the increase.

Southern Energy Inc., the subsidiary that includes Southern’sinternational operations and its competitive U.S. energy supplybusiness outside the Southeast, reported $101 million infirst-quarter 2000 earnings, compared with $88 million for the sameperiod last year. Its increased contribution to net income was duein large part to growing profitability from its Asian businessunits. Asian investments contributed $83 million in first-quarter2000 earnings, compared with $51 million for the same period lastyear.

Southern’s earnings for the 12 months ending March 31 were $1.3billion, compared with $959 million for the 12 months ending March31, 1999.

Reviewing operations, Dahlberg said electricity use by retailcustomers in Southern’s traditional service area in thesoutheastern United States increased 4.5% to 33.9 billionkilowatt-hours the first three months of 2000. In-home electricityneeds were up 3.9% to 9.8 billion kilowatt-hours. Electricityconsumption by commercial customers – offices, stores and othernon-manufacturing firms – rose 7.5% to 10.1 billion kilowatt-hours.Industrial energy use increased 2.9% to 13.6 billion kilowatt-hours. Total sales of electricity to Southern’s customers in theSoutheast, including sales to other utilities, increased 7.1% to39.1 billion kilowatt-hours the first three months of 2000.

Joe Fisher, Houston

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