Southern Company — Q1 2011 Form 10-Q
Business context and period. The combined, unaudited filing covers Southern Company and its listed utility and power subsidiaries for the three months ended March 31, 2011, compared with Q1 2010. The system primarily generates and sells electricity in the southeastern United States; results are seasonal and the quarter is not necessarily indicative of full-year performance.
Key financial results
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Operating revenue | $4.012 billion | $4.157 billion |
| Operating income | $854 million | $922 million |
| Net income | $438 million | $511 million |
| Net income after subsidiary preferred/preference dividends | $422 million | $495 million |
| EPS, basic / diluted | $0.50 / $0.49 | $0.60 / $0.60 |
| Operating cash flow | $998 million | $738 million |
| Cash and cash equivalents at quarter-end | $410 million | $339 million |
Operating revenue fell 3.5% and net income after subsidiary dividends declined 14.7%. Operating margin was approximately 21.3%, versus 22.2% a year earlier; net income after subsidiary dividends was approximately 10.5% of revenue, versus 11.9%. These are calculated from reported figures.
- Retail revenue was $3.396 billion, down $63 million (1.8%); wholesale revenue was $449 million, down $93 million (17.2%). Lower retail fuel-cost recovery and weaker wholesale sales contributed to the revenue decline.
- Fuel and purchased-power expense fell by $196 million to $1.576 billion. Other operations and maintenance rose $36 million to $944 million, while depreciation and amortization rose $75 million to $418 million.
- Operating cash flow increased $260 million. Investing cash use was $884 million, including $1.086 billion of property additions; financing cash use was $151 million. Cash declined $37 million during the quarter.
- At March 31, total assets were $55.019 billion, total liabilities $37.472 billion, and stockholders’ equity $17.172 billion. Long-term debt was $18.133 billion; securities due within one year were $1.435 billion and notes payable were $1.243 billion. Current assets of $5.240 billion were below current liabilities of $6.037 billion.
- Unused committed bank credit was approximately $4.8 billion. System commercial-paper borrowings were approximately $1.2 billion at a weighted-average rate of 0.3%. Approximately $1.4 billion was required through March 31, 2012 for long-term debt maturities and announced repurchases.
Material changes and operating drivers
- Management attributed lower earnings chiefly to milder weather than in Q1 2010, reduced wholesale revenue—particularly at Alabama Power—higher operations and maintenance expense, and reduced amortization of a Georgia Power regulatory liability related to cost-of-removal obligations.
- Georgia Power’s retail base-rate increase under its 2010 Alternate Rate Plan, effective January 1, 2011, and new Southern Power power-purchase agreements partly offset the decline. Southern Power net income increased to $37.7 million from $14.7 million, mainly on new PPA revenues. Alabama Power net income after preferred dividends fell to $152 million from $203 million; Georgia Power’s fell to $206 million from $238 million; Gulf Power’s fell to $11.7 million from $25.3 million; Mississippi Power’s fell to $14.6 million from $15.3 million.
- Weather-adjusted industrial electricity sales improved in several service areas, while residential and commercial sales were mixed or lower. Alabama Power’s non-affiliate wholesale revenue fell substantially following expiration of long-term unit-power contracts in 2010.
- Southern Company paid a quarterly common dividend of $0.455 per share, up from $0.4375 a year earlier. In April 2011, it raised the quarterly dividend payable in June to $0.4725.
Outlook, risks and unusual items
- Investment and construction: Planned base construction investment was $4.9 billion in 2011, $5.1 billion in 2012 and $4.5 billion in 2013. Estimated incremental investment for anticipated new environmental rules ranged up to $289 million, $670 million and $1.9 billion, respectively; management said the proposed Utility MACT rule could put spending near the high end. The filing cautions that costs may vary and may not be fully recoverable in rates.
- Plant Vogtle: Georgia Power expected the NRC construction and operating license for Units 3 and 4 in late 2011. The Georgia PSC had approved reported costs of $1.048 billion through June 30, 2010; cost-overrun risk-sharing terms remained unresolved. The NCCR tariff permits recovery of construction financing costs, with approximately $1.7 billion of projected financing costs recoverable during construction and projected in-service cost of approximately $4.4 billion. DOE loan guarantees, capped at the lesser of 70% of eligible project costs or approximately $3.4 billion, remained conditional.
- Kemper IGCC: Mississippi Power had spent $352.8 million through March 31, 2011 on the project, whose projected 2011–2013 investment was $685 million, $813 million and $616 million. DOE grants totaling $270 million were awarded, with $40 million received by quarter-end; an additional $20.1 million had been requested. The IRS certified $279 million of additional Section 48A tax credits in April 2011, subject to requirements including carbon capture and sequestration. Litigation, permitting, financing, construction and cost recovery remained uncertain.
- Environmental and legal exposure: The EPA’s proposed Utility MACT and cooling-water rules could require substantial control-equipment investment, affect plant-retirement decisions, and pressure earnings, cash flows or reliability if compliance costs are not recovered. Alabama Power’s NSR case was dismissed with prejudice in March, subject to EPA appeal. A separate EPA attempt to rescind Alabama’s opacity-rule approval was being challenged. The Kivalina case was stayed pending further proceedings; the Supreme Court heard argument in a separate greenhouse-gas nuisance case in April.
- After-quarter storm costs: April 27 storms caused extensive Alabama Power outages. Preliminary estimates were $40–$55 million in operations and maintenance costs and $180–$225 million in capital expenditures. The Alabama Power natural disaster reserve stood at $127 million at March 31. The filing also reports Georgia storm damage in April, not expected to materially affect its financial statements under existing regulatory treatment.
- Tax and liquidity items: Bonus-depreciation provisions were estimated to increase 2011 cash flow by $350–$450 million for Southern Company. Management described financial condition as stable and said operating cash flow, commercial paper, bank lines and capital-market access should meet liquidity needs. The company reported $1.4 billion of upcoming debt maturities/repurchases and current liabilities exceeding current assets.
- Management identified uncertainty around economic recovery, weather and demand, fuel costs, regulatory rate recovery, environmental compliance, construction execution, financing access and counterparties. No material change in disclosed risk factors was reported; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether lower earnings persist after seasonal weather effects and whether Southern Power’s new PPAs offset expiring contracts.
- Regulatory decisions and final requirements for environmental rules, fuel-cost recovery, Plant Vogtle, and Kemper; monitor updated project budgets, schedules and cost recovery.
- Actual Alabama storm restoration costs, reserve use, insurance or regulatory recovery, and resulting capital needs.
- Ability to refinance near-term debt maturities and renew expiring credit facilities while funding the multiyear construction program.
- Cash-flow quality: Q1 operating cash flow benefited from working-capital movements and tax-related items; assess recurring cash generation against capital spending and dividends.