Southern Company (SO) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; filed April 26, 2023. Unaudited results. This combined filing covers Southern Company and five subsidiaries; figures below are primarily consolidated Southern Company amounts unless noted.
Business context and financial performance
Southern Company is a regulated electric and natural gas utility holding company, with wholesale generation and related businesses. Results are seasonal and the company cautions that quarterly results are not necessarily indicative of full-year performance.
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Operating revenues | $6.480 billion | $6.648 billion | Down 2.5% |
| Operating income | $1.218 billion | $1.384 billion | Down 12.0% |
| Consolidated net income attributable to Southern Company | $862 million | $1.032 billion | Down 16.5% |
| Diluted earnings per share | $0.79 | $0.97 | Down 18.6% |
| Net cash from operating activities | $844 million | $1.592 billion | Down $748 million |
| Property additions | $1.850 billion | $1.419 billion | Up $431 million |
| Interest expense, net of amounts capitalized | $582 million | $462 million | Up 26.0% |
Operating margin was approximately 18.8%, compared with 20.8% a year earlier. Revenue fell mainly as lower natural gas cost recovery and milder electric-service-area weather offset rate increases and higher other revenues. Management attributed the earnings decline chiefly to higher depreciation and interest expense, and lower weather-related retail electric revenue.
Cash flow, debt and liquidity
- Operating cash flow of $844 million was below property additions of $1.850 billion; net investing cash outflow was $2.118 billion. Cash, cash equivalents and restricted cash ended the quarter at $1.217 billion, down from $2.037 billion at year-end 2022.
- At March 31, total assets were $134.756 billion and total liabilities were $100.194 billion. Long-term debt was $52.060 billion; securities due within one year were $4.363 billion and notes payable were $2.554 billion. These components total approximately $59.0 billion of debt and short-term borrowings.
- Current liabilities exceeded current assets by $4.338 billion. Management said working-capital needs can be met through operating cash flow, commercial paper, bank lines and short-term borrowing, as market conditions permit.
- Unused committed bank credit was $7.564 billion. The company reported compliance with applicable financing covenants. Q1 cash dividends were $0.68 per share, versus $0.66 in Q1 2022.
- Southern Company issued $1.725 billion of 3.875% convertible senior notes due December 2025 and redeemed $550 million of junior subordinated notes. The new notes are initially convertible at approximately $84.16 per share; no dilution from them was reported for Q1.
Material changes and subsidiary highlights
- Depreciation and amortization increased $219 million, primarily reflecting higher depreciation rates at Alabama Power and Georgia Power and additional plant in service. Interest expense rose $120 million, reflecting higher rates and average borrowings.
- Electric retail revenue was nearly flat year over year: $3.599 billion versus $3.613 billion. Management reported a $152 million adverse weather effect, partly offset by $97 million from rates and pricing.
- Southern Company Gas revenue declined 8.9% to $1.875 billion, mainly from lower gas-cost recovery; net income decreased to $309 million from $319 million. Gas prices were 31% lower year over year, and warmer weather reduced heating degree days in Illinois and Georgia.
- Southern Power revenue declined 5.8% to $508 million, while net income attributable to Southern Power increased to $102 million from $72 million, aided by a $16 million pretax gain on spare-parts sales and higher tax-equity-related income.
- Among the traditional electric utilities, Alabama Power net income fell to $255 million from $351 million; Georgia Power fell to $296 million from $385 million; Mississippi Power rose to $58 million from $42 million.
Outlook, notable projects and risks
- Plant Vogtle Units 3 and 4: Georgia Power owns 45.7%. Unit 3 achieved initial criticality March 6 and first generated electricity April 1, 2023; it was projected to enter service in May or June 2023. Unit 4 hot functional testing began March 20, with fuel load projected for Q3 2023 and service projected for late Q4 2023 or Q1 2024.
- Georgia Power’s share of the forecast capital cost to complete the units, including contingency, was approximately $10.593 billion, with $846 million remaining at March 31. The forecast includes approximately $610 million of costs not shared with other owners; financing costs were estimated at $3.5 billion, of which $3.3 billion had been incurred. Further delays may increase costs, and any nonrecoverable forecast increases could be charged to earnings.
- Georgia Power recorded $407 million of pretax charges through 2022 for Vogtle cost-sharing and owner-settlement matters; up to approximately $345 million of additional pretax charges could arise from unresolved OPC and Dalton disputes. Outcomes of the litigation and related cost allocation remain uncertain.
- After quarter-end, Georgia Power sought a 54% fuel-rate increase effective June 1, 2023, expected to raise annual billings by approximately $1.1 billion. The filing states fuel-rate changes do not significantly affect net income but do affect cash flows; the final regulatory outcome was pending as of the filing.
- Alabama Power’s Plant Barry Unit 8 had approximately $541 million of expenditures and was expected to enter service in November 2023. Alabama Power also filed for a $78 million annual retail-revenue increase related to the Central Alabama Generating Station.
- Risks highlighted include construction cost and schedule execution, regulatory cost recovery, inflation and interest rates, fuel and commodity prices, weather and demand, environmental compliance, litigation, cyber or physical attacks, and access to capital. The EPA’s proposed wastewater limits may result in significant compliance costs; the eventual impact was not yet determinable.
- Contingencies include an EPA notice concerning Alabama Power’s Plant Barry ash-pond closure plan, which could affect asset-retirement estimates; an appeal in Mississippi Power’s sales-tax audit dispute involving a $28 million assessment plus estimated interest; and other environmental and personal-injury litigation. The filing does not provide a clear estimate of potential losses for several matters.
Guidance: The provided filing text does not state a consolidated earnings-per-share or net-income forecast. Project dates and regulatory rate requests above are management estimates or pending matters, not assurances.
Important facts for investors to verify
- Whether Vogtle Unit 3 entered commercial service on the projected schedule and whether Unit 4 met its projected fuel-load and in-service milestones; monitor remaining costs, contingency and recoverability.
- Developments in Georgia Power’s disputes with OPC and Dalton, including any additional charges or changes in Georgia Power’s ownership and funding obligations.
- Final regulatory action and customer-bill effects from Georgia Power’s fuel-rate request, alongside collection of under-recovered fuel costs.
- Whether operating cash flow rebounds from the quarter’s timing-related decline and how construction spending, dividends and debt maturities affect liquidity.
- Resolution of the Plant Barry ash-pond proceedings, Mississippi Power’s tax audit appeal, and any environmental-rule changes that could raise compliance costs.