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, 2007. The Southern Company is a holding company for electric utility subsidiaries operating in the Southeastern United States. The filing includes unaudited condensed consolidated financial statements and management discussion and analysis for the parent company and each subsidiary.
Key Financial Metrics (Six Months Ended June 30, 2007)
| Metric | 2007 (in millions) | 2006 (in millions) |
|---|---|---|
| Total Operating Revenues | $7,180.6 | $6,654.8 |
| Consolidated Net Income | $767.8 | $646.8 |
| Earnings Per Share (Diluted) | $1.01 | $0.87 |
| Operating Cash Flow | $974.4 | $743.6 |
| Investing Cash Flow | ($1,682.1) | ($1,160.8) |
| Financing Cash Flow | $709.7 | $478.0 |
| Total Assets | $44,144.7 | $42,858.4 |
| Long-Term Debt | $13,207.6 | $10,942.0 |
| Cash and Cash Equivalents | $168.8 | $202.1 |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 7.9% year-over-year. Retail revenues rose 7.5% due to customer growth, favorable weather, and rate increases (specifically at Alabama Power). Wholesale revenues increased 13.2% driven by higher fuel costs passed through to customers and short-term opportunity sales.
- Profitability: Net income increased 18.7% to $767.8 million. Earnings per share (diluted) rose to $1.01 from $0.87. The increase was driven by higher revenues and tax credits from synthetic fuel investments, partially offset by higher maintenance, interest, and depreciation expenses.
- Cost Increases: Fuel expenses increased 17.7% due to rising fossil fuel prices and a decrease in hydro generation caused by lack of rainfall. Interest expense increased 10.4% due to additional debt outstanding and higher interest rates.
- Capital Expenditures: Net cash used for investing activities increased significantly to $1.68 billion, primarily due to gross property additions of $1.57 billion for utility plant construction and environmental compliance.
Guidance, Outlook, and Risks
- Regulatory Matters:
- Georgia Power: Filed a request on June 29, 2007, for a retail base rate increase of approximately 5.98% effective January 1, 2008, to cover environmental compliance and infrastructure costs. A final order is expected by December 20, 2007.
- Alabama Power: The Alabama PSC ordered an increase in the fuel cost recovery factor effective July 2007 to recover under-recovered fuel costs totaling $375 million.
- Mississippi Power: Received an $85.2 million grant from the State of Mississippi for storm restoration costs related to Hurricane Katrina.
- Environmental Compliance: Significant capital is being invested to comply with the Clean Air Act and new state regulations (e.g., Georgia's multi-pollutant rule). Compliance costs could impact earnings if not fully recovered in rates.
- Legal and Contingencies:
- NSR Litigation: Ongoing civil actions by the EPA regarding New Source Review violations at Alabama Power and Georgia Power facilities. The outcome remains uncertain pending Supreme Court decisions and lower court motions.
- Mirant Matters: Continued litigation regarding Mirant's bankruptcy, including asset recovery and securities litigation, though management does not anticipate a material adverse effect on financial statements.
- Property Tax Dispute: A dispute with Monroe County, Georgia, regarding the valuation of Plant Scherer could result in additional taxes of up to $20.4 million for Georgia Power and $3.9 million for Gulf Power.
- Accounting Changes: Adoption of FIN 48 (Accounting for Uncertainty in Income Taxes) and FSP 13-2 (Leveraged Leases) resulted in a reduction to beginning retained earnings of approximately $140 million combined, though these are non-cash charges.
Investor Verification Checklist
- Rate Case Outcomes: Verify the final approval and magnitude of the Georgia Power rate increase and the Alabama Power fuel cost recovery adjustments.
- Environmental Costs: Monitor the ability to recover capital expenditures related to new environmental regulations (e.g., Georgia multi-pollutant rule) through regulatory rate mechanisms.
- Legal Resolutions: Track the status of the EPA New Source Review (NSR) litigation and the Monroe County property tax dispute, as these represent significant contingent liabilities.
- Fuel Cost Recovery: Assess the trajectory of under-recovered fuel costs across all operating companies and the timing of regulatory adjustments to billing factors.
- Debt Maturities: Review the schedule of long-term debt maturities and the company's strategy for refinancing, given the increase in total debt levels.