SOUTHERN CO quarterly report, Q2 FY2019

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Southern Company (SO) — Q2 2019 Form 10-Q

Business context and reporting period

Unaudited results for the quarter and six months ended June 30, 2019. Southern Company is a regulated electric and natural gas utility holding company, with wholesale generation and other businesses. The filing also includes separate reports for its operating subsidiaries. Comparisons below are against 2018; Gulf Power was sold on January 1, 2019, and Southern Company Gas completed several dispositions in 2018, affecting comparability.

Key financial metrics

  • Revenue: Q2 operating revenue was $5.10 billion, down 9.4% from $5.63 billion. Six-month revenue was $10.51 billion, down 12.4% from $12.00 billion. The Gulf Power sale and prior-year storm restoration work were significant factors in the declines.
  • Earnings: Q2 net income attributable to Southern Company was $899 million, or $0.86 per diluted share, versus a $154 million loss, or $0.15 loss per share, in Q2 2018. Six-month attributable net income was $2.98 billion, or $2.84 per diluted share, versus $784 million, or $0.77 per diluted share.
  • One-time earnings effects: 2019 six-month results included a preliminary $2.5 billion pre-tax ($1.3 billion after-tax) gain on the Gulf Power sale. 2018 results included a $1.1 billion pre-tax ($0.8 billion after-tax) Vogtle construction charge. These items dominate the year-over-year earnings comparison.
  • Operating margin: Calculated operating margin was approximately 26.3% for Q2 2019 versus 1.1% for Q2 2018, and 47.9% for the first half versus 12.0%. The change primarily reflects the Vogtle charge in 2018 and Gulf Power sale gain in 2019, rather than a like-for-like improvement in underlying operations.
  • Cash flow: First-half operating cash flow was $2.51 billion, down from $3.26 billion. Investing activities provided $1.00 billion, mainly reflecting $5.00 billion of disposition proceeds, including Gulf Power, partly offset by capital spending. Financing activities used $3.65 billion. Cash, cash equivalents, and restricted cash ended at $1.39 billion.
  • Debt and liquidity: At June 30, long-term debt was $39.68 billion; securities due within one year were $3.15 billion and notes payable were $1.40 billion. Current liabilities exceeded current assets by $2.65 billion. The company reported $7.52 billion of unused committed bank credit and stated that financial condition remained stable.
  • Dividends: The Q2 common dividend was $0.62 per share, up from $0.60 a year earlier.

Material changes versus the prior comparable period

  • Retail electric revenue fell 5.3% in Q2 and 9.4% year to date; management attributed much of the year-to-date decline to Gulf Power’s sale. Weather-adjusted usage also weakened across customer classes, with energy efficiency and lower industrial demand among the cited factors.
  • Southern Power’s revenue declined, partly due to the Florida plant and Nacogdoches dispositions and lower short-term sales. Its earnings comparison benefited from prior-year impairment charges and 2019 sale and litigation-settlement gains.
  • Southern Company Gas revenue declined following 2018 dispositions and lower gas volumes; reported earnings rose versus 2018, which included disposition-related losses and impairments.
  • Southern Company adopted lease accounting standard ASC 842 on January 1, 2019, recognizing operating lease right-of-use assets and obligations of about $1.9 billion each on its consolidated balance sheet.

Outlook, management commentary, risks, and unusual items

  • Vogtle Units 3 and 4: Georgia Power’s estimated project capital cost remained $8.4 billion for its ownership share, net of specified Toshiba settlement proceeds and customer refunds; estimated remaining capital cost was $3.2 billion, excluding about $315 million of expected capitalized financing costs. In-service dates remained November 2021 for Unit 3 and November 2022 for Unit 4. Georgia Power had borrowed $3.46 billion under DOE-guaranteed facilities, with capacity up to approximately $5.13 billion. Delays, labor productivity, licensing, startup, and cost recovery remain material risks; an approved-schedule extension was estimated to add about $50 million per month in base capital costs and $12 million per month in AFUDC.
  • Regulatory rate requests: Georgia Power requested annual increases of $563 million in 2020, $145 million in 2021, and $234 million in 2022. Nicor Gas’s revised request was $180 million annually; Atlanta Gas Light requested $96 million annually. Outcomes were pending. Mississippi Power expected to file a base rate case in Q4 2019.
  • Environmental obligations: Alabama Power increased ash-pond closure asset retirement obligations by approximately $308 million; Mississippi Power recorded an approximately $58 million increase. Further estimates and regulatory approvals remain pending, and costs depend in part on continued rate recovery.
  • Kemper and litigation: Mississippi Power recorded $6 million of first-half 2019 Kemper-related charges and estimated up to $10 million of additional closure costs through the first half of 2020, excluding dismantlement. The company was evaluating the CO₂ pipeline’s disposition; removal could be material. The Department of Justice opened an investigation related to Kemper, and an arbitration claim seeks approximately $143 million plus additional amounts.
  • Other exposures and transactions: Southern Company Gas warned that lower natural-gas storage asset values could trigger impairment of facilities with a combined $438 million net book value. Southern Power’s Plant Mankato sale remained subject to approvals; either party could terminate if approvals were not obtained by October 1, 2019, potentially triggering a $15 million fee. Southern Power completed the $461 million Nacogdoches sale.
  • No quantified consolidated earnings guidance is provided in the supplied filing text. Management emphasizes regulatory cost recovery, customer usage and growth, weather, commodity prices, and successful execution of major construction projects as drivers of future results.

Most important facts for investors to verify

  • Whether Vogtle’s cost estimate, construction milestones, licensing progress, and rate recovery remain on track; assess potential exposure to additional cost overruns.
  • How much of 2019 earnings and cash flow reflects asset sales and other unusual items, and the earnings base after those effects.
  • Outcomes of Georgia Power, Nicor Gas, and Atlanta Gas Light rate proceedings, including authorized returns and recovery of environmental and storm costs.
  • Updated ash-pond closure estimates, regulatory approvals, and the extent to which resulting costs are recoverable from customers.
  • Developments in the Kemper investigation, pipeline disposition, and related litigation and arbitration claims.
  • Liquidity and refinancing needs, including near-term debt maturities, short-term borrowings, and continued access to bank facilities and capital markets.