Southern Company 2013 Form 10-K Summary
Business context and reporting period. Southern Company is a holding company whose principal business is regulated electricity sales through utilities serving the Southeast; subsidiary Southern Power sells electricity in wholesale markets. This annual filing covers the fiscal year ended December 31, 2013, with 2012 comparisons. The requested “2013 Q4” is not a standalone quarterly filing; the 10-K also reports unaudited fourth-quarter results.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Operating revenue | $17.09 billion | $16.54 billion |
| Operating income | $3.26 billion | $4.46 billion |
| Net income after subsidiary preferred and preference dividends | $1.64 billion | $2.35 billion |
| Basic / diluted EPS | $1.88 / $1.87 | $2.70 / $2.67 |
| Cash from operating activities | $6.10 billion | $4.90 billion |
| Property additions | $5.46 billion | $4.81 billion |
Operating margin was approximately 19.0% in 2013 versus 27.0% in 2012; net income after subsidiary preferred and preference dividends was approximately 9.6% of revenue versus 14.2%. The declines primarily reflect the Kemper IGCC charge described below. Retail revenue rose 2.5%; retail electricity sales were nearly flat, while wholesale revenue increased 10.7%.
Fourth quarter: unaudited consolidated revenue was $3.93 billion, operating income $799 million, net income after subsidiary preferred and preference dividends $414 million, and basic and diluted EPS $0.47.
Cash, debt, and liquidity: year-end cash and cash equivalents were $659 million. Long-term debt was $21.81 billion, including $469 million due within one year; short-term borrowings were $1.48 billion. Long-term debt was 51.5% of capitalization, compared with 49.9% in 2012. Current assets of $5.60 billion and current liabilities of $5.54 billion imply a current ratio of approximately 1.01. The companies had $5.21 billion of unused committed bank credit. Management said projected dividends, capital expenditures, and debt maturities for 2014–2016 would exceed operating cash flow, with debt and equity issuances expected to fund the shortfall.
Southern Company paid $2.0125 per common share in 2013. The reported dividend payout ratio was 107%; management cited a 74% payout ratio excluding specified unusual items. A quarterly dividend of $0.5075 per share was declared in January 2014.
Material changes and significant projects
- Kemper IGCC: Mississippi Power recorded a $1.18 billion pre-tax charge, or $729 million after tax, for revised estimated costs above the Mississippi PSC’s $2.88 billion construction cap, net of DOE grants and excluding specified exceptions. The charges contributed to the 30% decline in consolidated net income. The project’s total current estimate was approximately $5.04 billion; the company did not intend to seek recovery or joint-owner contributions for costs above the cap, subject to stated exceptions. The fourth-quarter 2014 in-service date remained the plan.
- Plant Vogtle Units 3 and 4: Georgia Power’s 45.7% ownership share faced a requested increase in estimated in-service capital cost from $4.4 billion to $4.8 billion and projected in-service dates of Q4 2017 and Q4 2018 for Units 3 and 4. Contractors claimed approximately $425 million of additional costs attributable to Georgia Power’s share; the company disputed the claims and schedule adjustments.
- Capital program: system construction spending was estimated at $6.1 billion in 2014, $5.4 billion in 2015, and $4.5 billion in 2016. Estimated environmental compliance capital spending for 2014–2016 was approximately $3.2 billion.
- Generation mix and assets: 2013 generation was 39% coal, 40% gas, 17% nuclear, and 4% hydro. Georgia Power retired several coal and oil units and planned additional retirements and fuel conversions in response to environmental requirements and resource planning.
Outlook, commentary, risks, and unusual items
- Management cited weather, economic growth, customer usage, conservation, fuel prices, wholesale-market conditions, regulation, and timely cost recovery as important drivers of future results. Electricity demand and earnings are seasonal.
- Further Kemper construction cost increases or delays could trigger additional material charges, jeopardize tax benefits, and affect rate recovery. The Mississippi PSC’s cost prudence reviews, the proposed securitization and multi-year rate plan, legal challenges, and the proposed SMEPA 15% ownership sale remained unresolved. The filing estimated the bonus-depreciation tax benefit to retail customers at approximately $200 million, dependent on the project entering service in 2014.
- Vogtle risks include construction delays, design and licensing issues, cost escalation, and continuing contractor litigation. Costs above certified amounts may not enter rate base unless found reasonable and prudent.
- Environmental risks include pending requirements for air emissions, cooling-water intake, wastewater, coal-combustion residuals, and greenhouse gases; compliance costs may be significant and recovery is not assured. EPA New Source Review litigation involving Alabama Power and Georgia Power also remained a contingency.
- An explosion at Plant Bowen in April 2013 damaged Units 1 and 2 and related facilities. Both units returned to service by December 2013; Georgia Power expected material repair costs to be covered by property insurance.
- Mississippi Power reported remediation of a prior material weakness in internal controls related to Kemper cost estimates; management concluded the weakness was remediated as of December 31, 2013. The independent auditor reported Southern Company’s financial statements fairly presented, in all material respects, and its internal control over financial reporting effective.
Most important facts for investors to verify
- Whether Kemper entered service on schedule, its final cost, the amount excluded from recovery, and Mississippi PSC prudence and rate-recovery decisions.
- Vogtle’s updated cost, schedule, contractor claims, and the treatment of costs above certified amounts; also verify the status and terms of DOE-guaranteed financing.
- Actual 2014–2016 capital spending and environmental compliance costs versus estimates, and the extent recovered through rates.
- Debt maturities, short-term borrowing, credit availability, and the financing required because projected 2014–2016 cash uses exceed operating cash flow.
- Underlying earnings and dividend coverage excluding the Kemper charge and other specified unusual items, including reconciliation of management’s non-GAAP figures to GAAP results.