Business context and reporting period
Southern Company’s combined Form 10-K covers the fiscal year ended December 31, 2015, with comparative results for 2014 and 2013; it is an annual filing, not a standalone fourth-quarter report. The group’s core business is regulated electricity generation, transmission, and distribution through four southeastern utilities, alongside Southern Power’s wholesale generation business.
Key financial metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Operating revenue | $17.489 billion | $18.467 billion |
| Operating income | $4.282 billion | $3.642 billion |
| Net income attributable to Southern Company | $2.367 billion | $1.963 billion |
| Basic / diluted EPS | $2.60 / $2.59 | $2.19 / $2.18 |
| Operating cash flow | $6.274 billion | $5.815 billion |
| Cash and cash equivalents at year-end | $1.404 billion | $710 million |
| Long-term debt, including amounts due within one year | $27.362 billion | $23.973 billion |
Revenue fell 5.3%, while attributable net income rose 20.6%. The operating margin, calculated from reported operating income and revenue, was approximately 24.5%, versus 19.7% in 2014. Lower fuel and purchased-power costs and smaller Kemper project charges supported the improvement. Fuel and purchased-power expenses declined 19.2% to $5.4 billion. System generation mix shifted toward gas (46%, versus 39% in 2014) and away from coal (34%, versus 42%).
Investing cash outflow was $7.280 billion, including $5.674 billion of property additions and $1.719 billion of plant acquisitions. Financing provided $1.700 billion. Year-end current liabilities exceeded current assets by $2.6 billion, mainly because of $2.7 billion of debt due within one year. The group reported $6.428 billion of unused committed bank credit, excluding the separate merger bridge facility. Long-term debt was 52.6% of capitalization, up from 49.2%.
The common dividend was $2.1525 per share for 2015; management reported an 83% payout ratio. Fourth-quarter 2015 results were revenue of $3.568 billion, operating income of $578 million, attributable net income of $271 million, and EPS of $0.30.
Material changes versus the prior year
- Consolidated net income increased by $404 million, primarily because Kemper estimate charges fell to $365 million pretax in 2015 from $868 million in 2014, and retail base rates increased. Higher non-fuel operating and maintenance costs and depreciation partly offset these gains.
- Retail and wholesale revenue declined, reflecting lower fuel-cost recovery, milder weather, lower wholesale energy revenues, and contract expirations. Retail electricity sales declined 0.7%; total energy sales declined 1.8%.
- Operating cash flow increased by $459 million. Cash used for investing rose to $7.280 billion from $6.408 billion, reflecting construction and acquisitions.
- Debt increased, and ratings outlooks were weakened following the Kemper developments and proposed AGL Resources acquisition. S&P downgraded Southern Company to A-; Mississippi Power was downgraded by Moody’s to Baa3.
Outlook, commentary, risks, and unusual items
- Kemper IGCC: Mississippi Power’s estimated total project cost was $6.63 billion, including $5.29 billion subject to the cost cap; actual costs incurred were $6.03 billion at year-end. The company recorded cumulative charges of $2.41 billion pretax ($1.5 billion after tax), including $365 million pretax in 2015. The remaining gasifier and gas-cleanup facilities were expected to enter service in the third quarter of 2016. The cost cap and recovery of remaining costs are subject to exclusions, prudence reviews, and regulatory decisions. A further delay beyond August 31, 2016 was estimated to add $25–$35 million in base costs per month, plus estimated monthly AFUDC of $13 million and other carrying, operating, consulting, and legal costs of about $2 million. The project also faced an appeal of the in-service asset rate order, uncertainty over CO2 offtake agreements, and the loss of $235 million of Phase II tax credits.
- Plant Vogtle Units 3 and 4: Georgia Power’s updated in-service capital cost forecast was $5.44 billion, with approximately $2.4 billion of estimated construction-period financing costs and a $3.6 billion CWIP balance at year-end. The contractor settlement included approximately $350 million payable by Georgia Power based on its ownership share; about $121 million was paid after year-end. The revised guaranteed completion dates were June 30, 2019 and June 30, 2020. Georgia PSC review of prudence, cost, schedule, and the settlement remained ongoing.
- Capital program and regulation: The system estimated construction investment of $7.3 billion in 2016, $5.2 billion in 2017, and $5.5 billion in 2018. These estimates exclude potential additional Clean Power Plan costs and certain coal-ash closure and monitoring costs. Environmental rules, including the CCR Rule and greenhouse-gas requirements, may require further spending, retirements, or fuel changes; timely recovery is not assured. The Supreme Court stayed the Clean Power Plan pending litigation.
- AGL Resources transaction: Southern Company agreed to acquire AGL for $66 per share in cash, with approximately $8.2 billion expected to fund the purchase and transaction costs, and to assume AGL debt of approximately $4.8 billion. The company expected to issue about $8.0 billion of debt and $1.2 billion of equity in 2016 and had an $8.1 billion bridge agreement as financing backup. Completion was expected in the second half of 2016, subject to regulatory approvals and other conditions.
- Other exposures: Gulf Power warned of a material negative earnings impact in 2016 as Plant Scherer Unit 3 contract coverage fell from 100% to 34% for 2016 and 27% through 2019. Other risks include weather and demand variability, fuel and wholesale price movements, construction execution, nuclear operations, environmental liabilities, cybersecurity, counterparty performance, and access to capital. Management’s non-GAAP adjusted EPS was $2.89, excluding $0.25 per share for Kemper, $0.03 for merger costs, and $0.01 for an insurance settlement; reported EPS was $2.60.
- Reporting and controls: The filing reports effective disclosure controls and internal control over financial reporting. The independent auditor issued unqualified opinions on the Southern Company consolidated financial statements and internal control.
Most important facts an investor should verify
- Updated Kemper completion timing, cost-to-complete estimates, cost-cap treatment, CO2 sales arrangements, and the outcome of regulatory and legal proceedings.
- Vogtle schedule and cost forecasts, the Georgia PSC’s prudence review, and any further contractor claims or NRC licensing issues.
- AGL merger approvals, final financing mix, resulting leverage and credit ratings, and expected integration costs and benefits.
- Whether planned capital spending, environmental compliance, CCR obligations, and near-term debt maturities can be funded and recovered through rates or contracts.
- Gulf Power’s replacement contracts or alternative use for Plant Scherer Unit 3, and the resulting effect on subsidiary earnings.
- The sustainability of earnings and dividends after excluding unusual project charges, tax benefits, and other adjustments; the filing does not provide a clear standalone fourth-quarter outlook.