Southern Company (SO) — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited. The combined filing covers Southern Company and its listed subsidiaries. Southern Company Gas was acquired July 1, 2016, so its inclusion makes consolidated year-over-year comparisons less comparable.
Financial performance and liquidity
| Metric | Q2 2017 | Six months 2017 | Comparable 2016 |
|---|---|---|---|
| Operating revenue | $5.430 billion | $11.202 billion | $4.459 billion; $8.451 billion |
| Operating income (loss) | $(1.594) billion | $(288) million | $1.185 billion; $2.125 billion |
| Net income (loss) attributable to Southern Company | $(1.381) billion | $(723) million | $623 million; $1.112 billion |
| Basic EPS | $(1.38) | $(0.73) | $0.67; $1.20 |
| Operating cash flow | Not separately presented | $2.742 billion | $2.140 billion |
Q2 and six-month losses were driven predominantly by Kemper IGCC charges of $3.0 billion and $3.1 billion pretax, respectively. Retail electric revenue rose 0.8% for Q2 and 0.7% year to date; wholesale electric revenue increased 38.6% and 36.5%, respectively. Gas revenue was $684 million for Q2 and $2.214 billion year to date, following the merger. The filing does not provide a comparable consolidated margin measure; reported operating results include the exceptional Kemper charge.
For the first six months, investing cash flow was $(4.889) billion, including $3.398 billion of property additions and $1.062 billion for acquisitions; financing cash flow was $1.605 billion. Cash and equivalents were $1.433 billion at June 30, down from $1.975 billion at year-end 2016. Long-term debt was $43.885 billion; securities due within one year were $3.031 billion and notes payable were $3.274 billion. Current liabilities exceeded current assets by $3.9 billion. The company reported $8.011 billion of unused committed bank credit and stated it had access to capital markets and bank facilities. Common dividends paid totaled $1.134 billion; the quarterly dividend was $0.58 per share.
Material changes and significant projects
- Kemper IGCC: Mississippi Power suspended gasifier start-up activity in June and expected to continue operating the combined-cycle portion as a natural-gas facility. The Mississippi PSC sought a settlement with no customer rate increase and removal of customer cost risk for the gasifier. At June 30, $3.3 billion of project costs were not reflected in rates, including $2.8 billion for gasification assets; the company concluded recovery of those gasification costs was no longer probable and recorded a $2.8 billion charge. Additional cancellation costs of $100 million to $200 million were estimated. Cumulative Kemper charges were approximately $6.0 billion pretax through June 30.
- Plant Vogtle Units 3 and 4: The EPC contractor filed for bankruptcy. Georgia Power and other owners transitioned construction management to Southern Nuclear under a services agreement effective July 27, 2017, while reassessing cost, schedule, and cancellation options. Georgia Power’s preliminary share of estimated net additional capital costs was $1.0 billion to $1.7 billion above the revised forecast; projected in-service dates were February 2021–March 2022 for Unit 3 and February 2022–March 2023 for Unit 4. These are preliminary estimates, not final guidance. Toshiba acknowledged guarantee obligations of $3.68 billion overall, approximately $1.7 billion attributable to Georgia Power, but Toshiba’s financial condition creates substantial collection risk.
- Southern Power’s revenue increased with new renewable and natural-gas facilities; first-half net income attributable to Southern Power rose to $151 million from $139 million. Approximately 498 MW of solar and wind facilities were acquired or placed in service during the first half. Its average investment coverage ratio was 91% through 2021 and 90% through 2026, with about 16 years of average remaining contract duration.
- Gulf Power’s Florida rate-case settlement provided an approximately $54.3 million annual net customer impact beginning July 2017 and included a $32.5 million pretax write-down of its Plant Scherer Unit 3 ownership, recorded in Q1.
Outlook, risks, and other disclosures
The filing gives no consolidated earnings or EPS guidance. Management identified regulatory cost recovery, customer and sales growth, weather, fuel and natural-gas prices, capital-market access, and execution of construction projects as important future earnings drivers. It also noted possible material effects from federal tax reform and environmental regulation. Mississippi Power’s continuation as a going concern depends on anticipated financial support from Southern Company; Southern Company stated it intended to provide loans or equity if external funding proved insufficient.
Other notable exposures include a formal SEC investigation concerning Kemper costs, schedule, accounting, and controls; securities and derivative litigation related to Kemper; a $500 million arbitration demand relating to a cancelled CO2 contract; and uncertainty over Kemper rate recovery. Mississippi Power’s debt rating was downgraded by Moody’s to Ba1, and several Southern Company ratings or outlooks were negative or under review. Management reported disclosure controls were effective and no material second-quarter change in internal control over financial reporting.
Investor facts to verify
- Final Mississippi PSC settlement and recoverability of Kemper’s remaining combined-cycle costs; potential additional cancellation charges and tax-refund exposure.
- Vogtle’s updated cost-to-complete and cancellation assessments, Georgia PSC treatment, revised schedule, and the collectability and timing of Toshiba guarantee payments.
- Near-term refinancing and liquidity needs, particularly the $3.0 billion of debt maturities expected through June 2018 and Mississippi Power’s reliance on parent support.
- Whether revenue and earnings trends excluding the Kemper charge are sustained; consolidated comparisons are affected by Southern Company Gas’s post-acquisition inclusion.
- Developments in the SEC investigation, Kemper-related litigation and arbitration, credit ratings, and pending regulatory rate cases.