Southern Company 2016 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2016; this is an annual filing, not a standalone fourth-quarter report. Southern Company operates regulated electric utilities in the Southeast, wholesale generation through Southern Power, and—following its July 1, 2016 merger—natural-gas distribution and related businesses through Southern Company Gas. Results include Southern Company Gas only from the merger date, limiting direct year-over-year comparability.
Financial performance and liquidity
- Revenue: $19.896 billion, up from $17.489 billion in 2015, primarily reflecting the acquired gas business and changes in electric revenues.
- Profit and EPS: Net income attributable to Southern Company was $2.448 billion, up 3.4%. Diluted EPS was $2.55 versus $2.59; the filing attributes a $0.12 per-share impact to increased average shares outstanding. Fourth-quarter revenue was $5.181 billion and net income attributable to Southern Company was $197 million, or $0.20 per diluted share.
- Margins: Operating income was $4.629 billion, up from $4.282 billion. Operating margin was approximately 23.3%, compared with 24.5% in 2015; the merger materially changes the revenue base.
- Cash flow: Cash from operations was $4.894 billion, down from $6.274 billion, mainly reflecting approximately $1.0 billion of voluntary pension contributions and higher unutilized tax credits. Investing cash use was $20.048 billion, including acquisitions, SNG investment, and capital spending. Financing cash provided was $15.725 billion. Year-end cash and cash equivalents were $1.975 billion.
- Debt and liquidity: Long-term debt was $42.629 billion; notes payable were $2.241 billion and securities due within one year were $2.587 billion. Common equity was 33.3% of total capitalization plus short-term debt, down from 40.5%. Current liabilities exceeded current assets by $3.2 billion. The company reported $8.273 billion of unused committed bank credit and compliance with applicable debt covenants.
- Dividends: 2016 dividends were $2.2225 per share, with an 86% payout ratio. Southern Company declared a $0.56 quarterly dividend in January 2017.
Material changes versus the prior comparable period
- The $8.0 billion Southern Company Gas merger closed July 1, 2016. Southern Company also acquired PowerSecure for $429 million and invested approximately $1.4 billion for a 50% interest in SNG.
- Southern Power expanded its generation portfolio: it acquired or began construction on approximately 2,134 MW of solar, wind, and natural-gas facilities, and completed approximately 1,060 MW of solar construction. It reported $338 million of net income attributable to the company, versus $215 million in 2015, aided by renewable tax benefits and sales.
- Electric retail revenue increased, supported by rate changes and warmer third-quarter weather, while weather-adjusted retail electricity sales were down 1.0%. Industrial sales were pressured by weaker activity in several sectors.
- Debt and equity increased substantially to fund the merger, investments, and construction. Southern Company issued approximately 50.8 million shares in underwritten offerings for about $2.5 billion and issued additional shares through at-the-market and employee programs.
Outlook, commentary, risks, and unusual items
- Kemper IGCC: The current total project cost estimate was approximately $6.99 billion versus a 2010 project estimate of $2.97 billion. Through year-end, Southern Company had recorded $2.76 billion of charges for costs above the Mississippi PSC cost cap; 2016 included a $428 million charge, including an additional $80 million estimated minimum probable non-recovery under the planned rate-mitigation approach. Mississippi Power does not intend to seek recovery of costs above the cap, subject to specified exceptions. The remainder of the plant was expected to enter service by mid-March 2017; delays were estimated to add $25–$35 million in monthly base costs, plus other carrying and operating costs. The 2017 rate case was due by June 3, 2017, and further material charges remained possible. The auditor issued an unqualified opinion with an emphasis paragraph noting uncertainty in Kemper cost recovery. The SEC was conducting a formal investigation, and related lawsuits were pending.
- Plant Vogtle Units 3 and 4: Georgia Power’s revised in-service capital cost forecast was $5.68 billion, including $240 million of contingency above its $5.44 billion current forecast. Contractor forecasts were December 2019 for Unit 3 and September 2020 for Unit 4. Georgia Power’s construction work in progress was approximately $3.9 billion, with $2.6 billion borrowed through the DOE/FFB loan facility. Toshiba’s financial condition and contractor performance, licensing, labor productivity, and schedule remain risks. Delayed service beyond December 31, 2020 would trigger additional customer-benefit and financing consequences under the Georgia PSC settlement.
- Capital needs and outlook: System construction spending was estimated at $9.1 billion for 2017; projected dividends, capital expenditures, and debt maturities were expected to exceed operating cash flows during 2017–2019. Management expected to use debt, equity, bank facilities, and operating cash flow to fund needs. No specific consolidated earnings guidance is stated in the provided filing text.
- Other risks and contingencies: Environmental compliance and coal-ash closure costs may change and recovery is not assured. The company also cited weather, fuel and pipeline availability, competition and distributed generation, interest rates, credit ratings, cyber and physical security, benefit-plan assumptions, and regulatory approvals as risks. Gulf Power’s requested $106.8 million annual rate increase remained pending; denial of retail recovery for Plant Scherer Unit 3 could lead to an asset sale and potential loss.
- Reporting and controls: Southern Company and its subsidiaries reported effective disclosure controls; management concluded internal control over financial reporting was effective. The 2016 statements reflect acquisition-related expenses and accounting-basis changes from the merger.
Most important facts for investors to verify
- Progress, final cost, sustained operating performance, and rate recovery for Kemper; the outcome of the 2017 rate case, SEC investigation, and related litigation.
- Vogtle schedule, cost forecast, contractor and Toshiba financial capacity, DOE loan conditions, and eligibility for production tax credits.
- Post-merger earnings and cash-flow contribution of Southern Company Gas, integration costs, and realization of anticipated merger savings.
- Funding of the projected capital program and debt maturities, credit ratings, leverage, and the sustainability of dividends relative to cash generation.
- Regulatory outcomes for Gulf Power’s rate case and Plant Scherer Unit 3, as well as environmental and coal-ash obligations and their recoverability.