Southern Company — Q1 2019 Form 10-Q
Business context and period. This combined, unaudited filing covers the three months ended March 31, 2019, for Southern Company and its electric utility, wholesale power, and natural gas subsidiaries. Comparisons are with Q1 2018. Southern Company sold Gulf Power effective January 1, 2019; results therefore reflect a changed portfolio. Results are seasonal and are not necessarily indicative of full-year performance.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Operating revenues | $5.412 billion | $6.372 billion | Down $960 million (15.1%); affected by Gulf Power’s sale, milder weather, lower cost-recovery revenues, and lower other revenues. |
| Operating income | $3.691 billion | $1.376 billion | Includes a $2.497 billion pre-tax Gulf Power sale gain; not representative of recurring operating performance. |
| Net income attributable to Southern Company | $2.084 billion | $938 million | Includes the Gulf Power gain of approximately $1.3 billion after tax. |
| Diluted EPS | $1.99 | $0.92 | Increase largely reflects the Gulf Power sale gain. |
| Net cash from operating activities | $744 million | $1.509 billion | Down $765 million, mainly from payment timing and the Gulf Power and Southern Company Gas dispositions. |
| Net cash from investing activities | $2.454 billion | $(1.995) billion | Driven primarily by $4.427 billion of disposition proceeds, largely Gulf Power. |
| Net cash used in financing | $(3.353) billion | $629 million | Reflects debt repayments and redemptions, repayment of short-term borrowings, and dividends. |
Balance sheet and liquidity. At March 31, 2019, total assets were $114.096 billion, total liabilities $83.118 billion, and stockholders’ equity $30.687 billion. Long-term debt was $40.457 billion, with $2.315 billion of securities due within one year and $1.251 billion of notes payable. Cash and cash equivalents were $1.361 billion. Current liabilities exceeded current assets by approximately $1.2 billion, primarily due to near-term debt and short-term borrowings. The system had $7.863 billion of committed bank credit arrangements, of which $7.834 billion was unused; approximately $2.3 billion of long-term debt maturities were expected through March 31, 2020. Management described financial condition as stable and said it expected to meet liquidity needs through operating cash flows and capital-market and bank access.
Material changes and business performance
- Gulf Power disposition: Completed January 1 for approximately $5.8 billion cash, less $1.3 billion of assumed debt, subject to working-capital adjustments. The preliminary gain was $2.5 billion pre-tax and $1.3 billion after tax. The one-time gain drove the reported earnings increase.
- Electric utilities: Retail electric revenues fell $484 million, reflecting the Gulf Power sale, milder weather, and reduced fuel and other cost-recovery revenues, partly offset by rates. Management cited modest or declining weather-adjusted usage in several customer classes.
- Southern Company Gas: Net income was $270 million versus $279 million. Excluding disposed businesses and wholesale gas services, management cited stronger gas distribution results from infrastructure recovery, rate changes, and colder Illinois weather. Wholesale gas services earnings declined amid lower commercial activity and less favorable comparison with Q1 2018 price volatility.
- Southern Power: Net income attributable to Southern Power was $56 million versus $121 million, primarily because Q1 2018 included tax benefits and Q1 2019 had fewer production tax credits, partly offset by tax-equity partnership allocations.
- Mississippi Power: Net income was $37 million versus a $7 million loss, mainly because Kemper-related charges and operating and maintenance expenses were lower than a year earlier.
- Accounting change: Adoption of lease accounting on January 1, 2019 added recognized right-of-use assets and lease obligations; Southern Company reported $1.9 billion of operating lease right-of-use assets net of amortization.
Outlook, projects, risks, and contingencies
- Vogtle Units 3 and 4: Georgia Power’s 45.7% share of the project cost forecast remained $8.4 billion, net of $1.7 billion of Toshiba settlement proceeds and approximately $188 million of customer refunds. The estimated remaining capital cost was $3.5 billion, excluding approximately $325 million of expected capitalized AFUDC. In-service dates remained November 2021 for Unit 3 and November 2022 for Unit 4; an April 2019 validation confirmed the cost forecast and schedule. Georgia Power had borrowed $3.46 billion under DOE-guaranteed facilities, with capacity of up to approximately $5.13 billion. Further delays could add an estimated $50 million of base capital cost and $12 million of AFUDC per month, based on Georgia Power’s ownership share; unrecoverable cost increases could materially affect earnings.
- Regulatory and rate proceedings: Georgia Power was scheduled to file a base rate case by July 1, 2019; Atlanta Gas Light by June 3, 2019; and Mississippi Power in Q4 2019. Nicor Gas revised its requested annual rate increase from $230 million to $180 million following an April 2019 staff stipulation; regulatory approval remained pending. Georgia Vogtle-related return-on-equity reductions were estimated to reduce earnings by about $75 million in 2019 and $635 million in aggregate during 2020–2022.
- Kemper and legal exposure: Mississippi Power recorded $2 million of pre-tax Kemper closure charges in Q1. Additional closure costs of up to $10 million pre-tax could occur through the first half of 2020, with further estimated period costs through 2023. The company was evaluating the CO2 pipeline’s disposition; removal could materially affect financial statements. A Department of Justice investigation relating to Kemper was disclosed on April 29, 2019, and DOE grant closeout discussions could require repayment for retained property. A Kemper-related arbitration demand seeks approximately $143 million plus other damages; management disputed the claims, but outcomes are uncertain.
- Planned asset sales: Southern Power expected mid-2019 closings for Plant Mankato, for approximately $650 million subject to conditions and approvals, and Nacogdoches, for $460 million subject to customary conditions. Completion and proceeds were not assured.
- Other risks: Management highlighted weather, customer usage and economic conditions; regulatory cost recovery; environmental and coal-ash compliance costs; fuel and commodity volatility; construction execution and licensing; financing access and credit ratings; and litigation. The filing reported no material change in previously disclosed risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- Separate recurring earnings and cash generation from the $2.5 billion pre-tax Gulf Power gain; assess the company’s post-sale earnings base.
- Track Vogtle cost, schedule, labor productivity, regulatory approvals, cost recovery, and DOE loan conditions; the forecast is not a cost cap.
- Monitor operating cash flow, near-term maturities, refinancing needs, credit access, and the effect of debt and lease obligations on liquidity.
- Check outcomes of the pending rate cases and the impact of Vogtle-related return reductions on Georgia Power earnings.
- Follow Kemper closure and pipeline decisions, the DOJ investigation, DOE grant closeout, and related litigation, including the approximately $143 million arbitration claim.
- Verify completion, timing, and final proceeds of the Mankato and Nacogdoches sales and assess their effect on Southern Power’s future revenues and earnings.