Business Context and Reporting Period
This Form 10-Q covers The Southern Company and its subsidiary operating companies (Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power) for the quarterly period ended September 30, 2007. The Southern Company is a holding company for a system of electric utilities and a wholesale power generator. The primary business involves the sale of electricity in the Southeastern United States.
Key Financial Metrics (Nine Months Ended Sept 30, 2007)
| Metric | 2007 (in millions) | 2006 (in millions) |
|---|---|---|
| Total Operating Revenues | $12,012.6 | $11,204.1 |
| Consolidated Net Income | $1,529.8 | $1,384.8 |
| Earnings Per Share (Diluted) | $2.02 | $1.85 |
| Operating Cash Flow | $2,467.3 | $1,980.2 |
| Investing Cash Flow | ($2,559.5) | ($2,148.5) |
| Financing Cash Flow | $459.8 | $384.3 |
| Cash and Equivalents (End of Period) | $534.5 | $418.1 |
| Long-Term Debt | $13,095.4 | $10,942.0 |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 7.2% year-over-year. Retail revenues rose 6.9% and wholesale revenues increased 12.5%. Drivers included favorable weather, customer growth, and rate increases (specifically at Alabama Power).
- Profitability: Net income increased 10.5% to $1.53 billion. Earnings per share rose to $2.02 from $1.85.
- Expense Increases: Fuel expenses increased 13.3% and purchased power expenses decreased 7.8% year-to-date. Total fuel and purchased power expenses rose due to higher fossil fuel prices and increased generation volumes necessitated by a severe drought reducing hydro generation.
- Interest Expense: Interest expense increased 13.3% due to additional debt outstanding ($1.6 billion increase) and higher interest rates on new issuances.
- Capital Expenditures: Property additions totaled $2.47 billion, driven by environmental compliance, transmission, and distribution projects.
Guidance, Outlook, and Risks
- Regulatory Matters:
- Georgia Power: Filed a general rate case requesting a 5.98% increase effective Jan 1, 2008, to cover environmental compliance and infrastructure costs. A final order is expected in December 2007.
- Alabama Power: Received approval for increased fuel billing factors effective July 2007 to recover under-recovered fuel costs.
- Mississippi Power: Received state grants totaling $102.8 million for Hurricane Katrina storm restoration costs.
- Environmental Compliance: Significant capital is being deployed for environmental controls (e.g., Georgia Multi-Pollutant Rule, Clean Air Act compliance). Costs are expected to be recovered through rates, but timing risks exist.
- Legal and Contingencies:
- FERC Proceedings: Ongoing proceedings regarding market-based rate authority and generation dominance. An adverse decision could result in refunds of approximately $19.7 million plus interest.
- Mirant Litigation: Ongoing securities and asset recovery litigation related to the former subsidiary Mirant.
- SILO Transactions: IRS challenges to leveraged lease tax deductions remain pending; litigation is ongoing.
- Construction Projects: The Integrated Gasification Combined Cycle (IGCC) project in Orlando faces cost increases and regulatory uncertainty regarding Florida's greenhouse gas executive orders.
Investor Verification Checklist
- Rate Case Outcomes: Verify the final approval of Georgia Power's rate increase and the specific revenue recovery amounts.
- Fuel Cost Recovery: Monitor the status of under-recovered fuel balances across subsidiaries and the effectiveness of new billing factors in recovering these costs.
- Environmental Capital Spend: Track actual capital expenditures against the budget for environmental compliance to ensure cost recovery assumptions hold.
- FERC Rulings: Watch for the Administrative Law Judge's initial decision in the generation dominance proceeding expected in November 2007.
- Hydro Generation: Assess the impact of continued drought conditions on hydro generation and the resulting reliance on more expensive fossil fuel generation.