Southern Company — Q3 2023 Form 10-Q
Business context and reporting period. Southern Company is a regulated electric and natural gas utility holding company, with wholesale generation through Southern Power. This combined, unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023, and also includes separate filings for Alabama Power, Georgia Power, Mississippi Power, Southern Power, and Southern Company Gas. Results are seasonal and interim performance is not necessarily indicative of full-year results.
Key financial metrics
| Southern Company consolidated | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Operating revenues | $6.980bn | $8.378bn | $19.208bn | $22.232bn |
| Operating income | $2.110bn | $2.193bn | $4.619bn | $5.232bn |
| Net income attributable to Southern Company | $1.422bn | $1.472bn | $3.121bn | $3.611bn |
| Diluted EPS | $1.29 | $1.35 | $2.84 | $3.36 |
- Operating margin was approximately 30.2% for Q3 versus 26.2% a year earlier, and 24.0% for the nine months versus 23.5%. Lower fuel-related revenues and costs are largely pass-through items, so revenue and margin movements should be considered alongside fuel expense and regulatory recovery.
- For the first nine months, operating cash flow was $5.740bn, capital expenditures/property additions were $6.561bn, net cash used in investing was $6.721bn, and cash dividends paid were $2.271bn. Cash, cash equivalents, and restricted cash ended the period at $1.890bn.
- At September 30, long-term debt was $56.003bn and securities due within one year were $3.076bn; notes payable were an additional $1.726bn. Current liabilities exceeded current assets by $2.126bn. The company reported $7.566bn of unused committed bank credit.
- Total assets were $138.321bn and stockholders’ equity was $35.304bn. The quarterly common dividend was $0.70 per share, up from $0.68 in Q3 2022.
Material changes versus the prior period
- Q3 operating revenue declined 16.7%; nine-month revenue declined 13.6%. Management attributed most of the drop to lower fuel and purchased-power cost recovery, lower natural gas cost recovery, and lower wholesale energy prices. Fuel and purchased-power expenses also fell substantially.
- Net income attributable to Southern Company decreased 3.4% in Q3 and 13.6% year to date. Management cited higher Vogtle construction charges, depreciation and amortization, and interest expense. Lower income taxes and non-fuel operating and maintenance expense partly offset the declines.
- Interest expense, net of amounts capitalized, rose to $620m in Q3 from $511m and to $1.812bn for the nine months from $1.461bn, reflecting higher rates and average borrowings. Depreciation and amortization increased to $1.143bn in Q3 from $922m and to $3.365bn from $2.728bn for the nine months.
- Southern Power’s nine-month revenue fell to $1.686bn from $2.618bn, mainly due to lower fuel-linked PPA and market energy prices; attributable net income nevertheless increased to $288m from $265m, aided by an arbitration award, other recoveries, and tax effects.
Outlook, commentary, risks, and unusual items
- Plant Vogtle Units 3 and 4: Unit 3 entered service July 31, 2023. Unit 4 fuel loading was completed in August; following a reactor coolant pump motor fault identified in October, management projected service in Q1 2024. Georgia Power’s forecast share of project capital costs was approximately $10.8bn, net of specified settlement receipts and customer refunds. Georgia Power estimated that delay beyond March 2024 could add up to $25m per month in base capital costs, plus financing and related costs; further amounts may be unrecoverable from customers.
- Georgia Power recorded a $160m pretax Vogtle charge in Q3 2023, versus a $70m credit in Q3 2022; the nine-month comparison was a $160m charge versus an $18m credit. The 2023 charge reflects owner cost-sharing settlements and is not expected to be recovered from retail customers. Georgia Power’s rate application sought recovery of $8.826bn in construction and capital costs; a proposed stipulation would permit recovery of $7.562bn. If approved, the stipulation projected an approximately $729m annual retail base revenue increase, or about 5%, after Unit 4 enters service. A Georgia PSC decision was expected December 19, 2023.
- Georgia Power filed 2024 tariff adjustments under its rate plan that would produce a net increase of approximately $191m, subject to approval. Its fuel billing increase of approximately $1.1bn annually began in June 2023 to recover prior under-recovered fuel costs; fuel recovery changes generally affect cash flows rather than net income.
- Other notable items include a $38m pretax Nicor Gas charge for a regulatory disallowance of certain 2019 infrastructure investments, which is under appeal; and Southern Power’s receipt of a $36m interim arbitration award, with $18m relating to prior losses and the remaining $18m restricted for future replacement costs.
- Key risks include Vogtle completion, cost recovery and operational performance; pending regulatory approvals and rate cases; environmental compliance and coal-ash closure obligations; litigation, including a False Claims Act action concerning Kemper DOE grants; inflation, interest rates, construction labor and supply constraints; weather, demand and commodity-price variability; and access to capital. The filing says there were no material changes to previously disclosed risk factors and no material changes in market-risk disclosures. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
- The filing provides no specific consolidated earnings or EPS guidance. Management described uncertainty around economic growth, inflation, borrowing costs, energy demand, and construction and regulatory outcomes.
Most important facts for investors to verify
- Unit 4’s pump replacement, remaining testing, projected Q1 2024 in-service date, and resulting cost exposure or unrecoverable charges.
- The Georgia PSC’s final treatment of Vogtle costs, the proposed $729m annual rate increase, and the pending 2024 tariff adjustments.
- Whether cash generation and committed credit remain adequate relative to capital spending, dividends, debt maturities, and fuel-cost recovery balances.
- Progress and potential financial effects of the Nicor Gas appeal, the Kemper-related litigation, and coal-ash and other environmental proceedings.
- How much of the reported earnings decline reflects ongoing operating conditions versus fuel-price pass-throughs, tax adjustments, and unusual Vogtle or regulatory items.