Southern Company — Form 10-Q Summary
Business context and reporting period
Quarter ended September 30, 2021; filed November 3, 2021. This combined, unaudited filing covers Southern Company and five subsidiaries. The businesses include regulated electric utilities, wholesale power generation, and natural gas distribution and related services. Nine-month comparisons are against the period ended September 30, 2020; balance-sheet comparisons are against December 31, 2020.
Key financial metrics
| Southern Company consolidated | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenue | $6.238 billion | $5.620 billion | $17.346 billion | $15.258 billion |
| Operating income | $1.723 billion | $1.835 billion | $4.029 billion | $4.156 billion |
| Net income attributable to Southern Company | $1.101 billion | $1.251 billion | $2.608 billion | $2.732 billion |
| Diluted EPS | $1.03 | $1.18 | $2.44 | $2.57 |
- Revenue increased 11.0% in Q3 and 13.7% year to date, while attributable net income fell 12.0% and 4.5%, respectively. Operating margin was approximately 27.6% in Q3 versus 32.7%, and 23.2% year to date versus 27.2%.
- Management attributed revenue growth primarily to higher electric and natural-gas rates, sales growth, and higher fuel and gas-cost recovery. Fuel and purchased-power cost recovery generally offsets related expenses and does not materially affect utility earnings.
- Operating cash flow was $5.081 billion for the first nine months, down from $5.220 billion. Property additions were $5.222 billion, versus $5.365 billion. Cash dividends paid were $2.077 billion.
- At September 30, cash and cash equivalents were $2.078 billion; current assets were $9.674 billion and current liabilities $11.259 billion (current ratio approximately 0.86). Long-term debt was $48.843 billion, securities due within one year $3.286 billion, and notes payable $707 million. These debt components total approximately $52.8 billion, compared with approximately $49.2 billion at year-end 2020.
- Cash, current assets, and debt figures are consolidated. The filing reports current liabilities exceeding current assets for several registrants, and explains that seasonal working-capital needs are funded through operating cash, credit lines, and short-term borrowings.
Material changes and unusual items
- Georgia Power recorded a $264 million pretax Vogtle Units 3 and 4 charge in Q3; nine-month charges were $772 million in 2021 versus $149 million in 2020. The charges were the largest contributor to the decline in Southern Company earnings.
- Southern Company Gas sold Sequent on July 1 for $159 million cash and recorded a preliminary $121 million pretax gain, partly offset by $85 million of additional tax expense from state apportionment changes. The sale also changes year-over-year segment comparability.
- Southern Company Gas recorded $84 million of pretax impairment charges related to PennEast; the project ceased development in September 2021.
- Southern Company’s total assets rose to $127.861 billion from $122.935 billion at year-end 2020. Long-term debt increased to $48.843 billion from $45.073 billion, and stockholders’ equity increased to $33.219 billion from $32.234 billion.
- Updated coal-ash closure estimates increased asset retirement obligations; the filing describes significant estimate and rate-recovery uncertainty. The utilities may need further material updates as closure plans and costs develop.
Outlook, management commentary, risks, and contingencies
- Vogtle: Georgia Power’s share of forecast remaining capital costs, including contingency, was $1.320 billion at September 30. The project’s total forecast for Georgia Power was $9.479 billion, net of the Toshiba settlement proceeds and related customer refunds. Unit 3 fuel load was targeted for Q1 2022, with an in-service date projected in Q3 2022; Unit 4 was targeted for March 2023, with an in-service date projected in Q2 2023. Management cited labor productivity, remediation, system turnovers, testing, and COVID-19 impacts; little schedule margin remains. Further delays could add estimated base costs of about $25 million per month for Unit 3 and $15 million per month for Unit 4, before related financing and other costs. Recovery of forecast increases remains uncertain.
- Georgia Power’s Unit 3 rate proceeding was approved by the Georgia PSC on November 2, 2021, after quarter-end. The approved annual base-rate increase is approximately $302 million, effective the month after Unit 3 enters service, partly offset by an expected $78 million annual reduction in the NCCR tariff. Separate 2019 rate-plan tariff adjustments proposed for January 2022 would produce a net increase of approximately $157 million, pending approval.
- Georgia Power proposed a 15% fuel-rate increase effective January 1, 2022, expected to increase annual billings by approximately $252 million, subject to the regulatory process described in the filing.
- Alabama Power agreed to acquire the 743-MW Calhoun Generating Station for approximately $180 million, subject to approvals and other conditions; completion was expected by September 30, 2022. The filing also describes potential coal-unit retirements or conversions under environmental compliance plans.
- Southern Company Gas’s $432 million natural-gas cost under-recovery balance was primarily associated with Winter Storm Uri. Recovery through rates and the timing of cash collection are important to liquidity.
- On October 27, 2021, after quarter-end, S&P downgraded Southern Company’s issuer credit rating to BBB+ from A- and revised the outlook to stable. Management noted that downgrades could affect capital-market access, borrowing costs, or collateral requirements; the filing said no material payment-schedule changes were required by existing credit arrangements.
- Management cited inflation, supply-chain and labor constraints, COVID-19 effects, fuel and commodity prices, weather, environmental compliance, construction execution, regulatory recovery, and litigation as risks. The filing does not provide a clear numeric consolidated earnings guidance figure for 2021.
Important facts for investors to verify
- Whether Vogtle achieves the revised schedules and cost forecast, and whether additional charges or owner cost-sharing obligations arise.
- Regulatory decisions and timing for recovery of Vogtle, coal-ash closure, Winter Storm Uri gas costs, and proposed rate adjustments.
- Cash conversion and liquidity, including collection of the gas-cost under-recovery and refinancing of debt maturities.
- Effects of Sequent’s sale and PennEast’s cancellation on recurring Southern Company Gas earnings and comparability.
- Financing costs and market access following the October 2021 S&P downgrade, and the status of significant litigation and environmental contingencies.