Business context and reporting period
Southern Company’s combined Form 10-Q covers the quarter and nine months ended September 30, 2009; the unaudited filing was issued November 6, 2009. Its core businesses are regulated electric utilities in the Southeast and Southern Power’s wholesale generation business. Comparisons below are with the corresponding 2008 periods.
Key financial metrics
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Operating revenue | $4.681B | $5.426B | $12.233B | $13.325B |
| Operating income | $1.415B | $1.405B | $2.791B | $3.037B |
| Net income after subsidiary preferred/preference dividends | $790M | $780M | $1.394B | $1.556B |
| Diluted EPS | $0.99 | $1.00 | $1.76 | $2.01 |
| Operating cash flow | Not separately stated here | $2.360B | $2.636B |
Quarterly revenue fell 13.7%, while net income rose 1.2%; nine-month revenue declined 8.2% and net income declined 10.4%. Reported operating margins, calculated from the stated figures, were approximately 30.2% versus 25.9% for the quarter and 22.8% versus 22.8% year to date.
- Cash and investment: Cash and cash equivalents were $607M at September 30. Nine-month property additions were $3.179B; net cash used for investing was $2.856B.
- Debt and liquidity: Balance-sheet long-term debt was $18.010B, securities due within one year $412M, and notes payable $1.065B. Unused bank credit arrangements were approximately $4.748B; system commercial paper outstanding was $1.1B.
- Equity and dividends: Total stockholders’ equity was $15.069B. Nine-month common dividends paid were $1.019B; dividends paid per share were $1.295, compared with $1.2425.
Material changes versus the prior comparable period
- Lower retail and wholesale revenues reflected reduced fuel-cost recovery, lower energy demand and prices, and recession-related weakness. Weather-adjusted retail KWH sales declined 3.4% in Q3 and 5.3% year to date; industrial sales fell 9.3% and 14.6%, respectively.
- Fuel and purchased-power costs declined substantially, generally offset by lower fuel-recovery revenues and therefore usually not affecting utility earnings. Lower operations and maintenance costs and higher Alabama Power customer-charge revenue supported Q3 earnings.
- Nine-month earnings were weighed down by a $202M MC Asset Recovery litigation settlement charge, weaker sales, higher depreciation and interest expense. The comparison also benefited from 2008 leveraged-lease accounting charges; 2009 included a $26.3M gain on early lease terminations and a $17.2M debt-extinguishment loss.
- Operating cash flow decreased $276M year over year. Long-term debt, excluding amounts due within one year, increased about $1.2B from year-end 2008, while equity increased about $1.1B.
Outlook, management commentary, risks and unusual items
- Management described financial condition as stable, with adequate capital-market access and no material counterparty credit losses. It provided no specific consolidated earnings or EPS guidance in the supplied filing text.
- Management expected recessionary conditions to continue pressuring energy sales, particularly industrial and commercial demand. Future earnings also depend on weather, fuel and power prices, cost control, regulatory recovery, wholesale contracts, and access to financing.
- Environmental and regulatory uncertainty includes potential greenhouse-gas and air-quality requirements, water-quality rules, and Clean Air Act litigation. New York carbon-dioxide litigation was remanded for further proceedings; the Kivalina case was dismissed, subject to possible appeal.
- Georgia Power projected retail ROE below the 2007 rate-plan range of 10.25%–12.25% for 2009 and 2010. The Georgia PSC authorized amortization of up to $324M of a regulatory liability over 2009–2010, subject to limits and conditions; $54M had been amortized by September 30.
- Major construction exposures include Plant Vogtle Units 3 and 4, certified at $6.4B in-service cost (about $4.5B after construction-period financing recovery), and Mississippi Power’s proposed $2.2B Kemper IGCC project, still subject to regulatory review and cost-recovery determinations. Mississippi Power had spent $64.5M on related planning and screening through September 30.
- Other notable items: Southern Company settled the MC Asset Recovery case for $202M; any recovery and final tax treatment remain uncertain. Georgia Power’s $29.4M voluntary attrition charge was expected to be offset by savings. Management estimated ARRA bonus-depreciation cash-tax reductions of $225M–$275M for 2009 and reported notice of a $165M transmission/distribution grant award pending final negotiations.
- Moody’s affirmed Southern Company ratings but revised its outlook to negative; S&P and Fitch affirmed ratings with stable outlooks. Southern Company reported maximum potential collateral needs of approximately $422M at specified lower investment-grade thresholds and $2.1B below BBB-/Baa3, subject to contract and rating conditions.
- Disclosure controls were deemed effective, and the filing reported no material third-quarter changes in internal control over financial reporting.
Important facts for investors to verify
- Whether industrial and commercial electricity demand, especially industrial KWH sales, stabilizes or continues to weaken.
- How fuel-cost under-recoveries, rate-case timing, and regulated cost-recovery mechanisms affect cash flow and utility earnings.
- Final regulatory approvals, cost estimates, schedules, and recoverability for Vogtle and Kemper, including the status of Kemper pre-construction cost prudence review.
- Potential outcomes and cash or tax effects of environmental litigation, greenhouse-gas regulation, and unresolved tax-credit positions.
- Debt maturities, credit-facility renewals, rating outlooks, and any collateral calls or changes in access to capital.