Business context and reporting period
Southern Company’s combined Form 10-Q covers the quarter and nine months ended September 30, 2013, and was filed November 6, 2013. It reports the parent and its regulated utilities—Alabama Power, Georgia Power, Gulf Power and Mississippi Power—plus wholesale generator Southern Power. The statements are unaudited; the filing cautions that seasonal results are not necessarily indicative of full-year performance.
Key financial metrics
| Southern Company consolidated | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $5.017bn | $5.049bn | $13.160bn | $12.834bn |
| Operating income | $1.491bn | $1.740bn | $2.456bn | $3.649bn |
| Net income after subsidiary preferred/preference dividends | $852m | $976m | $1.230bn | $1.967bn |
| Diluted EPS | $0.97 | $1.11 | $1.40 | $2.23 |
| Cash dividends per common share | $0.5075 | $0.4900 | $1.5050 | $1.4525 |
The filing does not provide a clear headline operating-margin figure. For the first nine months, operating cash flow was $4.411bn, investing cash flow was $(4.102)bn, and financing cash flow was $(255)m; cash increased $54m to $682m. At September 30, total assets were $64.697bn, total liabilities $44.788bn, long-term debt $21.053bn, securities due within one year $1.307bn, and notes payable $750m. The filing describes financial condition as stable.
Material changes versus the prior comparable period
- Nine-month operating revenue rose 2.5%, but operating income fell 32.7% and net income after subsidiary preferred/preference dividends fell 37.5%. The main driver was $1.14bn of 2013 pre-tax Kemper IGCC estimated-loss charges, versus none in the comparable 2012 period. The parent’s after-tax charge was $704m.
- Q3 revenue declined 0.6% and net income after subsidiary preferred/preference dividends declined 12.7%. Less favorable weather reduced retail revenue; rate effects at Georgia Power partly offset the decline.
- Nine-month retail revenue increased 1.5%, reflecting rates and fuel-cost recovery, partly offset by weather and weaker sales. Wholesale revenue increased 11.5%, partly reflecting higher capacity revenue and fuel-price-related energy revenue.
- Capital investment continued: property additions were $3.978bn for the first nine months, and property, plant and equipment increased $1.810bn from year-end 2012. Long-term debt increased $1.779bn.
Outlook, management commentary, risks and unusual items
- Kemper IGCC—major uncertainty: On October 28, 2013, Mississippi Power moved the expected in-service date to Q4 2014 and revised the project estimate to approximately $4.02bn, net of DOE grants and cost-cap exceptions. The Mississippi PSC’s $2.88bn cap excludes specified exceptions; Mississippi Power says it will not seek joint-owner contributions or rate recovery for costs above the cap, net of grants and exceptions. Further cost increases, schedule delays and additional charges remain possible. The project had incurred $3.61bn in costs by September 30; the filing estimates about $1.1bn in future cash expenditures with no recovery associated with the recorded losses.
- Kemper cost recovery remains subject to Mississippi PSC prudence reviews and other regulatory and legal proceedings. A proposed seven-year rate plan and securitization financing are not final; the proposed SMEPA sale of a 15% interest is subject to approvals and closing conditions. DOE tax credits and bonus depreciation also depend on project timing and other requirements.
- Plant Vogtle: Georgia Power’s eighth construction-monitoring report sought to raise its estimated in-service capital cost to $4.8bn and move the units’ expected dates to Q4 2017 and Q4 2018. The PSC deferred the certificate amendment decision. Contractor cost and schedule claims—including an asserted approximately $425m adjustment attributable to Georgia Power—are disputed.
- Rates and regulation: Georgia Power requested a $482m annual rate increase effective January 2014; PSC staff proposed materially different treatment, and the final order was pending. Gulf Power requested $74.4m of annual revenue in 2014 and a possible $16.4m step adjustment for 2015; outcomes were pending. Environmental rules, potential compliance spending and timely cost recovery may affect earnings, cash flow and capital requirements.
- Other items: An April explosion left Georgia Power’s Plant Bowen Unit 2 offline pending repairs; management expected material repair costs to be covered by insurance. Alabama Power recorded a $102m increase in its Plant Farley asset-retirement obligation estimate. Mississippi Power’s $150m SMEPA deposit is refundable under specified conditions, and Southern Company guaranteed the refund obligation.
- Controls and credit: Mississippi Power reported disclosure controls were not effective because of a previously identified material weakness concerning support for Kemper cost estimates and related communications; remediation work continued, with effectiveness assessment expected by year-end 2013. Southern Company, Alabama Power, Georgia Power, Gulf Power and Southern Power reported effective disclosure controls. S&P revised the outlook for Southern Company and the traditional utilities to negative; Moody’s downgraded Mississippi Power in August 2013.
- Management identifies weather, demand, fuel prices, construction execution, environmental requirements, regulatory decisions, financing access and credit ratings as risks. No full-year earnings guidance is provided in the supplied filing text.
Most important facts for investors to verify
- Whether Kemper’s revised $4.02bn estimate, Q4 2014 schedule and stated cost-cap treatment hold, and what additional unrecovered costs or charges may result.
- Mississippi PSC prudence findings and decisions on Kemper rate recovery, securitization, and the SMEPA ownership transaction and deposit.
- Plant Vogtle’s final approved cost and schedule, contractor claims, and recovery of costs above certified amounts.
- Final Georgia and Florida rate-case outcomes and the extent to which environmental and other capital spending can be recovered promptly in customer rates.
- Progress in remediating Mississippi Power’s material weakness, and any effect of ratings changes on collateral requirements or access to financing.