Business context and reporting period
Southern Company’s combined, unaudited Form 10-Q covers the three months ended March 31, 2010, with comparison to Q1 2009. The filing also reports separately for Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power. The principal business is regulated electric service in the Southeast; Southern Power also sells generation into wholesale markets.
Key financial metrics
| Southern Company consolidated | Q1 2010 | Q1 2009 |
|---|---|---|
| Operating revenue | $4.157 billion | $3.666 billion |
| Operating income | $922.0 million | $489.7 million |
| Net income after subsidiary preferred and preference dividends | $494.5 million | $125.7 million |
| Diluted EPS | $0.60 | $0.16 |
| Operating cash flow | $739.0 million | $401.1 million |
| Net cash used for investing | $1.088 billion | $1.122 billion |
| Net cash from (used for) financing | $(1.4) million | $976.5 million |
Revenue increased 13.4%; operating margin was approximately 22.2%, versus 13.4%, and net income after subsidiary preferred dividends was approximately 11.9% of revenue, versus 3.4%. These margins are calculated from reported figures. Property additions were $1.054 billion. Cash and equivalents were $339.1 million at quarter-end, down from $689.7 million at December 31, 2009.
At March 31, total liabilities were $36.3 billion, including $18.1 billion of long-term debt, $1.24 billion of securities due within one year, and $770 million of notes payable. Current assets of $5.22 billion were below current liabilities of $5.52 billion. The company reported approximately $4.8 billion of unused committed bank credit and $770 million of commercial paper outstanding. Q1 common dividends were $0.4375 per share; in April, the quarterly dividend payable in June was raised to $0.455.
Changes versus the prior comparable period
- Net income rose sharply, mainly reflecting the absence of the $202 million MC Asset Recovery litigation charge recorded in Q1 2009, colder weather, Georgia Power’s authorized amortization of a regulatory liability, and Alabama Power rate increases effective January 2010.
- Retail revenue rose 12.9% to $3.459 billion. Management attributed the increase to weather, rates and pricing, higher fuel-cost recovery billings, and modest sales growth. Weather-adjusted retail electricity sales increased 2.6%.
- Fuel and purchased-power costs increased, but regulated fuel recovery generally offsets these costs in earnings; recovery timing affects cash flow. Operations and maintenance expense increased 4.2% to $908.0 million.
- Southern Power net income declined to $14.8 million from $27.9 million, primarily due to expired affiliate PPAs, higher operating and depreciation costs. Mississippi Power net income after preferred dividends declined to $15.3 million from $18.0 million.
- Common shares outstanding increased; average diluted shares were 824.8 million versus 781.6 million.
Outlook, risks, contingencies and unusual items
- Management described financial condition as stable and expects to fund capital needs through operating cash flow and external financing. The filing provides no specific consolidated earnings guidance; results are seasonal and Q1 is not necessarily indicative of full-year performance.
- Georgia Power’s new fuel rates took effect April 1, expected to increase annual fuel-recovery billings by about $373 million, with collection of the under-recovered balance over 42 months. These billings are intended to recover fuel costs and are not expected to materially affect net income.
- Plant Vogtle Units 3 and 4 remain subject to regulatory, licensing, technical, and legal processes. DOE offered a conditional loan-guarantee commitment of up to approximately $3.4 billion, subject to conditions; final guarantees were not assured.
- Kemper IGCC is a major uncertainty for Mississippi Power. A PSC order dated April 29, 2010 imposed conditions including a proposed $2.4 billion construction cost cap, deferred a decision on construction-period cost recovery, and prompted Mississippi Power to consider seeking reconsideration or rehearing. The company reported $97 million of related planning and screening expenditures by March 31, of which $87 million was deferred as a regulatory asset. It stated that about $41 million of costs could be sought for recovery if the project does not proceed.
- Environmental rules and litigation—including greenhouse-gas regulation, coal-combustion byproduct proposals, air-quality requirements, and Clean Air Act cases—could increase costs; recovery through regulated rates is not assured. Outcomes of significant litigation and regulatory matters remain uncertain.
- Georgia Power’s state tax-credit case could materially benefit earnings if resolved favorably or require significant tax payments if not. A trial court ruled for Georgia Power on March 22; the state appealed on April 30. The outcome is uncertain.
- Other post-quarter developments include acceptance of a $165 million DOE smart-grid grant to be matched by Southern Company, and the Gulf of Mexico oil spill, whose operational and regional economic effects were undetermined. Southern Power recorded an approximately $3 million non-cash expense related to 2010 health-care legislation.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing states there were no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- How much of the earnings increase reflects recurring rate and demand trends versus colder weather and the prior-year $202 million settlement charge.
- Whether cash generation and available credit remain adequate for construction spending, scheduled debt maturities, and the higher dividend.
- Final regulatory terms, cost recovery, schedule, and financing for Vogtle and Kemper, including the status of the conditional DOE guarantees.
- Fuel-cost recovery balances and the effect of collection timing on utility cash flows.
- Developments in environmental proceedings and Georgia tax-credit litigation, including potential costs, recoveries, and rate treatment.