Southern Company 2014 Q3 Form 10-Q
Business context and period. This combined, unaudited filing covers The Southern Company and its subsidiaries Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power. The quarter and nine-month periods ended September 30, 2014; the report was signed November 6, 2014. The traditional utilities provide regulated electric service across four Southeastern states, while Southern Power sells wholesale generation, including renewable power.
Key financial results
| Southern Company, consolidated | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $5.339 billion | $5.017 billion | $14.450 billion | $13.160 billion |
| Operating income | $1.278 billion | $1.491 billion | $3.081 billion | $2.456 billion |
| Net income after subsidiary preferred dividends | $718 million | $852 million | $1.680 billion | $1.230 billion |
| Diluted EPS | $0.80 | $0.97 | $1.87 | $1.40 |
- Revenue and earnings: Q3 revenue rose 6.4%, but net income after preferred dividends fell 15.7%; nine-month revenue increased 9.8% and net income rose 36.6%. Quarterly operating margin was about 23.9% versus 29.7% a year earlier; nine-month operating margin was about 21.3% versus 18.7%.
- Drivers: Retail revenue increased 5.5% in Q3 and 8.4% year to date, reflecting rate increases, weather, sales, and fuel-cost recovery. Wholesale revenue rose 15.4% and 22.3%, respectively, largely from Southern Power contracts and sales. Fuel and purchased-power cost increases are generally recovered through regulated mechanisms and typically do not materially affect earnings.
- Cash flow: Nine-month operating cash flow was $4.687 billion, versus $4.411 billion; investing cash use was $4.157 billion, versus $4.102 billion, including $3.903 billion of property additions. Financing provided $225 million, compared with $255 million of cash use in 2013. Cash ended the period at $1.414 billion, up from $659 million at year-end 2013.
- Debt and liquidity: At September 30, long-term debt was $21.699 billion; current securities due within a year were $2.398 billion and notes payable were $361 million. Current assets of $6.258 billion were below current liabilities of $6.890 billion, reflecting seasonality and near-term debt maturities. The company reported $5.203 billion of committed bank credit arrangements, of which $5.188 billion was unused; management said it remained in compliance with covenants and described its financial condition as stable.
- Shareholder returns: Q3 common dividend was $0.525 per share, up from $0.5075. Nine-month common dividends paid were $1.391 billion.
Material changes and major projects
- Kemper IGCC: The project’s escalating cost estimate was the central earnings and execution issue. Southern recorded a $418 million pre-tax charge in Q3 2014, versus $150 million in Q3 2013; nine-month charges were $798 million, versus $1.140 billion. Cumulative charges through September 30, 2014 were $1.98 billion pre-tax ($1.22 billion after tax). The Q3 charge reduced consolidated net income by approximately $258 million after tax.
- The updated project estimate was approximately $6.10 billion in total, including $4.86 billion for costs subject to the cap, net of DOE grants and excluding specified exceptions; the Mississippi PSC cap is $2.88 billion on that basis. Actual total costs incurred at September 30 were $4.97 billion. Mississippi Power said it did not intend to seek recovery or joint-owner contributions for costs above the cap, subject to specified exceptions and regulatory determinations.
- The combined-cycle and associated facilities entered service on natural gas August 9, 2014. 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; a further delay was estimated to add $20 million to $30 million per month. The company expected about $0.8 billion in additional non-recoverable cash expenditures through completion, after $1.18 billion incurred through September 30.
- Vogtle Units 3 and 4: Georgia Power owns 45.7%. The estimated in-service dates were Q4 2017 and Q4 2018 for Units 3 and 4, respectively; estimated construction-period financing costs were approximately $2.0 billion. Georgia Power had borrowed $1.0 billion under the DOE-guaranteed FFB facility, with $1.0 billion of stated borrowing availability. Contractor claims over design changes and schedule impacts remained in litigation; project execution and cost recovery remained uncertain.
- Southern Power growth: The company acquired operating 20-MW Adobe and 50-MW Macho Springs solar facilities in 2014. A subsequent-quarter acquisition related to the approximately 150-MW Imperial solar facility was expected to bring Southern Power’s purchase price to about $508 million. New solar revenues supported wholesale growth, while added depreciation and lower capitalized interest contributed to lower Southern Power earnings.
Outlook, risks, and unusual items
- Management provided no consolidated earnings guidance in the supplied filing text. It estimated system construction spending of $7.2 billion for 2014, $5.8 billion for 2015, and $4.4 billion for 2016; these estimates are subject to revision and do not assure full cost recovery.
- Kemper cost, schedule, operational readiness, tax-credit eligibility, securitization, and rate recovery remained subject to substantial uncertainty and Mississippi PSC prudence review. The Seven-Year Rate Plan remained under review; proposed revisions were estimated to increase average annual retail revenue requirements by $60 million to $70 million through 2020, with rate-mitigation measures subject to approval.
- Mississippi Power had approximately $812 million of debt maturities due through September 30, 2015 and current liabilities exceeding current assets by about $1 billion. It expected to rely on Southern Company equity contributions or loans, cash, and credit markets. The parent reported approximately $2.4 billion of debt maturities through September 30, 2015.
- Other material exposures included potential Vogtle contractor claims; environmental rules and compliance costs, including the proposed Clean Power Plan and CSAPR implementation; fuel prices, weather, demand, and regulatory cost recovery; and possible collateral requirements following credit-rating downgrades. The filing said the ultimate impact of proposed environmental requirements could not yet be determined.
- Mississippi Power’s Sierra Club settlement required $15 million of grants over 15 years and a $2 million conservation-fund contribution; $7 million was paid and expensed in Q3. It also committed Mississippi Power to specified coal-to-gas conversions and unit retirement or repowering. The filing reported a roughly $100 million unrecognized tax benefit related to Kemper research-and-experimental deductions under IRS review.
- Georgia Power filed proposed January 2015 tariff increases, including about $107 million in base tariffs and $27 million in the Vogtle construction recovery tariff, subject to approval. Gulf Power’s approved 2015 cost-recovery clause changes were expected to raise annual revenue by $41.2 million, largely offset by expenses.
Most important facts for investors to verify
- Whether Kemper’s remaining construction and start-up meet the first-half 2016 target, and whether the estimate, cost-cap exceptions, and non-recoverable cash burden change.
- The Mississippi PSC’s prudence review, Seven-Year Rate Plan and securitization decisions, and completion of SMEPA’s proposed 15% project purchase.
- Vogtle schedule and cost progress, contractor claims and their potential Georgia Power share, and future financing needs.
- Actual recovery and timing of rate increases, fuel-cost balances, and environmental compliance costs under changing regulations.
- Near-term debt maturities, access to credit and capital markets, and the sustainability of cash flow and dividend payments amid the construction program.