Southern Company — Form 10-Q Summary
Reporting period: Three months ended March 31, 2015. The combined filing covers Southern Company and Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power. Financial figures below are consolidated Southern Company amounts unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenues | $4.183 billion | $4.644 billion | Down 9.9% |
| Operating income | $957 million | $700 million | Up 36.7% |
| Consolidated net income | $525 million | $368 million | Up $157 million |
| Net income after subsidiary preferred dividends | $508 million | $351 million | Up 44.7% |
| Diluted EPS | $0.56 | $0.39 | Up $0.17 |
| Operating margin | 22.9% | 15.1% | Higher |
| Operating cash flow | $913 million | $1.103 billion | Down $190 million |
| Cash used for investing | $1.107 billion | $1.215 billion | Outflow |
| Cash provided by financing | $596 million | $43 million | Higher |
Revenue and expenses were affected by milder weather, lower fuel prices, and lower energy sales. Retail revenue declined 8.2%; lower fuel and cost-recovery revenue accounted for much of the decrease and generally offsets related fuel costs. Non-fuel operations and maintenance expense rose $136 million to $1.122 billion. The improved earnings comparison primarily reflects the much smaller Kemper IGCC loss charge in Q1 2015 than in Q1 2014.
At March 31, 2015, cash and cash equivalents were $1.112 billion, total assets $71.610 billion, long-term debt $21.093 billion, notes payable $1.679 billion, and securities due within one year $3.306 billion. Current liabilities exceeded current assets by $2.8 billion, largely because of near-term debt maturities. The company reported access to $5.147 billion of unused committed credit arrangements and stated it remained in compliance with applicable credit covenants. The quarterly common dividend was $0.525 per share; it was increased to $0.5425 in April, payable in June.
Material changes and subsidiary results
- Kemper: The Q1 estimated-loss charge fell to $9 million pre-tax ($6 million after tax), from $380 million pre-tax ($235 million after tax) a year earlier. Southern Company’s cumulative charges through March 31, 2015 were $2.06 billion pre-tax ($1.27 billion after tax).
- Weather, fuel mix, and costs: Lower gas and coal prices and milder weather reduced fuel and purchased-power costs by $478 million. Gas provided 47% of system generation versus 33% a year earlier; coal’s share declined to 33% from 47%. Higher non-fuel operating and maintenance costs partly offset the benefit.
- Operating-company earnings after preferred dividends: Alabama Power $169 million versus $187 million; Georgia Power $236 million versus $266 million; Gulf Power $37 million in both periods; Mississippi Power $35 million versus a $172 million loss. Southern Power’s attributable net income was $33 million in both periods.
- Mississippi Power: Retail revenue fell 19.3%, principally reflecting the Mississippi Supreme Court decision concerning Kemper-related rate collections and lower fuel-cost recovery. The company had $311 million of Mirror CWIP regulatory liability, including carrying costs, and $275 million of refundable SMEPA deposits.
Outlook, risks, and unusual items
- Kemper IGCC: Total current project estimate was approximately $6.22 billion, with $4.94 billion subject to the Mississippi PSC cost cap. The remaining gasifier and gas-cleanup facilities were expected in service in the first half of 2016; the estimate included costs through March 31, 2016. Mississippi Power said it would not seek recovery or joint-owner contributions for costs exceeding the applicable $2.88 billion cap, net of grants and excluding specified exceptions. Further delay could add an estimated $25–$30 million per month in base costs, plus approximately $13 million monthly AFUDC and $6 million monthly carrying, operating, consulting, and legal costs. Cost recovery, prudency review, completion timing, and the proposed SMEPA interest sale remained uncertain.
- Mississippi rate litigation and liquidity: The Mississippi Supreme Court reversed the 2013 rate order and directed the regulator to restore prior rates and order refunds. Mississippi Power and the PSC sought rehearing. Up to $294 million collected under the order had been recorded, and any required refund could include carrying costs. Mississippi Power also had $900 million of bank term loans due April 1, 2016; it reported that 2015–2017 capital expenditures and maturities were expected to materially exceed operating cash flow. Subsequent to quarter-end, it arranged or extended loans maturing in April 2016.
- Vogtle Units 3 and 4: The contractor’s revised forecast delayed estimated in-service dates by 18 months, to Q2 2019 for Unit 3 and Q2 2020 for Unit 4. Georgia Power’s filing estimated total in-service capital cost of $5.0 billion and construction-period financing costs of about $2.5 billion; financing costs were estimated at about $30 million per month. Georgia Power disputed responsibility for contractor delay costs, and related litigation and negotiations continued. The Georgia PSC said certified costs are not a recovery cap; excess costs may enter rate base if found reasonable and prudent.
- Environmental compliance: Following the EPA’s April 17, 2015 coal-combustion-residuals rule, Southern Company expected to record $525–$575 million of incremental asset retirement obligations in Q2 2015. The filing also describes unit retirements, coal-to-gas conversions, and other compliance spending; recoverability and final costs remain subject to regulatory review.
- FERC market-based rates: An April 27, 2015 FERC order questioned existing market-power mitigation in certain areas and required the traditional operating companies and Southern Power to respond within 60 days or propose further mitigation. The outcome was not determined.
- Other risks and plans: Southern Power planned substantial 2015 investment in acquisitions and renewable construction, with estimated capital expenditures of about $1.4 billion. Demand, weather, fuel prices, environmental regulation, construction execution, regulatory cost recovery, credit ratings, and legal proceedings could affect results. Management provided no specific earnings guidance in the supplied filing text.
Most important facts for investors to verify
- Whether Kemper reaches commercial operation on the expected schedule and whether its total cost, further loss charges, and recoverable amounts change.
- The outcome and timing of Mississippi’s rehearing, any refund of Mirror CWIP collections, replacement rate recovery, and the SMEPA transaction.
- Vogtle schedule and cost developments, contractor claims, Georgia PSC treatment of costs above the certified amount, and available financing.
- The effect of the EPA CCR rule and other environmental requirements on asset retirement obligations, capital spending, and customer rate recovery.
- Near-term refinancing needs, particularly Mississippi Power’s April 2016 maturities, and whether cash flow and committed facilities remain adequate.
- The result of the FERC market-power proceeding and any effect on market-based sales authority.