Southern Company — Q2 2010 Form 10-Q
Business context and period. Combined, unaudited quarterly filing for The Southern Company and five subsidiaries, for the quarter and six months ended June 30, 2010. Southern Company’s core businesses are regulated electric utilities in the Southeast and Southern Power’s wholesale generation business. Comparisons below are with 2009; dollar amounts are in millions unless noted.
Key financial results
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenue | $4,207.4 | $3,885.2 | $8,364.7 | $7,551.5 |
| Operating income | $951.1 | $886.2 | $1,873.0 | $1,375.9 |
| Consolidated net income | $526.4 | $494.8 | $1,037.1 | $636.7 |
| Net income after subsidiary preferred/preference dividends | $510.2 | $478.6 | $1,004.7 | $604.3 |
| Diluted EPS | $0.61 | $0.60 | $1.21 | $0.77 |
| Operating margin | 22.6% | 22.8% | 22.4% | 18.2% |
Second-quarter revenue rose 8.3% and net income after subsidiary preferred/preference dividends rose 6.6%. For the first half, revenue increased 10.8% and that net-income measure increased 66.2%. The first-half comparison benefited substantially from the absence of the $202 million MC Asset Recovery litigation charge recorded in Q1 2009. Common dividends paid were $0.455 per share in Q2, up from $0.4375.
Cash flow, debt and liquidity
- Six-month operating cash flow was $1,415, versus $620 in 2009. Investing cash use was $2,036, including $1,936 of property additions; financing provided $197. Cash and equivalents ended June 30 at $266, down from $690 at year-end 2009.
- At June 30, long-term debt was $18,135; securities due within one year were $1,514 and notes payable were $882. Together these reported debt categories totaled about $20.5 billion, versus about $19.9 billion at December 31, 2009.
- Current assets of $5,524 were below current liabilities of $5,935. Management cited $4.8 billion of unused committed bank credit and access to commercial paper; system commercial paper borrowings were about $879 million.
- Property, plant and equipment increased $1.4 billion in the first half, reflecting construction and environmental, generation, transmission and distribution investment.
Material changes and management commentary
- Management attributed stronger utility results mainly to warmer Q2 weather, significantly colder Q1 weather, higher rates and cost-recovery billings, and industrial-sales growth. System weather-adjusted retail KWH sales increased 3.8% in Q2 and 3.2% year to date; industrial sales were notably stronger.
- Retail revenue increased $278.5 million in Q2 and $672.7 million year to date. The filing attributes much of the increase to fuel and other cost recovery; these billings generally track related expenses and do not materially affect earnings.
- Operations and maintenance expense rose $87.2 million in Q2 and $124.1 million year to date. Fuel and purchased-power costs also increased, while lower depreciation—largely from Georgia Power’s authorized amortization of a cost-of-removal regulatory liability—supported results.
- Southern Power’s first-half net income fell to $44.5 million from $59.0 million. New non-affiliate PPAs increased revenue, but expired Plant Wansley contracts reduced affiliate revenue; higher operating and depreciation costs also weighed on earnings.
- Mississippi Power’s first-half net income after preferred dividends declined to $30.5 million from $39.9 million, primarily due to lower non-affiliate wholesale energy revenue and higher operating costs.
Outlook, significant matters and risks
- Georgia rates: Georgia Power filed for a $615 million annual base-rate increase, effective January 1, 2011 if approved, proposing an 11.95% retail ROE. The requested recovery includes base, environmental, demand-side-management and municipal-franchise-fee tariffs. A final PSC order was expected in December 2010; the outcome was uncertain.
- Kemper IGCC: Mississippi Power received a final certificate in June for the project, with an approved construction-cost cap of up to $2.88 billion, subject to PSC prudence review for costs above $2.4 billion and specified exemptions. It had spent $142.4 million through June 30. The Sierra Club challenged the approval; a proposed 17.5% sale to SMEPA remained subject to approvals and other conditions. DOE loan-guarantee discussions were ongoing, with no assurance of an award.
- Plant Vogtle: Georgia Power accepted terms for a conditional DOE loan-guarantee commitment of up to approximately $3.4 billion for Units 3 and 4; final approval depended on licensing, agreements, due diligence and other conditions. Design-certification concerns and legal challenges remained, though management did not then expect design-review delays to affect projected commercial-operation dates.
- Environmental exposure: Proposed and final EPA actions involving air standards, greenhouse gases and coal-combustion byproducts could require substantial compliance spending and affect plant operations or retirement decisions. Recovery through regulated rates is not assured or necessarily timely. The filing also discusses pending New Source Review and greenhouse-gas litigation; outcomes and potential impacts were uncertain.
- Credit and other risks: Moody’s placed ratings of Southern Company and certain subsidiaries on review for possible downgrade in June. Management highlighted sensitivity to economic recovery, weather, demand, fuel prices, cost control, regulatory decisions, construction execution and capital-market access. The Gulf of Mexico oil spill’s potential operational and regional economic impacts could not be determined.
- Other unusual items: Southern Power recorded an approximately $4 million non-cash expense from healthcare legislation in the first half. Southern Company accepted a $165 million DOE smart-grid grant, to be matched by the company. No specific consolidated earnings guidance was provided in the supplied filing text.
Most important facts for investors to verify
- Whether Georgia Power’s $615 million rate request and proposed multi-year rate-plan changes were approved, and the final allowed return and recovery mechanisms.
- Kemper’s final cost, schedule, cost-recovery treatment, DOE financing, SMEPA transaction and appeal outcomes.
- Vogtle licensing and construction milestones, remaining financing conditions, and any cost or schedule changes.
- Actual recovery and cash-flow timing for under-recovered fuel costs, especially Georgia Power’s approximately $657 million balance and the system’s approximately $669 million Georgia/Gulf balances.
- Updates to Moody’s reviews, credit-facility availability, debt maturities and collateral exposure under further rating downgrades.
- Subsequent developments in EPA rules and litigation, including compliance costs and the extent to which those costs can be recovered in rates.