Business Context and Reporting Period
This Form 10-Q covers The Southern Company and its subsidiary operating companies (Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power) for the quarterly and nine-month periods ended September 30, 2008. The Southern Company operates as a holding company for vertically integrated utilities serving the Southeast and a competitive wholesale power generator. The reporting period coincided with significant volatility in global financial markets and rising energy commodity prices.
Key Financial Metrics (Nine Months Ended Sept 30, 2008)
| Metric | 2008 (in millions) | 2007 (in millions) |
|---|---|---|
| Total Operating Revenues | $13,324.6 | $12,012.6 |
| Consolidated Net Income | $1,556.0 | $1,529.8 |
| Earnings Per Share (Diluted) | $2.01 | $2.02 |
| Operating Cash Flow | $2,586.6 | $2,467.3 |
| Investing Cash Flow | ($2,979.8) | ($2,559.5) |
| Financing Cash Flow | $998.6 | $459.8 |
| Cash and Equivalents (End of Period) | $806.0 | $534.5 |
| Long-Term Debt | $15,781.8 | $14,143.1 |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 10.9% year-over-year. Retail revenues rose 10.1% and wholesale revenues increased 22.8%, driven primarily by higher fuel cost recovery provisions and market-response rates for large commercial customers.
- Expense Increases: Fuel expenses increased 15.8% and purchased power expenses rose 50.0% due to significant increases in coal and natural gas commodity prices. Depreciation and amortization increased 15.2% due to new plant in service related to environmental projects.
- Leveraged Lease Impact: Leveraged lease income turned to a loss of $53.6 million (compared to $31.9 million income in 2007) due to a $51.2 million after-tax charge in Q2 2008 related to the application of FASB Staff Position No. 13-2 regarding tax timing.
- Capital Expenditures: Net cash used for investing activities increased $420 million, primarily due to property additions for utility plant construction.
Guidance, Outlook, and Risks
- Regulatory Environment: The company faces ongoing uncertainty regarding the Clean Air Interstate Rule (CAIR), which was vacated by a federal court in July 2008, and New Source Review (NSR) actions brought by the EPA. While the company secured partial summary judgment in the Alabama Power NSR case, the ultimate outcome remains undetermined.
- Construction Projects: Georgia Power is proceeding with the construction of two new nuclear units at Plant Vogtle (Units 3 and 4), with an estimated cost share of $6.4 billion. Mississippi Power is evaluating an Integrated Coal Gasification Combined Cycle (IGCC) facility.
- Financial Market Turmoil: The company maintained access to capital markets without drawing on committed credit lines. However, it noted that access to commercial paper could be limited due to credit market contraction. Cash balances were increased as a precautionary measure.
- Under-recovered Fuel Costs: Traditional operating companies had approximately $1.2 billion in under-recovered fuel costs as of September 30, 2008. Regulatory filings are ongoing to adjust billing factors to recover these costs, which impacts cash flow but not net income.
- Legal Contingencies: Significant litigation includes the Kivalina carbon dioxide lawsuit (seeking $95M-$400M), Mirant-related securities and asset recovery litigation, and potential penalties from the SERC Reliability Council regarding vegetation management.
Investor Verification Checklist
- Fuel Cost Recovery: Verify the status of pending rate cases in Alabama, Georgia, and Florida to confirm the timing of cash flow recovery for the $1.2 billion under-recovered fuel balance.
- Leveraged Lease Tax Position: Monitor the outcome of the IRS settlement initiative and pending litigation regarding SILO transactions, which could impact future tax benefits and cash flows.
- Environmental Compliance Costs: Assess the potential capital expenditure impact of the vacated CAIR ruling and new ozone regulations on future rate cases.
- Nuclear Project Viability: Track the Georgia PSC certification process for Plant Vogtle Units 3 and 4, given the $6.4 billion cost exposure.
- Wholesale Market Exposure: Review the impact of the new FERC "must-offer" energy auction tariff on Southern Power's wholesale revenue margins.