Southern Company — 2010 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2010. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below are included for context. Southern Company is a holding company whose principal business is regulated electric service in the Southeast, alongside wholesale generation through Southern Power.
Financial performance and position
| Metric | 2010 | 2009 |
|---|---|---|
| Operating revenue | $17.456 billion | $15.743 billion |
| Operating income | $3.802 billion | $3.268 billion |
| Consolidated net income | $2.040 billion | $1.708 billion |
| Net income after subsidiary preferred and preference dividends | $1.975 billion | $1.643 billion |
| Basic / diluted EPS | $2.37 / $2.36 | $2.07 / $2.06 |
| Operating cash flow | $3.991 billion | $3.263 billion |
| Cash used for investing activities | $4.256 billion | $4.319 billion |
| Cash from financing activities | $22 million | $1.329 billion |
| Cash and cash equivalents at year-end | $447 million | $690 million |
| Long-term debt, excluding amounts due within one year | $18.154 billion | $18.131 billion |
Revenue increased about 10.9% and net income after subsidiary preferred and preference dividends increased about 20.2%. Operating margin, calculated from reported operating income and revenue, was approximately 21.8%, versus 20.8% in 2009. The company reported $4.8 billion of unused bank credit arrangements at year-end; the Southern Company system also had approximately $1.3 billion of commercial paper outstanding. Current liabilities exceeded current assets, with short-term borrowing part of the company’s funding approach.
Gross property additions were $4.443 billion. Southern Company issued $772 million of common stock during 2010 and paid $1.8025 per share in dividends. The dividend payout ratio was 76%, compared with management’s approximate 70% target. Long-term debt was 51.2% of capitalization excluding amounts due within one year; common equity was 45.7%.
Fourth-quarter context: Unaudited consolidated revenue was $3.771 billion, operating income was $470 million, net income after subsidiary preferred and preference dividends was $153 million, and basic EPS was $0.18. Management cited seasonal weather effects on results.
Material changes versus the prior comparable period
- 2010 earnings improved from 2009, when results included a $202 million MC Asset Recovery litigation settlement charge. Colder first- and fourth-quarter weather, warmer second- and third-quarter weather, higher retail sales, rate changes, and increased industrial sales contributed to 2010 revenue and earnings growth.
- Total retail electricity sales rose 7.6% in 2010; weather-adjusted retail sales rose 2.0%. Customer growth was 0.3%. Industrial sales recovered from recession-related declines in 2009.
- Fuel and purchased-power costs increased with higher generation and purchases and higher unit costs. These expenses are generally recovered through regulated fuel clauses or, for Southern Power, passed through under PPAs, and generally do not directly drive utility net income.
- Operations and maintenance expense rose to $4.010 billion from $3.526 billion, partly reflecting higher generation maintenance and outage costs, a higher Alabama Power natural-disaster-reserve accrual, and spending returning toward more normal levels after 2009 cost containment.
- Operating cash flow increased by $728 million. Investing cash use remained substantial, while financing cash flow fell sharply, primarily because of long-term debt redemptions. Year-end cash declined by $243 million.
- Moody’s downgraded Southern Company’s senior unsecured rating to Baa1 from A3 in August 2010. Fitch affirmed the long-term rating but moved the outlook to negative in September; it returned the outlook to stable in December.
Outlook, projects, risks, and contingencies
- Construction and capital needs: Management estimated base construction investment of $4.9 billion in 2011, $5.1 billion in 2012, and $4.5 billion in 2013. The estimates are subject to revision, regulatory approval, cost escalation, and potential recovery limitations.
- Plant Vogtle expansion: Georgia Power’s 45.7% share of Units 3 and 4 is part of a project with approximately $6.1 billion in certified costs. The Georgia PSC-approved construction cost recovery tariff was expected to collect about $223 million in 2011. The company expected NRC licensing in late 2011 and commercial operation in 2016 and 2017; approvals, construction costs, schedule, and any risk-sharing mechanism remained material uncertainties.
- Kemper IGCC: Mississippi Power’s 582-MW project was approved with a $2.4 billion cost cap and an alternative cap of up to $2.88 billion, subject to prudence determinations for specified excess costs; certain mine and carbon-dioxide-pipeline costs are exempt from the cap. Commercial operation was expected in May 2014. The company reported $255 million spent through 2010. Sierra Club appeals and permit issues remained pending; DOE loan guarantees were not assured. SMEPA’s proposed 17.5% ownership was conditional on approvals and other requirements.
- Environmental exposure: Potential new air, water, greenhouse-gas, and coal-combustion-byproduct rules could require substantial investment, operating changes, unit retirement or replacement, or new waste facilities. System estimates for incremental environmental investment were $74–$289 million in 2011, $191–$670 million in 2012, and $476 million–$1.9 billion in 2013. Recovery of all costs is not assured.
- Legal and tax contingencies: EPA New Source Review litigation involving Alabama Power remained active, with a trial scheduled for October 2011 for any remaining claims. Greenhouse-gas nuisance litigation included a case accepted for review by the U.S. Supreme Court. Georgia Power’s state tax-credit litigation and the IRS review of the repair-cost tax accounting change could affect cash flows; outcomes were uncertain.
- Other exposures: Results depend on weather, economic recovery, electricity demand, fuel availability and prices, regulatory decisions and cost recovery, construction execution, counterparties, capital-market access, interest rates, pension and benefit-plan assumptions, and reliability or catastrophic events. Southern Company reported $2.5 billion of potential collateral requirements under certain contracts if ratings fell below investment grade.
- Management commentary and controls: Management described financial condition as stable and reported effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion on the consolidated financial statements and concluded that Southern Company maintained effective internal control over financial reporting.
Most important facts for investors to verify
- Progress, final cost, financing, regulatory recovery, and schedule for Vogtle Units 3 and 4 and the Kemper IGCC, including the status of DOE guarantees and SMEPA’s proposed stake.
- Final environmental rules and the resulting capital requirements, generation-retirement decisions, and ability to recover costs from customers.
- Whether retail sales and earnings growth persist after separating weather effects, fuel-cost recovery, rate changes, and the 2009 settlement comparison.
- Liquidity and refinancing needs, including commercial-paper balances, unused credit facilities and maturities, ratings, and collateral triggers.
- Resolution and cash-flow effects of the EPA litigation, Georgia tax-credit claims, and IRS repair-cost accounting review.
- Dividend sustainability relative to the 76% payout ratio, management’s approximate 70% target, and ongoing equity issuance.