Business context and reporting period
Southern Company’s unaudited combined Form 10-Q covers the quarter and nine months ended September 30, 2019, with comparisons to 2018. Its businesses include regulated electric utilities, wholesale power generation, and natural gas distribution and related services. The filing also includes separate statements for major subsidiaries; figures below are consolidated Southern Company unless noted.
Southern Company completed the sale of Gulf Power on January 1, 2019. Accordingly, year-over-year comparisons reflect a smaller business, as well as significant disposal-related gains.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $6.00 billion | $6.16 billion | $16.51 billion | $18.16 billion |
| Operating income | $2.01 billion | $2.17 billion | $7.05 billion | $3.61 billion |
| Operating margin | 33.6% | 35.3% | 42.7% | 19.9% |
| Net income attributable to Southern Company | $1.32 billion | $1.16 billion | $4.30 billion | $1.95 billion |
| Diluted EPS | $1.25 | $1.13 | $4.09 | $1.91 |
| Net cash from operating activities | Not provided as a quarterly comparison in the cited cash-flow statement | $4.88 billion | $5.58 billion |
Operating margins are calculated as operating income divided by operating revenue. The nine-month 2019 margin and earnings were substantially boosted by the Gulf Power sale gain; the comparison period included a large Vogtle construction loss.
- Revenue and quarterly results: Q3 revenue fell 2.7%, while attributable net income rose 13.1%. Retail electric revenue declined year over year, with Gulf Power’s sale and lower customer usage partly offset by rates and pricing and warmer weather. Energy efficiency and lower industrial demand contributed to softer sales.
- Nine-month results and unusual items: Revenue fell 9.1%; attributable net income more than doubled. The 2019 results included a preliminary $2.5 billion pre-tax ($1.3 billion after-tax) gain on Gulf Power. The 2018 comparison included a $1.1 billion pre-tax ($0.8 billion after-tax) estimated Vogtle loss. Without these items, the headline earnings comparison is not a like-for-like measure.
- Cash flow: Nine-month operating cash flow was $4.88 billion, down from $5.58 billion, primarily reflecting vendor-payment timing and the Gulf Power and Southern Company Gas dispositions. Investing used $1.07 billion, including $5.04 billion of disposition proceeds; financing used $2.39 billion.
- Liquidity and debt: At September 30, cash and cash equivalents were $2.93 billion. Current liabilities exceeded current assets by approximately $617 million. Long-term debt was $42.10 billion; securities due within one year were $3.31 billion and notes payable were $542 million. The company reported $7.58 billion of unused committed bank credit and stated it was in compliance with applicable covenants.
- Capital and dividends: Southern Company issued equity units with a $1.725 billion stated amount and approximately $1.682 billion in net proceeds; their stock purchase contracts can require issuance of up to 30.2 million shares by August 2022. The Q3 common dividend was $0.62 per share, versus $0.60 a year earlier.
Material changes, outlook, and risks
- Vogtle Units 3 and 4: Georgia Power’s share of the total project capital cost forecast remained $8.4 billion, net of specified Toshiba payments and customer refunds, with $2.9 billion estimated to complete, excluding about $300 million of expected future capitalized financing costs. Target in-service dates remained November 2021 for Unit 3 and November 2022 for Unit 4. Georgia Power had borrowed $3.46 billion under DOE-guaranteed facilities with capacity up to approximately $5.13 billion. Management warned that schedule extensions could add approximately $50 million in base project costs and $11 million in AFUDC per month, based on Georgia Power’s ownership interest; unrecoverable cost increases could be material.
- Rate proceedings: Georgia Power requested annual rate increases of $560 million in 2020, $144 million in 2021, and $233 million in 2022; a final decision was expected in December 2019. Atlanta Gas Light requested a $93 million annual increase, with a decision expected in December 2019. Nicor Gas received approval for a $168 million annual base-rate increase effective October 8, 2019. Mississippi Power was scheduled to file a base rate case by year-end 2019.
- Asset retirement and environmental exposure: Alabama Power increased its coal ash-related asset retirement obligations by approximately $312 million in 2019, with the estimate for one ash pond still to be updated and potentially material. Mississippi Power recorded an approximately $58 million CCR-related ARO increase. Recovery through regulated rates is important to avoiding material effects on earnings, cash flow, and financial condition.
- Kemper and litigation: Mississippi Power continued mine reclamation and closure work following abandonment of the Kemper IGCC. Potential CO2 pipeline removal costs were not yet determined and could be material. The Department of Justice opened an investigation related to Kemper; the DOE grant closeout could also require payment. Separate Kemper-related arbitration and litigation include claims of approximately $143 million and a class-action allegation of up to $23.5 million in customer refunds, among other claims.
- Other asset and project risks: Southern Company Gas recorded a $92 million pre-tax ($65 million after-tax) impairment on a Louisiana storage facility; it no longer expected a cavern to return to service by 2021. Atlantic Coast Pipeline permitting challenges increased the project’s cost estimate, while a court ruling concerning PennEast raised potential delay, cancellation, and impairment risk. Plant Mankato’s proposed sale was restructured after a state commission denial; closing remained subject to approvals and conditions.
- Management commentary and controls: Management described financial condition as stable and said it expected to use operating cash flow, bank facilities, and debt and equity markets to meet funding needs. Key risks include project execution and cost recovery, customer demand, weather, fuel and commodity prices, environmental regulation, litigation, and access to capital. Management reported effective disclosure controls and no material third-quarter change in internal controls over financial reporting. The filing provides no consolidated earnings-per-share guidance.
Most important facts for investors to verify
- Underlying earnings excluding the Gulf Power gain and the prior-year Vogtle charge, and the contribution of ongoing operations to reported EPS.
- Vogtle’s remaining cost, schedule progress, regulatory cost recovery, construction productivity, and availability of DOE loan advances.
- Outcomes of Georgia Power and Atlanta Gas Light rate cases, Mississippi Power’s planned filing, and Nicor Gas’s approved rates.
- Updated CCR closure estimates, related AROs, and the extent and timing of recovery from customers.
- Potential Kemper liabilities, the Department of Justice investigation, CO2 pipeline disposition costs, and related litigation outcomes.
- Liquidity and refinancing needs, including approximately $3.3 billion of consolidated long-term debt maturities due through September 2020.
- Whether pipeline permitting delays or natural-gas-storage market conditions lead to additional costs, project changes, or impairments.