Business context and reporting period
Southern Company’s combined Form 10-K covers the fiscal year ended December 31, 2018. The group operates regulated electric utilities in the Southeast, wholesale generation through Southern Power, and natural gas distribution and related businesses through Southern Company Gas. Gulf Power was included in 2018 results but was sold to NextEra Energy on January 1, 2019.
The filing is an annual report, not a standalone fourth-quarter filing. For Q4 2018, Southern Company reported operating revenues of $5.337 billion and net income attributable to Southern Company of $278 million; diluted EPS was $0.27.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Operating revenues | $23.495 billion | $23.031 billion |
| Net income attributable to Southern Company | $2.226 billion | $842 million |
| Diluted EPS | $2.17 | $0.84 |
| Net cash from operating activities | $6.945 billion | $6.394 billion |
| Net cash used for investing activities | $5.760 billion | $7.190 billion |
| Net cash from (used for) financing activities | $(1.813) billion | $951 million |
| Cash and cash equivalents, year-end | $1.396 billion | $2.130 billion |
Year-end total assets were $116.914 billion; common stockholders’ equity was $24.723 billion; long-term debt was $40.736 billion. Long-term debt represented 58.1% of capitalization. Current liabilities exceeded current assets by $4.7 billion, chiefly reflecting debt due within one year and notes payable. The company paid $2.38 per share in dividends; its reported payout ratio was 108.9%.
Material changes versus the prior comparable period
- Net income increased $1.384 billion year over year, largely because 2017 included $3.4 billion of pre-tax Kemper IGCC charges. This comparison was partly offset by a $1.1 billion pre-tax charge in 2018 for Georgia Power’s revised Vogtle construction estimate and contingency.
- Revenue rose about 2%. Electric retail revenue declined modestly, while wholesale revenue and natural gas revenue increased. Electricity sales volumes benefited from colder first-quarter and warmer second- and third-quarter weather; weather-adjusted retail electricity sales increased 0.9%.
- Cash from operations increased by $551 million, primarily due to timing of vendor payments and higher fuel-cost recovery. Investing outflows declined, partly reflecting disposition proceeds.
- Southern Company’s common dividend increased from $2.30 to $2.38 per share. Shares outstanding also increased, including through at-the-market equity issuances.
Outlook, management commentary, risks and unusual items
- Vogtle: Georgia Power’s estimated share of project capital cost was $8.4 billion, net of $1.7 billion received from Toshiba and about $188 million in customer refunds; the estimated remaining cost was $3.8 billion. Unit 3 and Unit 4 were expected in service in November 2021 and November 2022. A schedule extension was estimated to add about $50 million of base capital cost and $12 million of AFUDC monthly. Cost recovery remains uncertain; the 2018 charge was $1.1 billion pre-tax ($0.8 billion after tax). Georgia Power had borrowed $2.6 billion under the DOE loan facility.
- Other construction and investment: The system projected about $8.0 billion in 2019 construction expenditures. Southern Power sold noncontrolling interests in solar and wind businesses for about $1.2 billion each and sold the Florida Plants for $203 million; its proposed sale of Plant Mankato for about $650 million was pending. Southern Company Gas completed 2018 dispositions for approximately $2.7 billion in proceeds.
- Gulf Power: The sale closed after year-end for approximately $5.8 billion, less $1.3 billion of debt assumed. Management expected to record a preliminary 2019 gain of $2.5 billion pre-tax ($1.3 billion after tax).
- Environmental and operating exposure: CCR closure estimates increased AROs by about $1.2 billion at Alabama Power and $3.1 billion at Georgia Power in 2018. The group’s total reported ARO liability was approximately $9.4 billion at year-end. Recoverability, timing and ultimate closure costs remain uncertain. Other risks include regulatory decisions, storm costs, fuel and weather volatility, construction execution, credit ratings, cyber or physical incidents, and changing energy demand.
- Contingencies: Kemper gasifier construction was abandoned; further mine closure costs and possible CO₂ pipeline removal could be material. The DOE grant closeout may require repayment for retained property. A Kemper-related arbitration demand seeks approximately $143 million, and a separate customer class action challenges historical refunds. Southern Company Gas’s Atlantic Coast Pipeline estimate increased to $7.0–$7.8 billion from $6.0–$6.5 billion; its 5% investment was $83 million, with key segments expected in late 2020 and remaining work potentially extending into early 2021.
- Management outlook: Southern Company set goals to reduce carbon emissions 50% from 2007 levels by 2030 and achieve low- to no-carbon operations by 2050, subject to technology, fuel prices, policy and project execution. No specific consolidated earnings guidance is provided in the text reviewed.
Most important facts for investors to verify
- Vogtle’s updated cost and schedule, the outcome of project validation and regulatory reviews, and the amount ultimately recoverable from customers.
- Actual cash proceeds, final gain and debt repayment from the Gulf Power sale, and completion terms for the pending Mankato disposition.
- Updated CCR closure estimates, related cash outlays and rate recovery, including whether the substantial 2018 ARO revisions change further.
- Progress and cost exposure on the Atlantic Coast and PennEast pipeline projects, and any material Kemper pipeline or DOE grant closeout liability.
- Liquidity and refinancing needs: operating cash flows were projected to fall short of dividends, capital expenditures and debt maturities over 2019–2021; confirm subsequent financing and debt reduction.