Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2008, for The Southern Company and its subsidiary operating companies: Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power. The Southern Company is a holding company for vertically integrated electric utilities serving the Southeastern United States and a competitive wholesale power generator. The filing includes unaudited condensed consolidated financial statements and management discussion and analysis.
Key Financial Metrics
| Metric | Q1 2008 | Q1 2007 |
|---|---|---|
| Total Operating Revenues | $3,682.9 million | $3,408.7 million |
| Consolidated Net Income | $359.2 million | $338.7 million |
| Earnings Per Share (Diluted) | $0.47 | $0.45 |
| Operating Cash Flow | $520.0 million | $261.9 million |
| Investing Cash Flow | ($995.2 million) | ($787.9 million) |
| Financing Cash Flow | $523.5 million | $520.7 million |
| Cash and Cash Equivalents (End of Period) | $248.8 million | $161.5 million |
| Long-Term Debt | $14,887.5 million | $14,143.1 million (Dec 31, 2007) |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 8.0% year-over-year. Retail revenues rose 9.5% ($261.8 million) driven by base rate increases at Alabama Power and Georgia Power, market-response rates for large customers, and fuel cost recovery. Wholesale revenues increased 6.9% due to higher fuel costs and new contracts.
- Profitability: Net income increased 6.1% ($20.5 million). This was primarily due to higher retail revenues and increased contributions from market-response rates, partially offset by higher operating expenses and depreciation.
- Expenses: Fuel expenses increased 10.3% ($135.4 million) and purchased power expenses increased 45.0% ($28.8 million), reflecting a 12.8% increase in the average cost of coal. Depreciation and amortization rose 12.3% ($37.6 million) due to new plant in service related to environmental and transmission projects.
- Cash Flow: Operating cash flow more than doubled to $520 million, largely due to a $114 million reduction in cash outflow for tax payments and improved receivables collection. Investing cash outflows increased $207 million due to higher property additions.
Guidance, Outlook, and Risks
- Construction Projects: The revised estimated total construction program for Southern Company is $4.4 billion in 2008, $5.2 billion in 2009, and $4.8 billion in 2010. A significant portion relates to the Plant Vogtle nuclear expansion (Units 3 and 4), with Georgia Power's share estimated at $6.4 billion in-service costs. Mississippi Power is evaluating an Integrated Coal Gasification Combined Cycle (IGCC) facility in Kemper County.
- Regulatory Matters:
- Fuel Cost Recovery: Under-recovered fuel costs totaled approximately $957 million at March 31, 2008. Georgia Power filed a request to increase fuel billings by $222 million annually, with a ruling expected in May 2008.
- Environmental: The EPA finalized stricter eight-hour ozone standards in March 2008, which may require new nonattainment designations and compliance costs. Florida enacted legislation authorizing a cap-and-trade program for greenhouse gases, pending ratification.
- Legal and Contingencies:
- Carbon Dioxide Litigation: Southern Company is a defendant in a suit filed by the Native Village of Kivalina seeking damages ($95 million to $400 million) for alleged global warming impacts. Management believes the claims are without merit.
- Mirant Matters: Ongoing litigation with MC Asset Recovery (related to the former Mirant subsidiary) seeks damages in excess of $2 billion. Southern Company is vigorously defending these claims.
- Tax Matters: The IRS challenged deductions related to leveraged lease (SILO) transactions. The ultimate impact on net income and cash flow could be significant and material.
- Dividends: The quarterly dividend was increased to $0.42 per share for the dividend payable in June 2008.
Investor Verification Checklist
- Regulatory Approvals: Verify the outcome of the Georgia Power fuel cost recovery filing (expected May 2008) and the Mississippi PSC's decision on the Kemper County IGCC project costs (expected January 2009).
- Environmental Compliance Costs: Monitor the designation of nonattainment areas under the new EPA ozone standards and the implementation of Florida's cap-and-trade legislation.
- Legal Exposure: Track developments in the Kivalina carbon dioxide litigation and the MC Asset Recovery lawsuit regarding Mirant.
- Tax Litigation: Assess the status of the IRS audit regarding SILO transactions and the potential impact on unrecognized tax benefits.
- Capital Expenditures: Review the progress and cost estimates for the Plant Vogtle nuclear expansion and other major construction projects against the $4.4 billion 2008 budget.