Business context and reporting period
Southern Company’s combined Form 10-K covers the fiscal year ended December 31, 2009, with quarterly information for 2009 and 2008. Its core business is regulated electric service through four southeastern operating utilities; Southern Power sells generation wholesale at market-based rates. The results below are consolidated Southern Company figures unless a subsidiary is identified. The filing also includes separate reports for its subsidiaries.
Financial performance and liquidity
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Operating revenue | $15.743 billion | $17.127 billion |
| Operating income | $3.268 billion | $3.506 billion |
| Consolidated net income | $1.708 billion | $1.807 billion |
| Net income after subsidiary preferred and preference dividends | $1.643 billion | $1.742 billion |
| Basic / diluted EPS | $2.07 / $2.06 | $2.26 / $2.25 |
| Operating margin, approximately | 20.8% | 20.5% |
| Net income after subsidiary preferred dividends as a share of revenue, approximately | 10.4% | 10.2% |
| Cash from operations | $3.263 billion | $3.464 billion |
| Property additions | $4.670 billion | $3.961 billion |
| Long-term debt, excluding amounts due within one year | $18.131 billion | $16.816 billion |
For the fourth quarter of 2009, consolidated revenue was $3.510 billion, operating income $477 million, net income after subsidiary preferred and preference dividends $249 million, and basic EPS $0.31. Fourth-quarter 2008 comparables were $3.802 billion, $469 million, $186 million, and $0.24, respectively.
At year-end, cash and cash equivalents were $690 million, total assets $52.046 billion, total liabilities $36.086 billion, and stockholders’ equity $15.585 billion. Long-term debt represented 53.2% of capitalization, compared with 53.9% in 2008. Southern Company and subsidiaries had $4.8 billion of unused bank credit and reported investment-grade ratings. Common dividends were $1.7325 per share for the year, up from $1.6625; the reported payout ratio was 83.3%, or 74.2% excluding the MC Asset Recovery settlement.
Material changes versus the prior comparable period
- Revenue fell 8.1% and net income after subsidiary preferred and preference dividends fell 5.7%. Management attributed the earnings decline primarily to the $202 million MC Asset Recovery settlement, lower electricity demand, reduced market-response revenues, higher depreciation and interest, and unfavorable weather.
- Total electricity sales declined 6.8%: retail sales fell 4.8% and wholesale sales 14.9%. Industrial retail volume dropped 11.8%, reflecting recession-related demand weakness. The number of retail customers was approximately flat.
- Fuel and purchased-power expenses fell 15.8%, mainly due to lower generation and purchases and lower natural-gas costs. Coal’s share of generation declined to 57% from 68%, while gas rose to 23% from 16%.
- Operating cash flow decreased $201 million while property additions increased; investing cash use exceeded operating cash flow. Debt rose, and Southern Company issued common shares, raising $1.286 billion in total proceeds from common stock issuances.
- Southern Power acquired West Georgia, a roughly 669-MW dual-fuel plant, and Nacogdoches Power, which is developing a 100-MW biomass facility. Southern Power reported 7,880 MW of nameplate capacity in commercial operation at year-end.
Outlook, management commentary, risks, and unusual items
- Management’s 2009 EPS target was $2.30–$2.45; actual basic EPS was $2.07. Excluding the MC Asset Recovery settlement, management reported EPS of $2.32. This is a 2009 performance target, not forward guidance; the supplied filing text does not provide a clear formal 2010 earnings forecast.
- The $202 million MC Asset Recovery charge was paid in the second quarter of 2009; the settlement resolved the claims and the case was dismissed with prejudice. Management’s non-GAAP adjusted EPS excludes this charge.
- Planned system construction spending was approximately $4.9 billion in 2010, $5.3 billion in 2011, and $6.2 billion in 2012, including environmental expenditures of $545 million, $721 million, and $1.2 billion, respectively. Management cautioned that estimates may change and cost recovery is not assured.
- Plant Vogtle Units 3 and 4 are planned for service in 2016 and 2017, subject to licensing and other approvals. Georgia Power’s share is 45.7%. The filing cites a $6.4 billion certified in-service cost and approximately $1.7 billion of construction-period financing costs recoverable beginning in 2011; later monitoring refers to an effective certified amount of about $6.1 billion. A DOE conditional loan-guarantee commitment of up to approximately $3.4 billion was offered after year-end and remained subject to conditions and acceptance.
- Mississippi Power’s proposed 582-MW Kemper IGCC project was estimated at approximately $2.4 billion, with expected commercial operation in May 2014, subject to regulatory decisions. The Mississippi PSC’s resource and cost-recovery decision was pending; $73.5 million of pre-construction planning and related costs had been incurred by year-end, most deferred as a regulatory asset.
- Material risks include new environmental rules on greenhouse gases, air and water quality, and coal ash; the unresolved EPA New Source Review actions; greenhouse-gas nuisance litigation; construction delays or overruns; fuel and demand volatility; pension funding; and the ability to recover costs through rates. The Second Circuit revived the New York greenhouse-gas case, while the Kivalina dismissal was appealed. The DOE spent-nuclear-fuel claims remained unresolved; no amounts were recognized for those claims.
- Georgia Power was required to file a general rate case by July 1, 2010. Its proposed fuel-recovery stipulation would increase annual billings by about $425 million and recover a year-end under-recovered balance of approximately $665 million over 32 months, subject to PSC approval. Alabama Power’s 2010 rate adjustments included a $152 million annual RSE increase and a $195 million annual environmental increase.
Important facts for investors to verify
- Review the audited financial statements and notes for cash-flow conversion, debt maturities, liquidity, and the effect of higher capital spending and share issuance.
- Confirm subsequent regulatory decisions, cost estimates, financing, licensing, and schedules for Vogtle, Kemper, and other major construction projects.
- Track the timing and recoverability of fuel, environmental, and storm-related balances, including Georgia Power’s fuel case and 2010 rate filings.
- Assess exposure to environmental regulation and litigation, including potential coal-unit retirements, EPA actions, and greenhouse-gas claims.
- Verify the assumptions behind the adjusted $2.32 EPS measure, the MC Asset Recovery settlement treatment, and the elevated reported dividend payout ratio.