Southern Company — Q1 2014 Form 10-Q
Business context and period. This combined, unaudited filing covers Southern Company and its regulated utility subsidiaries and Southern Power for the three months ended March 31, 2014, compared with Q1 2013. The core business is electricity generation and sales across the Southeast. Results are seasonal and the filing cautions that the quarter is not necessarily indicative of full-year performance.
Key financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Operating revenue | $4.644 billion | $3.897 billion | +19.2% |
| Operating income | $700 million | $325 million | +$375 million |
| Consolidated net income | $368 million | $97 million | +$271 million |
| Net income after subsidiary preferred dividends | $351 million | $81 million | +$270 million |
| Diluted EPS | $0.39 | $0.09 | +$0.30 |
| Cash from operating activities | $1.103 billion | $737 million | +$366 million |
Operating margin was approximately 15.1% versus 8.3% in the prior-year quarter; net income after subsidiary preferred dividends was approximately 7.6% of revenue versus 2.1% (calculated from reported figures). Cash dividends paid were $0.5075 per share, up from $0.49. In April 2014, the quarterly dividend payable in June was raised to $0.525 per share.
Balance sheet and liquidity at March 31, 2014: Cash was $590 million, down from $659 million at year-end 2013. Current assets were $5.140 billion and current liabilities $4.835 billion. Long-term debt was $22.288 billion, compared with $21.344 billion at December 31; securities due within one year were $768 million and notes payable $598 million. Operating cash flow exceeded investing outflows of $1.215 billion, principally reflecting $1.180 billion of property additions. Financing provided $43 million. Management described financial condition as stable and reported compliance with credit-facility covenants.
Drivers and material changes
- Retail revenue rose 17.0% to $3.858 billion. Management attributed the increase to rates and pricing (+$84 million), sales growth (+$14 million), colder weather (+$117 million), and fuel and other cost recovery (+$345 million). Rate increases included Georgia Power’s 2013 rate plan, Gulf Power’s January 2014 increase, and Mississippi Power’s previously approved increases.
- Wholesale revenue increased 39.8% to $604 million, primarily from higher weather-related demand, higher natural gas prices, and new or expanded contracts. Higher fuel and purchased-power costs largely tracked recoverable costs and generally did not materially affect earnings.
- System generation increased to 47 billion kWh from 43 billion kWh. Coal’s share rose to 47% from 34%, while gas fell to 33% from 44%; management cited demand and relative generation economics.
- The largest earnings drag remained the Kemper IGCC construction project. The Q1 2014 estimated-loss charge was $380 million pretax ($234.7 million after tax), versus $540 million pretax ($333.5 million after tax) in Q1 2013. Cumulative charges through March 31, 2014 were $1.6 billion pretax ($963 million after tax).
- Southern Power’s net income attributable to Southern Power increased to $33.5 million from $29.2 million, supported by non-affiliate energy revenues and lower income taxes, partly offset by higher depreciation. Georgia Power borrowed $1.0 billion under a DOE-guaranteed Federal Financing Bank facility for eligible Vogtle construction costs.
Outlook, risks, and unusual items
- Kemper IGCC: The filing reports an April 28, 2014 revised estimate of $4.44 billion for the plant costs subject to the Mississippi PSC cost cap and $5.53 billion total including specified exclusions, grants, AFUDC, and regulatory assets. These figures use different cost categories from the $2.88 billion cap. The combined-cycle and common-facilities portion was expected in service in summer 2014; the remainder, including gasification, was forecast for the first half of 2015. A further delay was estimated to add about $25 million per month. Mississippi Power said it did not intend to seek recovery or joint-owner contributions for costs above the cap, excluding specified exceptions. Further estimate changes could be material.
- Kemper recovery depends on Mississippi PSC prudence determinations, approval of the proposed Seven-Year Rate Plan and securitization arrangements (securitization limit: $1.0 billion), and resolution of legal challenges. Prudence hearings on costs through March 2013 were expected in Q3 2014. The proposed sale of a 15% interest to SMEPA for approximately $572 million remained pending; $225 million of SMEPA deposits were refundable under stated conditions. Mississippi Power expected about $924 million of additional non-recoverable cash expenditures through project completion, following $636 million incurred through March 31.
- Kemper tax benefits are schedule-sensitive: approximately $170 million of expected cash-flow benefit from bonus depreciation depended on qualifying assets being placed in service in 2014; delay could forfeit an estimated $120–$150 million of benefits for the remaining project. Some investment tax credits are subject to IRS requirements, including timing and CO2 capture and sequestration conditions.
- Plant Vogtle Units 3 and 4: Georgia Power’s latest reported estimate included $4.8 billion of in-service construction capital costs for its share and approximately $2.0 billion of associated construction-period financing costs. Estimated in-service dates were Q4 2017 and Q4 2018 for Units 3 and 4. Contractor cost and schedule claims, licensing matters, construction execution, and potential further delays remained unresolved.
- The Southern Company system’s construction program was estimated at $6.9 billion in 2014, $5.6 billion in 2015, and $4.5 billion in 2016, including Kemper expenditures of $1.3 billion in 2014 and $208 million in 2015. Cost recovery, project execution, weather and demand, fuel prices, environmental rules, and access to capital are key risks.
- Environmental and legal matters include pending Clean Air Act proceedings, evolving water-quality rules, and other litigation. The filing says the ultimate outcomes of significant matters cannot be determined. The Supreme Court’s April 2014 action on CSAPR and proposed Clean Water Act changes occurred after quarter-end; their ultimate effects were uncertain.
- Management said disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress against Kemper’s revised cost estimate, schedule, monthly delay exposure, and the risk of further material charges.
- Mississippi PSC decisions on Kemper cost prudence, the Seven-Year Rate Plan, securitization, and related litigation; completion and terms of the proposed SMEPA sale.
- Whether Kemper qualifies for expected bonus depreciation and investment tax credits, and the resulting customer-rate and cash-flow effects.
- Vogtle construction costs, completion dates, contractor claims, and Georgia PSC and NRC approvals.
- Cash generation, debt maturities, construction funding needs, and the sustainability of dividends amid ongoing capital spending.