Southern Company — Q2 2021 Form 10-Q
Business context and reporting period. This combined, unaudited filing covers Southern Company and five subsidiary registrants. Southern Company operates regulated electric utilities, wholesale power generation, and natural gas businesses. The reporting period ended June 30, 2021; comparisons are with the three and six months ended June 30, 2020, unless otherwise noted.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Operating revenue | $5.198 billion | $4.620 billion | $11.108 billion | $9.638 billion |
| Operating income | $708 million | $1.058 billion | $2.306 billion | $2.321 billion |
| Net income attributable to Southern Company | $372 million | $612 million | $1.508 billion | $1.480 billion |
| Diluted EPS | $0.35 | $0.58 | $1.41 | $1.39 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $2.904 billion | $2.847 billion |
- Revenue increased 12.5% in Q2 and 15.3% year to date. Higher retail electric revenue, fuel and gas cost recovery, and wholesale activity contributed; many fuel-cost recovery amounts generally do not increase earnings.
- Q2 attributable net income fell 39.2%, primarily reflecting higher Vogtle construction charges and the PennEast impairment, partly offset by improved electric revenues and lower leveraged-lease impairment charges. First-half net income rose 1.9% year over year.
- Approximate operating margin was 13.6% in Q2 versus 22.9% in Q2 2020, and 20.8% for the first half versus 24.1%. The deterioration reflects higher operating expenses, particularly the Vogtle charge.
- First-half investing cash use was $4.026 billion, including $3.384 billion of property additions; financing provided $1.671 billion. Cash, cash equivalents, and restricted cash totaled $1.617 billion at period-end.
- At June 30, total assets were $125.9 billion and stockholders’ equity was $32.7 billion. Long-term debt was $47.8 billion, versus $45.1 billion at year-end 2020. Including securities due within one year and notes payable, reported interest-bearing debt was approximately $52.1 billion.
- Current assets of $9.6 billion were below current liabilities of $11.7 billion. The company reported $7.55 billion of unused committed bank credit arrangements. Management described the registrants’ financial condition as stable and said working-capital needs could be met through operating cash flow and available financing.
- Southern Company paid a $0.66-per-share Q2 dividend, up from $0.64 in Q2 2020. Management stated it did not expect to issue equity in capital markets through 2025, though employee stock-plan issuance may continue.
Material changes and unusual items
- Vogtle Units 3 and 4: Georgia Power recorded $460 million of pre-tax estimated losses in Q2 and $508 million year to date. Georgia Power’s estimated total capital cost forecast, including contingency and net of specified Toshiba payments and customer refunds, was $9.215 billion; estimated remaining cost to complete was $1.359 billion. The forecast and recovery remain uncertain.
- Unit 3’s projected in-service date was second-quarter 2022; Unit 4’s was first-quarter 2023. The project faced productivity, remediation, labor, system turnover, spent-fuel-pool repair, and testing challenges. Further delay was estimated to add about $25 million per month for Unit 3 and $15 million per month for Unit 4, plus AFUDC.
- Southern Company Gas recorded an $82 million pre-tax ($58 million after-tax) impairment of its PennEast Pipeline investment. Project timing, permits, and ultimate construction remain uncertain.
- Winter Storm Uri contributed to a $485 million natural-gas cost under-recovery asset at Southern Company Gas and pressured operating cash flow. Wholesale gas services also experienced significant derivative losses in Q2.
- On July 1, 2021, after quarter-end, Southern Company Gas completed the sale of Sequent for $150 million, with a preliminary gain of about $90 million expected in Q3. At June 30, related payment guarantees were $268 million, with maximum exposure generally capped at $1 billion; the buyer provided a corresponding guarantee during the release period.
- Q2 results also reflect pandemic-related recovery in commercial and industrial electric demand versus 2020, when activity and spending were affected by COVID-19. The filing cautions that interim results are seasonal and not necessarily indicative of full-year results.
Outlook, regulation, and risks
- Georgia Power requested an annual rate increase of approximately $370 million after Vogtle Unit 3 enters service, partly offset by an approximately $116 million reduction in the NCCR tariff expected January 1, 2022. A Georgia PSC decision was scheduled for November 2, 2021. No consolidated earnings guidance is provided in the supplied filing text.
- Key uncertainties include Vogtle completion, cost overruns and regulatory recovery; COVID-19 and economic conditions; fuel prices and demand; environmental compliance and coal-plant decisions; weather and storms; financing access and interest rates; and litigation and regulatory proceedings.
- The EPA announced plans to further revise the electric-generating-unit effluent limitation rules. Alabama Power was assessing compliance options for coal units totaling about 2,000 MW, with net book value of approximately $2.3 billion and associated net capitalized retirement costs of about $900 million.
- Other disclosed proceedings include appeals and claims relating to Georgia Power’s municipal franchise fees and Plant Scherer, as well as an appeal involving Mississippi Power’s historical Kemper-related customer refunds. Outcomes and potential losses were not clear or estimable in the filing.
Investor verification priorities
- Track Vogtle construction milestones, updated cost forecasts, remaining contingency, and the Georgia PSC’s treatment of costs above the amount previously deemed reasonable.
- Confirm the timing and net customer impact of Georgia Power’s proposed Unit 3 rate changes, including the NCCR offset and fuel savings.
- Monitor Southern Company Gas’s Sequent sale accounting and remaining guarantee exposure, and verify whether the PennEast impairment signals further project or investment risk.
- Assess the duration and cash-recovery timing of the $485 million gas cost under-recovery following Winter Storm Uri.
- Review debt maturities, liquidity and credit availability alongside capital spending, dividends, and any developments in environmental compliance or material litigation.