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, Savannah Electric, and Southern Power) for the quarterly period ended September 30, 2005. The company operates as a vertically integrated utility system in the Southeastern United States, providing electricity to retail customers and engaging in wholesale power generation. The reporting period was significantly impacted by Hurricanes Dennis and Katrina, which caused substantial damage to infrastructure in Florida, Alabama, and Mississippi, alongside rising fuel costs and ongoing regulatory proceedings.
Key Financial Metrics (Consolidated)
Figures are in millions unless otherwise noted.
| Metric | Three Months Ended Sep 30, 2005 | Three Months Ended Sep 30, 2004 | Nine Months Ended Sep 30, 2005 | Nine Months Ended Sep 30, 2004 |
|---|---|---|---|---|
| Total Operating Revenues | $4,377.6 | $3,440.8 | $10,386.5 | $9,182.0 |
| Operating Income | $1,262.6 | $1,115.0 | $2,549.7 | $2,437.3 |
| Consolidated Net Income | $722.2 | $644.5 | $1,432.0 | $1,327.7 |
| Diluted Earnings Per Share | $0.97 | $0.87 | $1.91 | $1.79 |
| Net Cash from Operating Activities | N/A | N/A | $2,079.9 | $2,080.7 |
| Net Cash Used for Investing Activities | N/A | N/A | $(1,844.4) | $(1,626.7) |
| Long-Term Debt | $10,894.3 | $10,488.1 | $10,894.3 | $10,488.1 |
| Cash and Cash Equivalents | $416.3 | $373.2 | $416.3 | $373.2 |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated operating revenues increased 27.2% in the third quarter and 13.1% year-to-date compared to 2004. This was driven by warmer weather in September 2005, customer growth, and base rate increases at Georgia Power. Retail revenues specifically rose 26.0% in the quarter.
- Expense Increases: Fuel expenses increased 45.7% in the third quarter and 25.1% year-to-date due to higher unit costs for coal and natural gas. Purchased power expenses rose 85.0% in the quarter due to higher demand and fuel prices. Other operations expenses increased 19.5% in the quarter, largely due to higher salaries and benefits.
- Depreciation: Depreciation and amortization increased 24.4% in the quarter, primarily due to the expiration of certain provisions in Georgia Power's 2001 Retail Rate Plan which previously provided credits to amortization expense.
- Storm Impact: Hurricanes Dennis and Katrina caused significant restoration costs. Mississippi Power reported that approximately 19,200 customers remained without service as of September 30, 2005. Total incremental restoration costs for Mississippi Power are estimated between $245 million and $295 million.
Guidance, Outlook, and Risks
- Storm Damage Recovery: The company is working with regulators to recover storm restoration costs. Alabama Power has filed to recover $69 million in deferred costs over two years. Mississippi Power expects to file for recovery of $245 million to $295 million in costs. Gulf Power is evaluating securitized financing options for its $58 million in deferred costs.
- Fuel Cost Recovery: Under-recovered fuel costs totaled approximately $985 million across the system as of September 30, 2005. Alabama Power filed for a fuel cost recovery increase effective December 2005. Georgia Power implemented a new fuel rate in June 2005 to recover $508 million in under-recovered costs over four years.
- Regulatory Proceedings:
- FERC Investigations: The FERC initiated proceedings regarding market-based rate authority, transmission market power, and the Intercompany Interchange Contract (IIC). Revenues from new market-based transactions entered into after July 19, 2005, are subject to refund pending the outcome.
- Environmental Litigation: Ongoing litigation includes New Source Review (NSR) actions regarding Plant Miller and Plant Wansley, and carbon dioxide emissions lawsuits (currently dismissed but under appeal).
- Mirant Bankruptcy: Mirant Corporation filed a complaint against Southern Company in bankruptcy court alleging fraudulent transfers and illegal dividends, seeking damages in excess of $2 billion. Southern Company intends to vigorously defend against these claims.
- Accounting Changes: The company anticipates the adoption of FASB Statement No. 123R (Share-Based Payments) effective January 1, 2006, and FASB Interpretation No. 47 (Asset Retirement Obligations) effective December 31, 2005.
Investor Verification Checklist
- Storm Cost Recovery Timelines: Verify the approval status and effective dates of rate riders filed by Alabama Power, Mississippi Power, and Gulf Power to recover Hurricane Dennis and Katrina costs.
- Fuel Cost Recovery Filings: Monitor the outcome of Alabama Power's fuel cost recovery filing (effective Dec 2005) and Savannah Electric's filing (decision expected Nov 2005) to ensure cash flow improvements.
- FERC Proceedings Outcome: Track the FERC hearings scheduled for March and June 2006 regarding market-based rate authority and the IIC, as adverse rulings could require refunds of wholesale revenues.
- Mirant Litigation Status: Monitor the bankruptcy court proceedings regarding the $2 billion claim, including any motions to transfer the case to federal district court.
- Mississippi Power Restoration: Verify the progress of restoring service to the remaining 19,200 customers and the finalization of redevelopment plans for the Mississippi shoreline, which impacts cost estimates.