Southern Company 10-Q Summary
Business context and period: Southern Company is a regulated electric and natural gas utility holding company, with traditional electric utilities, Southern Power, and Southern Company Gas. This unaudited combined filing covers the three months ended March 31, 2020, compared with the same quarter of 2019. Interim results are seasonal and are not necessarily indicative of full-year results.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Operating revenue | $5.018 billion | $5.412 billion | Down 7.3% |
| Operating income | $1.263 billion | $3.691 billion | Down $2.428 billion |
| Net income attributable to Southern Company | $868 million | $2.084 billion | Down 58.3% |
| Diluted earnings per share | $0.81 | $1.99 | Down $1.18 |
| Cash from operating activities | $894 million | $744 million | Up $150 million |
| Property additions | $1.560 billion | $1.678 billion | Down $118 million |
The prior-year comparison is heavily affected by a preliminary $2.5 billion pretax ($1.3 billion after-tax) gain on the 2019 sale of Gulf Power. Q1 2020 included a $39 million pretax ($23 million after-tax) gain from Southern Power’s sale of Plant Mankato. Lower fuel and natural gas costs reduced reported revenue and expenses; regulated fuel and gas cost recovery generally offsets related expense changes and does not materially affect earnings.
At March 31, 2020, Southern Company reported $2.164 billion of cash and cash equivalents, $44.235 billion of long-term debt, $1.809 billion of securities due within one year, and $1.710 billion of notes payable. Current assets were $9.430 billion versus current liabilities of $9.553 billion. Unused committed bank credit was $7.636 billion. Operating cash flow exceeded property additions by $666 million before other investing and financing activity; common dividends paid were $655 million, or $0.62 per share. Management said liquidity remained adequate, while noting periods of constrained commercial-paper access during market volatility.
Business and period changes
- Retail electric revenue was nearly flat at $3.078 billion versus $3.084 billion. Rates and pricing added revenue, offset mainly by lower fuel and cost-recovery billings and milder weather. Reported COVID-19 effects on first-quarter retail sales were small.
- Natural gas revenue declined to $1.249 billion from $1.474 billion, primarily reflecting lower gas prices and volumes, warmer weather, and lower wholesale gas-services revenue. Southern Company Gas net income increased to $275 million from $270 million, as distribution-rate increases and infrastructure investment gains partly offset weaker wholesale gas-services results.
- Alabama Power net income after preferred dividends rose to $280 million from $217 million, reflecting lower operations and maintenance expense and prior-year tax-related customer bill credits.
- Georgia Power net income rose to $331 million from $311 million. The 2019 rate plan and lower income tax expense were partly offset by substantially higher depreciation and amortization.
- Mississippi Power net income declined to $32 million from $37 million, mainly due to higher scheduled outage costs.
- Southern Power net income attributable to the company increased to $75 million from $56 million, including the Plant Mankato gain, despite lower revenue following asset sales.
Outlook, risks, and unusual items
- COVID-19: Management described business-continuity measures and temporary customer disconnection suspensions. The pandemic may weaken commercial and industrial energy demand, operating cash flows, labor availability, construction productivity, and access to capital; the duration and financial effects were uncertain. Incremental costs deferred as regulatory assets at Georgia Power and Mississippi Power were immaterial at quarter-end, with recovery periods still to be determined.
- Vogtle Units 3 and 4: Georgia Power’s approximate share of forecast capital cost was $8.4 billion, including $0.2 billion contingency, with $2.2 billion estimated remaining to complete as of March 31. The forecast excludes about $270 million of expected future capitalized financing costs; estimated total financing costs were $3.1 billion, of which $2.3 billion had been incurred. Expected in-service dates remained November 2021 for Unit 3 and November 2022 for Unit 4. Management warned that COVID-19, labor productivity, contractor, technical, licensing, and start-up issues could cause further delays or cost increases. An April 2020 workforce reduction of about 20% was expected to cost Georgia Power about $20 million; management did not expect it to alter the forecast or dates, but the ultimate impact was unknown. Each month of schedule extension was estimated to add about $50 million of base capital cost and $10 million of AFUDC to Georgia Power’s share. Costs not expected to be recoverable through rates could require material charges to income. The Georgia PSC had not imposed a cost cap, and recovery remains subject to prudence review.
- Other regulatory and rate matters: Mississippi Power’s approved rate-case settlement reduced annual retail rates by about $16.7 million, effective April 2020. Georgia Power requested a 16% fuel-rate reduction from June 2020, expected to lower annual billings by about $329 million; approval was pending. Virginia Natural Gas expected to file a base-rate case in June 2020, delayed by the pandemic.
- Legal and environmental contingencies: Mississippi Power faces arbitration over Kemper-related agreements, with a claimed $143 million plus unspecified amounts; the panel denied Mississippi Power’s summary-judgment motions. A separate Kemper customer case alleges up to $23.5 million in under-refunds. The Department of Justice is investigating matters related to Kemper, whose outcome could be material. Southern Company Gas reported $262 million of environmental remediation liabilities. PennEast’s estimated project costs attributable to Southern Company Gas were about $300 million, excluding financing costs; delays or cancellation could impair its investment.
- Capital and transactions: Southern Company issued $1.0 billion of 4.95% junior subordinated notes in January and, after quarter-end, issued $1.0 billion of 3.70% senior notes. Southern Power sold Plant Mankato for approximately $663 million. Southern Company Gas sold its interests in Pivotal LNG and Atlantic Coast Pipeline for aggregate proceeds of $178 million. No formal consolidated earnings guidance is provided in the supplied filing text.
Important investor verification points
- Track Vogtle construction productivity, contingency use, cost forecasts, licensing milestones, schedule dates, and the recoverability of future costs.
- Assess how COVID-19 affects utility sales, collections, bad debt, deferred costs, construction, and funding needs as the pandemic evolves.
- Reconcile underlying earnings trends excluding the 2019 Gulf Power sale gain and the 2020 Plant Mankato gain, and evaluate the recurring performance of each segment.
- Review debt maturities, short-term borrowing levels, market access, available credit, and the effect of financing costs on liquidity and earnings.
- Monitor regulatory decisions on fuel rates, Mississippi Power’s rate settlement implementation, and pending Vogtle cost-recovery and litigation matters.