Southern Company — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011; filed February 24, 2012. The filing covers Southern Company and its utility and generation subsidiaries. Southern is principally a regulated electric utility serving customers in the Southeast, with wholesale generation operations through Southern Power.
Financial results and position
| Metric | 2011 | 2010 |
|---|---|---|
| Operating revenue | $17.657 billion | $17.456 billion |
| Operating income | $4.231 billion | $3.802 billion |
| Consolidated net income | $2.268 billion | $2.040 billion |
| Net income after subsidiary preferred and preference dividends | $2.203 billion | $1.975 billion |
| Basic / diluted EPS | $2.57 / $2.55 | $2.37 / $2.36 |
| Operating cash flow | $5.903 billion | $3.991 billion |
| Property additions | $4.525 billion | $4.086 billion |
- Revenue rose 1.2%; net income after subsidiary preferred and preference dividends rose about 11.5%. Consolidated operating margin was approximately 24.0%, versus 21.8% in 2010.
- Operating cash flow increased $1.912 billion, with management citing higher net income, the prior-year pension contribution, and lower taxes paid associated with bonus depreciation. Cash and cash equivalents were $1.315 billion at year-end.
- At December 31, long-term debt excluding amounts due within one year was $18.647 billion; an additional $1.717 billion of securities was due within one year. Total long-term debt including current maturities was $20.364 billion. Long-term debt was 50.0% of capitalization, down from 51.2%.
- Current assets were $6.272 billion and current liabilities $6.577 billion. Unused committed bank credit was approximately $5.137 billion; short-term debt was $854 million.
- Basic EPS exceeded the stated 2011 target range of $2.48–$2.56. The annual common dividend was $1.8725 per share; management’s approximate payout-ratio target was 70%, compared with 73% actual.
Fourth quarter comparison: Revenue was $3.696 billion versus $3.771 billion in Q4 2010; net income after subsidiary preferred and preference dividends was $261 million versus $153 million. Basic EPS was $0.30 versus $0.18.
Material changes and management commentary
- Management attributed improved 2011 earnings mainly to Georgia Power’s rate increases under its 2010 Alternative Rate Plan and recovery of Plant Vogtle financing costs, increased Southern Power energy and capacity revenues, and lower operations and maintenance expense, especially at Alabama Power.
- Retail electricity sales fell 2.7% in volume, largely due to milder, more normal weather than in 2010; weather-adjusted retail sales rose 1.0%. Industrial sales increased, while residential and commercial volumes declined. Wholesale sales also declined, partly reflecting expiration of Alabama Power unit-power contracts.
- Operating cash flow exceeded property additions by approximately $1.378 billion, but management said projected dividends, capital expenditures, and debt maturities for 2012–2014 would exceed operating cash flow. It expects to use debt and equity issuances to fund the shortfall.
- The company reported 2011 system capacity of about 43,555 MW and a 19.2% reserve margin. Southern Power had 7,908 MW in commercial operation.
Outlook, major projects, risks, and unusual items
- Capital program: Base construction investment was forecast at $5.267 billion for 2012, $4.381 billion for 2013, and $4.341 billion for 2014. The filing does not provide a clear consolidated 2012 earnings or EPS forecast.
- Environmental exposure: Preliminary estimates put traditional operating companies’ potential capital costs for the MATS rule and proposed water and coal-ash rules at $13–$18 billion through 2021. Recovery through rates is not assured; compliance could require controls, fuel switching, unit retirements, or replacement capacity.
- Plant Vogtle Units 3 and 4: Georgia Power’s ownership share is 45.7%; the project’s certified total cost is approximately $6.1 billion, with projected financing-cost recovery of about $1.7 billion during construction. Full construction licenses were received in February 2012; commercial operation was expected in 2016 and 2017. The filing describes potential schedule and cost claims, regulatory and legal challenges, and possible cost overruns.
- Kemper IGCC: Mississippi Power’s planned 582-MW plant was estimated at $2.4 billion net of $245.3 million in DOE grants, with a $2.88 billion construction cap subject to exclusions. About $943 million had been spent by year-end 2011; commercial operation was expected in May 2014. DOE loan guarantees, permits, SMEPA’s proposed 17.5% ownership, tax-credit conditions, cost recovery, and construction execution remained uncertainties.
- Other items: Georgia Power recorded approximately $64 million of tax benefits and a related $62 million regulatory liability from a state tax-credit settlement, plus a $23 million reduction in related interest expense. Southern Power recorded a $20 million loss associated with an early debt redemption. Bonus depreciation was expected to benefit 2012 cash flow; the filing’s consolidated estimate was $400–$550 million.
- Other key risks include regulatory decisions and delayed cost recovery, economic and weather-related demand variability, fuel availability and prices, construction overruns, environmental and New Source Review litigation, nuclear safety and spent-fuel disposal, counterparty performance, credit ratings and capital-market access, storms, and cybersecurity or grid disruptions.
Important facts for investors to verify
- Whether actual cash generation and financing keep pace with the 2012–2014 capital program, debt maturities, and dividend commitments.
- Updated cost, schedule, regulatory recovery, and ownership assumptions for Vogtle and Kemper, including financing and DOE support.
- Final environmental requirements, compliance expenditures, unit-retirement decisions, and the extent and timing of customer cost recovery.
- Progress on Georgia Power’s proposed 2015 capacity purchases and associated PSC approvals, and the outcome of the Florida Power rate case and Mississippi rate filings.
- That the filing’s consolidated financial statements received an unqualified audit opinion and management reported effective internal control over financial reporting; also verify subsequent developments after the filing date.