Business context and reporting period
Southern Company’s unaudited combined Form 10-Q covers the three months ended March 31, 2021, with comparison to the three months ended March 31, 2020. The group comprises regulated electric utilities, Southern Power’s wholesale generation business, and Southern Company Gas. The quarter is seasonally affected, and management cautions that interim results are not necessarily indicative of full-year results.
Key financial results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Operating revenue | $5.910 billion | $5.018 billion | +17.8% |
| Operating income | $1.598 billion | $1.263 billion | +26.5% |
| Net income attributable to Southern Company | $1.135 billion | $868 million | +30.8% |
| Diluted earnings per share | $1.06 | $0.81 | +$0.25 |
| Operating margin (operating income/revenue) | 27.0% | 25.2% | +1.8 percentage points |
| Cash from operating activities | $1.242 billion | $894 million | +$348 million |
| Property additions | $1.678 billion | $1.560 billion | +$118 million |
Revenue growth reflected higher retail electric and natural gas revenues, colder weather, increased recoverable fuel and gas costs, and increased wholesale gas services activity. Fuel and purchased-power costs generally flow through regulated recovery mechanisms and therefore typically have limited direct effect on utility earnings.
Financial position, debt and liquidity
- At March 31, 2021, total assets were $125.4 billion, total stockholders’ equity was $33.1 billion, and cash and cash equivalents were $1.77 billion ($1.80 billion including restricted cash, as presented in the cash flow statement).
- Reported long-term debt was $46.7 billion; securities due within one year were $3.5 billion and notes payable were $1.1 billion. These are separate balance-sheet categories.
- Unused committed bank credit across the registrants was $7.648 billion. The filing says current liabilities exceeded current assets by $2.117 billion at Southern Company; management cited operating cash flow, commercial paper, credit lines and short-term borrowing as liquidity sources.
- Cash flow from investing activities was negative $2.243 billion, primarily reflecting construction spending, including $1.678 billion in property additions. Financing activities provided $1.734 billion, including debt issuance; cash dividends paid were $678 million. The quarterly dividend was $0.64 per share, up from $0.62.
- Southern Company issued $1.0 billion of senior notes in February. Management stated it did not expect to issue equity in capital markets through 2025.
Material changes and business drivers
- Southern Company’s attributable net income rose to $1.135 billion from $868 million. Management attributed the increase chiefly to colder-weather-related electric and gas revenues and stronger wholesale gas services results.
- Southern Company Gas net income increased to $398 million from $275 million, primarily as Winter Storm Uri increased wholesale gas services commercial activity. The segment’s results also included $75 million of charitable contributions in other expense.
- Southern Power attributable net income increased to $97 million from $75 million, including a tax benefit related to Alabama tax legislation and gains from contributed wind-turbine equipment. It acquired a controlling interest in the 300-MW Deuel Harvest wind facility and obtained $220 million in tax-equity funding.
- Weather-adjusted commercial and industrial electric sales remained affected by COVID-19 and related business and supply-chain disruptions. Colder weather and higher fuel and gas prices increased reported revenues and costs.
Outlook, significant items and risks
- Vogtle Units 3 and 4: Georgia Power’s forecast of its proportionate share of total project capital cost was approximately $8.755 billion, net of Toshiba payments and related customer refunds, with $1.195 billion estimated remaining to complete at March 31. Financing costs were estimated at about $3.0 billion, of which $2.7 billion had been incurred. Georgia Power recorded a $48 million pre-tax ($36 million after-tax) charge for an increase in the project cost forecast; future recovery is subject to regulatory review.
- Unit 3’s current site plan targeted fuel loading in Q3 2021 and service in December 2021, but management said schedule margin was minimal and a delay could move service to Q1 2022. Unit 4’s regulatory-approved in-service date remained November 2022. COVID-19 productivity impacts were estimated to have used three to four months of schedule margin; estimated incremental COVID-related costs of $150–$190 million were included in the project forecast. Further delays could increase costs and unrecoverable amounts could require additional charges.
- Winter Storm Uri: Southern Company Gas recorded a $487 million natural gas cost under-recovery asset. Recovery depends on regulatory mechanisms. Wholesale gas services benefited from exceptional storm-driven commercial activity, partly offset by derivative losses; that performance may not recur. Its reported VaR high for the quarter was $55.3 million, while management said exposure returned to typical levels as weather and supply normalized.
- Other contingent matters: Southern Company Gas disclosed a $93 million investment in the PennEast Pipeline, with expected project costs of approximately $300 million; delays or cancellation could impair the investment. It also committed to a contingent contribution of up to $150 million to SNG if SNG cannot refinance or otherwise satisfy $300 million of debt due in June 2021. Litigation and regulatory matters remain, including appeals involving Mississippi Power’s Kemper-related customer refunds and a Georgia Power franchise-fee class action; outcomes and potential losses are uncertain.
- Mississippi Power’s April 2021 rate filings and retirements proposed in its 2021 integrated resource plan were subsequent-period developments and remained subject to regulatory processes. The filing provides no consolidated full-year earnings or EPS guidance.
- Principal risks include Vogtle cost, schedule, licensing and recovery uncertainty; COVID-19 effects; fuel and commodity-price volatility; regulatory decisions; construction execution; environmental compliance; customer demand; and access to capital. Management reported no material change to the risk factors in the 2020 Form 10-K.
Most important facts for investors to verify
- Progress against Vogtle Unit 3 and Unit 4 milestones, updated cost estimates, contingency, and the Georgia PSC’s decisions on recovery of project costs.
- Whether and when the $487 million gas-cost under-recovery is recovered from customers, and the continuing financial effects of Winter Storm Uri and the Sequent sale.
- Cash generation, upcoming debt maturities and refinancing needs, and availability of committed credit across the separately reporting registrants.
- Regulatory and legal developments affecting proposed generation retirements, environmental compliance, PennEast, SNG, and pending litigation.
- Whether Q1 earnings growth—particularly storm-related wholesale gas results, tax benefits, and disposition or equipment-contribution gains—persists in subsequent quarters.