Business Context and Reporting Period
This Form 10-Q covers The Southern Company and its subsidiary operating companies (Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power) for the quarterly period ended June 30, 2009. The Southern Company is a holding company for vertically integrated electric utilities in the Southeast and a competitive wholesale power generator. The reporting period reflects the impact of a recessionary economy, which significantly reduced industrial electricity demand, alongside ongoing regulatory proceedings and environmental compliance costs.
Key Financial Metrics (Six Months Ended June 30, 2009)
| Metric | 2009 (in millions) | 2008 (in millions) |
|---|---|---|
| Total Operating Revenues | $7,551.5 | $7,898.1 |
| Consolidated Net Income | $636.7 | $808.0 |
| Net Income After Preferred Dividends | $604.3 | $775.6 |
| Diluted EPS | $0.77 | $1.00 |
| Operating Cash Flow | $619.6 | $1,410.9 |
| Long-Term Debt | $17,921.4 | $16,816.4 |
| Cash and Cash Equivalents | $781.8 | $416.6 |
Material Changes Versus Prior Period
- Revenue Decline: Total operating revenues decreased by approximately 4.4% year-to-date. Retail revenues fell 1.5% and wholesale revenues dropped 19.6%, primarily due to a 6.5% decline in weather-adjusted retail KWH sales driven by recessionary conditions, particularly in the industrial sector (down 17.3%).
- Net Income Decrease: Net income after preferred dividends declined 22.1% to $604.3 million. This decrease was primarily driven by a $202 million litigation settlement charge with MC Asset Recovery (related to Mirant matters) recorded in the first quarter, lower revenues, and higher depreciation.
- Expense Management: Despite revenue declines, fuel and purchased power expenses decreased by 7.1% due to lower fossil fuel prices and reduced generation volumes. Other operations and maintenance expenses decreased by 6.0% due to cost containment efforts.
- Unusual Items: The period included a $26.3 million gain on the disposition of lease terminations and a $17.2 million loss on the extinguishment of debt related to leveraged lease investments. Conversely, the $202 million MC Asset Recovery settlement was a significant non-recurring charge.
Guidance, Outlook, and Risks
- Economic Outlook: Management expects the economic recession to continue negatively impacting energy sales, particularly for industrial customers. Future earnings depend heavily on the timing and extent of the economic recovery.
- Regulatory Environment:
- Georgia Power: Projected retail Return on Equity (ROE) is expected to fall below the 10.25% floor of its 2007 Retail Rate Plan in 2009 and 2010. Instead of filing for a rate increase, Georgia Power filed for an accounting order to amortize $324 million of regulatory liabilities to reduce operating expenses.
- Mississippi Power (Kemper IGCC): The Mississippi PSC initiated a two-phase evaluation of the Kemper Integrated Coal Gasification Combined Cycle project. Phase I hearings are scheduled for October 2009 to determine the need for new resources.
- Georgia Power (Plant Vogtle): The Georgia PSC certified construction of Plant Vogtle Units 3 and 4. An environmental group has filed a petition challenging the certification and the Georgia Nuclear Energy Financing Act.
- Environmental Risks: Potential legislation regarding greenhouse gas emissions (e.g., American Clean Energy and Security Act) could impose significant compliance costs. The EPA's proposed endangerment finding for greenhouse gases remains a key uncertainty.
- Liquidity: The company maintains adequate access to capital with $4.7 billion in unused credit arrangements. Cash and cash equivalents increased to $782 million, bolstered by proceeds from the termination of leveraged lease investments.
Key Facts for Investor Verification
- MC Asset Recovery Settlement: Verify the final tax treatment and potential for recovery of the $202 million settlement payment, as this impacts the effective tax rate and future earnings.
- Georgia Power ROE: Monitor the outcome of the accounting order request filed with the Georgia PSC, as approval is critical to mitigating the impact of falling below the allowed ROE range.
- Kemper IGCC Project: Track the Mississippi PSC's Phase I decision (November 2009) regarding the need for the Kemper plant, which determines the project's viability and cost recovery.
- Industrial Sales Trends: Continue to monitor weather-adjusted industrial KWH sales, which have declined significantly (17.3% YTD) and are a primary driver of revenue volatility.
- Under-recovered Fuel Costs: Review the balance of under-recovered fuel costs ($882 million system-wide), which impacts cash flow timing and future rate case filings.