Southern Company — Q3 2018 Form 10-Q
Business context and period: This combined, unaudited filing covers Southern Company and its listed utility, power-generation, and gas subsidiaries. The reporting period ended September 30, 2018; comparisons are with the three and nine months ended September 30, 2017. Results include material seasonal and one-time items.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $6.159 billion | $6.201 billion | $18.158 billion | $17.403 billion |
| Operating income | $2.174 billion | $1.991 billion | $3.613 billion | $1.594 billion |
| Net income attributable to Southern Company | $1.164 billion | $1.069 billion | $1.948 billion | $347 million |
| Diluted EPS | $1.13 | $1.06 | $1.91 | $0.35 |
| Cash dividends per common share | $0.60 | $0.58 | $1.78 | $1.72 |
- Cash flow: For the first nine months, operating cash flow was $5.584 billion, versus $5.251 billion. Investing activities used $3.500 billion, including $5.793 billion of property additions and $2.773 billion of disposition proceeds. Financing activities used $2.340 billion. Cash, cash equivalents, and restricted cash ended at $1.891 billion.
- Debt and liquidity: At September 30, long-term debt was $41.425 billion; securities due within one year were $3.013 billion and notes payable were $2.564 billion. Current liabilities exceeded current assets by $3.581 billion. The company cited $8.101 billion of unused committed bank credit arrangements and stated it was in compliance with applicable covenants.
- Balance sheet: Total assets were $111.717 billion and total stockholders’ equity was $28.065 billion. Common shares outstanding were approximately 1.029 billion.
Material changes versus the prior period
- Q3 revenue declined slightly, while attributable net income rose 8.9%, mainly from lower federal income tax expense and weather-related retail electricity sales, partly offset by tax-reform-related customer bill credits and higher operating and maintenance expenses.
- Nine-month attributable net income increased sharply from 2017. The comparison is heavily affected by the $3.2 billion pre-tax Kemper IGCC charge recorded in 2017; 2018 included a $1.1 billion pre-tax Vogtle construction charge. Lower federal taxes also contributed to the 2018 increase.
- Interest expense increased to $1.386 billion for the first nine months from $1.248 billion, reflecting higher rates and debt levels at the parent and other financing changes.
- Southern Company Gas completed sales of Pivotal Home Solutions, Elizabethtown Gas and Elkton Gas, and Florida City Gas. Southern Power sold a 33% interest in its solar partnership for about $1.2 billion. Southern Company recorded disposition gains, but related tax expense and the Pivotal Home Solutions loss meant the net after-tax effect differed from the pre-tax gain.
Outlook, commentary, and principal risks
- Vogtle Units 3 and 4: Georgia Power’s forecasted project capital cost is $8.4 billion, net of $1.7 billion received under the Toshiba settlement and about $188 million in related customer refunds; estimated remaining capital cost was $4.1 billion at September 30. The forecast excludes about $350 million of future capitalized financing costs. Expected in-service dates remain November 2021 for Unit 3 and November 2022 for Unit 4. Georgia Power recorded a $1.1 billion pre-tax charge because of cost increases and uncertainty about recovery; it did not seek rate recovery for the $0.7 billion increase in the base forecast. A one-month schedule extension is estimated to add about $50 million in base capital costs and $12 million in AFUDC, based on Georgia Power’s ownership interest. The owners unanimously voted to continue construction, subject to revised cost-sharing and other terms.
- Construction spending: System construction expenditures were estimated at approximately $8.8 billion in 2018, $8.2 billion in 2019, and $7.2 billion in 2020. Estimates remain subject to revision and regulatory cost recovery is not assured.
- Dispositions: The proposed Gulf Power sale to NextEra is for $5.75 billion less assumed debt estimated at about $1.3 billion, subject to adjustments and approvals; closing was expected in Q1 2019. Southern Power also announced post-quarter agreements to sell its Florida plants and Plant Mankato, and to bring in wind tax-equity investors; these transactions remained subject to approvals and closing conditions.
- Environmental obligations: Alabama Power increased its coal-ash-related asset retirement obligations by about $1.2 billion after updated closure studies. Southern Company reported total asset retirement obligations of $6.165 billion at September 30. Further estimates, especially for Georgia Power and Gulf Power ash-pond closures, could change materially; recovery through rates is important.
- Storms: After quarter-end, Hurricane Michael damage was estimated at $350 million to $400 million for Gulf Power and $125 million to $150 million for Georgia Power. Recovery depends on regulatory action and the costs charged to reserves or capitalized.
- Credit and regulation: Rating actions included downgrades for Southern Company and Georgia Power and negative outlooks assigned by Fitch to Southern Company and certain subsidiaries. A FERC investigation into the utilities’ 11.25% transmission return on equity could lead to refunds; the estimated maximum potential refund was not expected to be material through September 30.
- Other exposures: Mississippi Power recorded $45 million of 2018 year-to-date Kemper closure charges and estimated up to $20 million of additional closure costs through the first half of 2020. A contractor arbitration claim seeks approximately $143 million plus other damages. A leveraged-lease exposure could reduce net income by about $86 million after tax if the lessee fails to pay and the related debt defaults.
- No earnings guidance: The filing provides no specific consolidated earnings or EPS guidance. Management emphasizes regulatory cost recovery, customer growth, weather, commodity prices, construction execution, and financing access as key drivers and risks.
Most important facts for investors to verify
- Whether Vogtle stays within the $8.4 billion capital forecast and November 2021/November 2022 schedule, and what costs regulators ultimately allow in rates.
- Whether Gulf Power and Southern Power transactions close on the stated terms and timing, and the final after-tax proceeds and gains or losses.
- How updated coal-ash and other environmental closure estimates affect asset retirement obligations, cash requirements, and rate recovery.
- The final cost, regulatory treatment, and customer recovery process for Hurricane Michael repairs.
- Southern Company’s debt, refinancing needs, interest costs, credit ratings, and ability to maintain liquidity while funding its construction program and dividends.
- Final tax accounting for the Tax Reform Legislation and completed dispositions, including customer refunds, deferred tax balances, and gains or losses.