Southern Company 10-Q Summary — Quarter Ended June 30, 2013
Business context and reporting period
Southern Company is a regulated electric utility holding company whose principal operations are its four traditional utilities and Southern Power’s wholesale generation business. This combined, unaudited Form 10-Q also covers Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power. Results cover the three and six months ended June 30, 2013; interim results are seasonal and are not necessarily indicative of full-year performance.
Financial performance and liquidity
Amounts below are for Southern Company on a consolidated basis unless stated otherwise; dollars are in millions except per-share data.
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Operating revenue | $4,246 | $4,181 | $8,143 | $7,785 |
| Operating income | $640 | $1,143 | $965 | $1,909 |
| Net income after subsidiary preferred dividends | $297 | $623 | $378 | $991 |
| Diluted EPS | $0.34 | $0.71 | $0.43 | $1.13 |
- First-half operating margin was approximately 11.9%, down from 24.5%; net income after subsidiary preferred dividends was approximately 4.6% of revenue, versus 12.7%. The declines primarily reflect Kemper IGCC loss charges.
- First-half cash from operations was $1,947, compared with $1,757; investing used $2,629, compared with $2,791; financing provided $478, compared with $378. Cash and cash equivalents ended June at $424, down from $628 at year-end 2012.
- At June 30, total current assets were $6,001 and current liabilities $7,346. Long-term debt was $19,943; securities due within one year were $2,085 and notes payable were $1,587. Management said financial condition remained stable and cited access to capital markets and bank credit arrangements.
- First-half common dividends were $870; the Q2 dividend was $0.5075 per share, up from $0.49. The company reported a $44.13 quarter-end share price and $20.64 book value per share.
Material changes versus the prior comparable period
- Kemper IGCC drove the major earnings decline. Southern Company recorded estimated probable losses of $990 pretax ($611.3 after tax) in the first half, including $450 pretax in Q2. The charges reflect expected costs above the Mississippi PSC’s $2.88 billion cap, net of grants and specified exceptions.
- After quarter-end, Mississippi Power revised the Kemper estimate to approximately $3.87 billion, net of DOE grants and cost-cap exceptions. At June 30, project spending totaled $3.29 billion; $2.24 billion was recorded in construction work in progress, net of grants and estimated losses. The project was expected to enter service in May 2014.
- Retail revenue rose 3.4% year to date, partly from rate and fuel-cost recovery. Weather-adjusted electricity sales were weaker across several customer classes, reflecting lower usage and economic conditions. Wholesale revenue rose 16.0%, primarily from higher fuel-related energy revenue and new Southern Power capacity contracts.
- Fuel expense rose with higher natural gas prices, while purchased-power expense declined. Fuel-cost recovery generally offsets these expense movements in earnings, but changes in recovery balances affect cash flow.
- Southern Power’s first-half net income declined to $57 million from $76 million, despite higher non-affiliate wholesale revenue, as operating costs, depreciation, and interest expense increased.
Outlook, commentary, risks, and unusual items
- Kemper: The $3.87 billion revised estimate and May 2014 expected in-service date were subject to further change. Mississippi Power said it would not seek joint-owner contributions or rate recovery for costs above the cap, excluding specified exceptions and net of grants. Further overruns or delays could produce additional material charges; tax-credit eligibility, SMEPA’s proposed 15% ownership purchase, prudence reviews, and rate recovery remained uncertain.
- Other major construction: Georgia Power’s Plant Vogtle Units 3 and 4 estimate was amended to $4.8 billion of in-service capital cost for its share, with estimated construction-period financing costs of about $2.0 billion. The units were then estimated to enter service in Q4 2017 and Q4 2018. Contractor claims and construction, licensing, and schedule risks remained unresolved.
- Rate proceedings: Georgia Power requested a $482 million, or 6.1%, rate increase effective January 1, 2014, proposing an 11.50% retail ROE; the Georgia PSC’s decision was expected in December 2013. Gulf Power requested $74.4 million in additional annual gross revenues for 2014 and a potential $16.4 million step increase effective July 2015, subject to Florida PSC decisions.
- Capital and tax outlook: The system estimated construction spending of $6.2 billion in 2013, $6.1 billion in 2014, and $5.2 billion in 2015. Southern Company estimated a $565–$630 million 2013 cash-flow benefit from bonus depreciation. These estimates depend on project costs, regulatory approvals, tax rules, and financing conditions.
- Controls and credit: Mississippi Power reported a material weakness in internal control over financial reporting tied to Kemper cost-estimate support and communication. Remediation steps were underway, but effectiveness had not yet been assessed; its disclosure controls were concluded to be ineffective for the period. Other named registrants concluded their disclosure controls were effective. S&P changed the outlook for Southern Company and traditional utilities to negative; Moody’s placed Mississippi Power on review for possible downgrade.
- Other exposures: An April explosion damaged Georgia Power’s Plant Bowen Units 1 and 2; Unit 1 returned to service August 3, while Unit 2 remained offline pending repairs. Management expected material repairs to be covered by property insurance. Environmental rule changes, fuel and demand variability, regulatory cost recovery, litigation, and construction execution could affect results and cash flows.
- The filing provides no formal consolidated earnings guidance. Management stated that actual results depend on sales, weather, economic conditions, cost recovery, fuel prices, and successful construction execution.
Most important facts for investors to verify
- Subsequent Kemper cost estimates, remaining exposure under the cap and exceptions, project schedule, and any further charges or regulatory decisions.
- Mississippi PSC prudence review and Kemper rate plan outcomes; SMEPA’s proposed ownership purchase and related deposit-refund exposure.
- Plant Vogtle updated cost and completion estimates, contractor claims, licensing status, and recovery of costs above certified amounts.
- Georgia and Gulf rate-case decisions, and the timing and collectability of other regulated cost-recovery balances.
- Mississippi Power’s remediation of the material weakness and whether management later determines the controls effective.
- Liquidity and refinancing needs, credit-rating developments, and the operational and insurance outcome for Plant Bowen Unit 2.