Southern Company 10-Q Summary — First Quarter 2013
Business context and reporting period
This combined, unaudited Form 10-Q covers the three months ended March 31, 2013, compared with the first quarter of 2012. Southern Company is a holding company whose principal businesses are regulated electric utilities in the Southeast and Southern Power, a wholesale generator. The filing also covers Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power as separate registrants. Utility results are seasonal and the quarter is not necessarily indicative of full-year results.
Key financial metrics
| Southern Company consolidated | Q1 2013 | Q1 2012 |
|---|---|---|
| Operating revenue | $3.897 billion | $3.604 billion |
| Operating income | $325 million | $766 million |
| Net income after subsidiary preferred dividends | $81 million | $368 million |
| Diluted EPS | $0.09 | $0.42 |
| Cash dividends per common share | $0.49 | $0.4725 |
| Net cash from operating activities | $737 million | $568 million |
| Net cash used for investing activities | $1.279 billion | $1.427 billion |
| Net cash from financing activities | $429 million | $588 million |
Revenue rose 8.1%, while operating income fell 57.6% and net income after subsidiary preferred dividends fell 78.0%. The reported operating margin was approximately 8.3%, compared with 21.3% in Q1 2012; net margin after subsidiary preferred dividends was approximately 2.1%, compared with 10.2%. The decline primarily reflects a $540 million pretax estimated loss on Kemper IGCC, plus lower leveraged-lease income and higher depreciation. The filing reports no separate consolidated cash-flow or debt margin measure.
At March 31, 2013, cash and cash equivalents were $515 million, total assets $63.274 billion, current liabilities $6.439 billion, long-term debt $20.223 billion, and securities due within one year $1.769 billion. Notes payable were $1.294 billion. Current liabilities exceeded current assets of $5.932 billion; management cited seasonal working-capital needs and routine short-term debt use, and said access to operating cash flows, capital markets, and credit facilities supported liquidity. Committed bank credit arrangements totaled $5.177 billion, of which $5.167 billion was unused. The company reported approximately $1.8 billion of long-term debt maturities through March 31, 2014. The quarterly dividend was raised to $0.5075 per share in April, payable in June 2013.
Material changes versus the prior period
- Retail revenue increased $206 million (6.7%), reflecting rate and pricing changes, more favorable weather, and higher fuel-cost recovery; sales growth was slightly negative. Wholesale revenue increased $83 million (23.8%), largely from energy and capacity revenues.
- Fuel expense increased $198 million, partly reflecting higher generation and natural-gas costs; purchased-power expense fell $46 million. Fuel-cost recovery mechanisms generally offset the effect of recoverable fuel costs on earnings, but affect cash flow.
- Operating cash flow increased $169 million, primarily due to a reduction in fossil fuel stock. Property additions were $1.197 billion.
- Southern Company reported $540 million pretax and $333.5 million after-tax Kemper IGCC charges. Mississippi Power recorded $462 million pretax and $285.3 million after tax in Q1; it had restated 2012 to include a separate $78 million pretax charge. Southern Company recorded the full $540 million in Q1 because its assessment found the 2012 portion not material to its consolidated statements.
- Southern Power revenue rose, but its net income was nearly unchanged at $29.2 million; higher depreciation, interest, operations and maintenance costs offset revenue growth.
Outlook, commentary, risks and unusual items
- Kemper IGCC: Mississippi Power revised its estimate to approximately $3.42 billion, net of DOE grants and specified cost-cap exceptions, versus the $2.88 billion cost cap. It did not intend to seek joint-owner contributions or rate recovery for costs above the cap other than qualifying exceptions. The project’s expected in-service date was May 2014. Further cost increases or schedule delays could be material; estimates, cost recovery, prudence review, tax-credit eligibility, and proposed securitization remained uncertain.
- Kemper rate plan and funding: Mississippi regulators approved rate increases designed to collect $156 million annually beginning in 2014, with amounts collected through April 2014 expected to total $126 million and be used to mitigate later rate impacts. Approval of the proposed seven-year recovery plan, final prudence review, and SMEPA’s proposed 15% ownership purchase remained unresolved. SMEPA’s $150 million deposit was refundable under specified circumstances.
- Other construction: Southern Company’s construction program was estimated at $5.9 billion in 2013, $6.0 billion in 2014, and $5.2 billion in 2015. Georgia Power’s Plant Vogtle Units 3 and 4 had requested estimated in-service capital costs of $4.8 billion for its ownership share, estimated in-service dates in Q4 2017 and Q4 2018, and approximately $2.0 billion of construction-period financing costs. Regulatory approvals, contractor disputes, licensing/design issues, costs, and timing remained risks. DOE loan-guarantee commitment for Vogtle was conditional and due to expire June 30, 2013 unless extended.
- Regulatory and environmental matters: Georgia Power’s next base rate case was due by July 1, 2013. Gulf Power notified the Florida PSC of its intent to seek a base-rate increase, estimating a request of $75–$80 million annually. Proposed federal water-quality rules and evolving air-emissions requirements could require significant spending; timely recovery in rates is not assured. Georgia Power’s 2013 resource plan remained under PSC review. Proposed wind PPAs totaling 300 MW were subject to approval and would entail approximately $1.3 billion of obligations after 2017.
- Plant Bowen: An April 4, 2013 explosion damaged Unit 2 and related equipment; Units 1 and 2, approximately 1,400 MW, remained offline pending assessment and repairs. Georgia Power expected material repair costs to be covered by property insurance, but the outcome was uncertain and the outage was expected to hurt 2013 peak-season forced-outage performance.
- Control weakness: Mississippi Power’s disclosure controls were concluded to be ineffective, following a previously identified material weakness involving support for Kemper cost estimates and communication of their effects. Remediation was expected in Q2 2013. The other named registrants concluded their disclosure controls were effective.
- Management described Southern Company’s financial condition as stable and planned to fund capital needs through internal cash flow and external financing. No specific consolidated earnings guidance was provided in the supplied filing text.
Most important facts for investors to verify
- Whether Kemper’s revised cost estimate, schedule, remaining contingency, cost-cap treatment, regulatory recovery, and SMEPA transaction have changed since this filing.
- Whether Mississippi Power remediated the material weakness on schedule and whether subsequent cost-estimation controls are effective.
- Progress on Kemper and Vogtle regulatory approvals, prudence reviews, financing, tax-credit conditions, and contractor claims.
- Current debt maturities, short-term borrowing, available credit capacity, and funding plans relative to the construction program.
- Plant Bowen repair timing, insurance recovery, and resulting effects on generation availability and costs.
- Outcomes of pending rate proceedings and environmental rules, including potential effects on cost recovery, customer rates, capital spending, and demand.