SOUTHERN CO quarterly report, Q3 FY2011

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Business context and reporting period

Southern Company’s combined, unaudited Form 10-Q covers the quarter and nine months ended September 30, 2011, with 2010 comparatives. Its core business is regulated electric service in the Southeast through Alabama Power, Georgia Power, Gulf Power, and Mississippi Power; Southern Power sells electricity in wholesale markets. Results are seasonal and are not necessarily indicative of full-year performance.

Financial results and position

MetricQ3 2011Q3 2010Nine months 2011Nine months 2010
Operating revenue$5.428B$5.320B$13.961B$13.685B
Operating income$1.652B$1.459B$3.642B$3.332B
Net income$933M$834M$1.991B$1.871B
Net income after subsidiary preferred and preference dividends$916M$817M$1.942B$1.822B
Diluted EPS$1.06$0.97$2.26$2.19

Revenue increased 2.0% in Q3 and 2.0% year to date; net income after subsidiary preferred and preference dividends rose 12.1% and 6.6%, respectively. Operating margin, calculated from reported figures, was approximately 30.4% versus 27.4% in Q3 and 26.1% versus 24.4% year to date. Cash dividends per common share were $0.4725 in Q3 and $1.40 year to date, compared with $0.455 and $1.3475.

  • Cash flow: Nine-month operating cash flow was $4.598B, compared with $3.527B; investing cash outflow was $2.898B versus $3.006B; financing cash outflow was $631M versus $48M provided. Cash at period-end was $1.516B, up from $447M at December 31, 2010.
  • Debt and liquidity: At September 30, current securities due within one year were $1.891B, notes payable $137M, and long-term debt $18.733B. Current assets were $6.495B and current liabilities $5.657B. The company reported approximately $5.127B of unused committed bank credit in addition to cash.
  • Investment and funding: Property, plant, and equipment increased $1.795B from year-end, including construction and environmental projects. Nine-month debt issuance totaled $3.144B and redemptions $1.987B; common-stock issuance generated $620M.

Material changes versus prior periods

  • Georgia Power’s rate increases under its 2010 Alternate Rate Plan and nuclear construction cost recovery tariff were the principal drivers of consolidated earnings growth. The Georgia tax-credit settlement also contributed to year-to-date results, including approximately $64M of tax benefits and a $23M reduction in related interest expense.
  • Cooler Q3 weather, particularly in September, reduced retail revenues; year-to-date comparisons also reflected colder weather in Q1 2010. Weather-adjusted retail electricity sales increased 0.5% in Q3 and 1.1% year to date.
  • Southern Power’s nine-month net income rose to $138M from $109M, supported by new power purchase agreements (PPAs); its Q3 net income declined to $56M from $63M. Alabama Power’s nine-month net income after preferred dividends fell to $606M from $652M, and Gulf Power’s fell to $86M from $101M. Georgia Power’s increased to $1.035B from $896M; Mississippi Power’s rose to $78M from $64M.
  • Depreciation and amortization increased $142M year to date, largely because of lower amortization of a Georgia Power regulatory liability and additions to utility plant. Fuel and purchased-power costs declined overall, generally offset by regulated fuel-cost recovery.

Outlook, risks, contingencies, and unusual items

  • Outlook: The filing provides no specific consolidated earnings or EPS guidance. Management identifies demand, weather, the uncertain economic recovery, fuel costs, cost control, rate recovery, financing access, and wholesale contract renewals as factors affecting future results.
  • Environmental exposure: Preliminary estimates put traditional operating-company capital costs for proposed environmental rules at $13B–$18B through 2020 if adopted as proposed. The Utility MACT, cooling-water, coal-combustion-byproduct, and Cross State Air Pollution rules could require major investment, affect unit availability or retirement decisions, and pressure reliability and results if costs are not recovered in rates. The estimates and outcomes remain uncertain.
  • Major construction: Georgia Power’s Plant Vogtle nuclear units were expected to enter service in 2016 and 2017; NRC licensing, schedule, cost, and contractor disputes remain risks. Mississippi Power’s Kemper IGCC project had $664.9M of costs incurred by September 30, 2011; construction, permitting, cost recovery, DOE support, and litigation remain uncertain. The company estimated 2011–2013 base construction investment of $4.9B, $5.1B, and $4.5B, respectively.
  • Rate cases and recovery: Gulf Power sought a permanent $93.5M annual retail rate increase; an interim $38.5M annual increase was approved subject to refund, with a decision expected in Q1 2012. Alabama Power expected an approximately $150M annual revenue effect from a rate-structure change beginning in 2012, while agreeing to no 2012 increase under its Rate RSE mechanism.
  • Post-quarter transaction: On October 20, Mississippi Power bought the Plant Daniel combined-cycle facility for about $85M cash and assumed debt with a $270M face value and an estimated $346M fair value. The facility is expected to be recorded at approximately $431M; requested regulatory accounting treatment remained pending.
  • Other contingencies: Southern Company identified a possible after-tax impairment of approximately $80M on a leveraged lease if a project is abandoned. Environmental and other litigation outcomes remain uncertain. Alabama Power’s EPA New Source Review case was dismissed, but the EPA appealed. The filing states there were no material changes to previously disclosed risk factors and that disclosure controls were effective.

Important facts for investors to verify

  1. Whether Georgia Power’s rate-driven earnings growth and higher sales persist after weather effects and unusual tax benefits.
  2. Final environmental rules, compliance spending, rate-recovery approvals, and their effects on generation availability and reliability.
  3. Plant Vogtle and Kemper licensing, construction schedules, total costs, financing support, and regulatory recovery.
  4. Outcomes of Gulf Power’s permanent rate case and Mississippi Power’s Plant Daniel accounting requests.
  5. Debt maturities, funding needs, and liquidity after the Plant Daniel purchase and planned construction spending.
  6. Developments in the leveraged-lease exposure and material litigation or regulatory proceedings.