Southern Company (SO) — Q1 2022 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2022, compared with Q1 2021. Southern Company is a regulated electric and natural-gas utility holding company, with wholesale generation through Southern Power. The filing is a combined report for Southern Company and five subsidiaries; figures below are consolidated unless identified otherwise. Results are seasonal and interim performance is not necessarily indicative of the full year.
Key financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Operating revenue | $6.648 billion | $5.910 billion |
| Operating income | $1.384 billion | $1.598 billion |
| Net income attributable to Southern Company | $1.032 billion | $1.135 billion |
| Basic and diluted EPS | $0.97 | $1.07 basic; $1.06 diluted |
| Cash from operating activities | $1.592 billion | $1.242 billion |
| Cash used for investing activities | $1.555 billion | $2.243 billion |
| Cash and cash equivalents at March 31 | $1.662 billion | $1.798 billion at Dec. 31, 2021 |
| Long-term debt | $50.633 billion | $50.120 billion at Dec. 31, 2021 |
| Notes payable | $2.330 billion | $1.440 billion at Dec. 31, 2021 |
Operating margin was approximately 20.8%, down from 27.0%; net income attributable to Southern Company was about 15.5% of revenue versus 19.2%. Revenue growth largely reflected higher fuel and gas-cost recovery, which generally offsets the related expense and does not materially increase utility earnings. Revenue rose 12.5%, while attributable net income fell 9.1%. The company paid $0.66 per share in Q1 dividends, versus $0.64 a year earlier.
At quarter-end, current assets were $9.297 billion and current liabilities $10.434 billion, a $1.137 billion shortfall (current ratio approximately 0.89). The company reported $7.574 billion of unused committed bank credit across the listed entities. Total borrowings increased: long-term debt plus securities due within one year and notes payable were approximately $54.2 billion at March 31, versus $53.7 billion at year-end. These figures are consolidated balance-sheet amounts, not a measure of net debt.
Material changes and business drivers
- Electric utilities: Retail electric revenue increased $271 million, primarily from higher fuel and other cost recovery, Georgia Power base tariff increases, and modest sales growth. Fuel and purchased-power costs rose with fuel prices and generation volumes; regulated recovery mechanisms generally offset these costs.
- Southern Company Gas: Revenue increased $364 million, mainly due to higher gas prices and cost recovery, while cost of natural gas rose $512 million. Distribution revenue and gas costs are substantially affected by pass-through recovery. Net income declined to $319 million from $398 million, including the absence of $126 million of Q1 2021 Sequent earnings; Sequent was sold July 1, 2021.
- Southern Power: Revenue rose to $539 million from $440 million, principally from higher energy sales under natural-gas PPAs. Net income attributable to Southern Power declined to $72 million from $97 million, largely because Q1 2021 included gains on wind-turbine equipment contributions.
- Other cost pressures: Consolidated operations and maintenance expense rose $144 million; excluding Sequent-related 2021 costs, the increase was $192 million. Management cited transmission and distribution line maintenance, generation maintenance, and customer-related costs. Interest expense increased $12 million to $462 million.
Operating cash flow improved year over year, in part from higher natural-gas cost recovery and payment timing. Property additions were $1.419 billion, compared with $1.678 billion in Q1 2021. Cash used for financing was $193 million, including $702 million of common dividends, partly offset by borrowings and debt issuance. Cash-flow comparisons are affected by working-capital timing and seasonal gas operations.
Outlook, significant matters and risks
- Vogtle Units 3 and 4: Georgia Power’s forecast share of remaining project capital cost, including contingency, was $10.401 billion, with $1.686 billion estimated to complete. Fuel loading for Unit 3 was projected for Q3 or Q4 2022, with service in Q4 2022 or Q1 2023; Unit 4 was projected for service in Q3 or Q4 2023. These are project estimates, not earnings guidance. Management cited construction productivity, remediation, labor availability, system turnover, inspections, and testing as schedule dependencies. COVID-related impacts were estimated at $160–$200 million for Georgia Power.
- Further delays beyond the then-projected in-service dates could add up to $60 million per month for Unit 3 and $40 million per month for Unit 4, plus related financing and support costs. Georgia Power said as much as approximately $460 million of additional pre-tax charges could arise from disputed joint-owner cost-sharing and tender provisions; the outcome and recoverability of future costs remain uncertain. All owners voted on February 25, 2022 to continue construction following a schedule extension.
- Rates and capital: Georgia Power was required to file its next general base-rate case by June 24, 2022. Mississippi Power’s requested 1.9% annual revenue increase, approximately $18 million, took effect in April subject to refund; the proceeding was expected to conclude in summer 2022. Southern Company said it did not expect capital-markets equity issuance through 2026, apart from settlement of existing equity units and stock-plan issuance. No consolidated full-year earnings guidance is provided in the supplied filing text.
- Economic and operating risks: Management cited inflation, rising interest rates, supply-chain disruption, labor and materials cost escalation, COVID-19 impacts, and uncertainty following Russia’s invasion of Ukraine. Other risks include fuel prices, weather, regulation and rate recovery, environmental compliance, reliability, and construction execution.
- Legal and credit matters: The Fifth Circuit reversed dismissal of certain claims against Mississippi Power concerning historical Kemper-related customer refunds and remanded the case; the filing says an adverse outcome could materially affect Mississippi Power. Georgia Power also faces Plant Scherer-related claims for alleged personal injury and property damage; losses could not be estimated. Fitch downgraded Georgia Power’s senior unsecured rating to BBB+ from A- and moved several other Southern Company-related outlooks to negative. Management reported covenant compliance at quarter-end.
- Other items: The NRC closed two Vogtle Unit 3 inspection findings in March 2022 and returned the unit to its baseline inspection program. The filing reported no material changes to risk factors or market-risk disclosures and said disclosure controls were effective.
Investor verification priorities
- Track Vogtle cost forecasts, construction milestones, cost-sharing/tender disputes, regulatory recovery, and potential additional charges.
- Separate underlying utility earnings from fuel and gas-cost pass-throughs and from the year-over-year impact of Sequent’s sale.
- Review debt maturities, short-term borrowing needs, credit availability, ratings, and interest-rate exposure alongside the current-liability deficit.
- Monitor the Mississippi Power remanded litigation and Georgia Power’s Plant Scherer claims, including any updates to estimated exposure.
- Check outcomes of the Georgia Power rate case and Mississippi Power rate filing, and assess whether inflation and supply-chain pressures change construction or operating costs.