Southern Company 10-Q Summary: First Quarter 2012
Business context and reporting period. The combined filing covers The Southern Company and its utility subsidiaries Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power. The reporting period is the three months ended March 31, 2012, compared with the same period in 2011. Southern Company is principally an electric utility holding company; its operating utilities serve customers in the Southeast, while Southern Power sells electricity wholesale. The unaudited quarterly results are seasonal and are not necessarily indicative of full-year results.
Key financial metrics
| Southern Company consolidated | Q1 2012 | Q1 2011 |
|---|---|---|
| Operating revenue | $3.604 billion | $4.012 billion |
| Operating income | $766 million | $854 million |
| Net income | $384 million | $438 million |
| Net income after subsidiary preferred and preference dividends | $368 million | $422 million |
| Diluted EPS | $0.42 | $0.49 |
| Cash dividends per common share | $0.4725 | $0.4550 |
- Revenue fell 10.2% and net income after subsidiary preferred and preference dividends declined 12.8%. Operating margin, calculated from reported figures, was approximately 21.3% in both quarters.
- Operating cash flow was $568 million, versus $998 million. Investing cash outflow was $1.427 billion, including $1.231 billion of property additions; financing provided $588 million. Cash declined from $1.315 billion at year-end to $1.044 billion.
- At March 31, total assets were $59.874 billion. Current assets of $6.041 billion were below current liabilities of $6.317 billion. Long-term debt was $19.051 billion; current securities due within one year were $1.881 billion and notes payable were $1.029 billion.
- Committed bank credit arrangements totaled $5.177 billion, of which $5.172 billion was unused. Management said the system’s financial condition remained stable and that it monitors access to capital markets and bank facilities.
Changes versus the prior comparable period
- Retail revenue declined $304 million (9.0%), principally reflecting $113 million from milder weather and $267 million lower fuel and other cost-recovery revenue. Fuel-cost recovery revenues and expenses generally offset and did not significantly affect earnings.
- Wholesale revenue declined $100 million (22.3%), mainly from lower energy sales and prices. Total fuel and purchased-power expense fell $371 million, primarily from lower average fuel and purchased-power costs; lower fuel expense was substantially offset by lower fuel-recovery revenue.
- Other operations and maintenance expense rose $23 million, and depreciation and amortization rose $23 million, partly reflecting pension and benefit costs and new plant and infrastructure in service. Interest expense decreased $11 million.
- Industrial electricity sales increased, but overall demand and reported revenue were affected by mild weather. System generation fell to 39 billion kWh from 46 billion, while purchased power increased to 4 billion kWh from 1 billion; gas represented 42% of generation versus 28% a year earlier.
- Results differed among subsidiaries: Gulf Power’s net income after preference dividends increased to $20.7 million from $11.7 million, and Mississippi Power’s increased to $25.3 million from $14.6 million, while Alabama Power and Georgia Power declined to $126 million and $167 million, respectively. Southern Power net income fell to $29.3 million from $37.7 million, mainly on weaker non-affiliate energy revenues and lower contracted capacity revenues.
Outlook, management commentary, and material risks
- No consolidated earnings or EPS guidance is provided in the supplied filing text. Management emphasized regulatory cost recovery, electricity demand, weather, fuel costs, economic conditions, and the wholesale market as drivers of future results. The quarterly dividend was raised after quarter-end to $0.49 per share, payable in June 2012.
- Management estimated a positive 2012 cash-flow benefit from bonus depreciation of $530 million to $720 million for Southern Company. The filing notes that tax-credit utilization may be deferred, including at Mississippi Power.
- Kemper IGCC: Mississippi Power had spent $1.30 billion on the project by March 31, including mine, pipeline, and regulatory costs; $1.28 billion was recorded in construction work in progress, net of grant funds. The certificated estimate is $2.4 billion, excluding the lignite mine and CO₂ pipeline, and the approved construction cost cap is up to $2.88 billion, also excluding those items. Mississippi Power said substantially all contingency in the certificated estimate had been used and completion costs within the capped scope would likely exceed that estimate, though management expected them to remain below the cap. Commercial operation was expected in May 2014. The Mississippi Supreme Court had reversed the original certificate order; the PSC issued a new order confirming the certificate on April 24, after quarter-end, and an appeal followed. DOE loan guarantees remained uncertain. SMEPA’s $150 million purchase deposit is refundable under specified conditions.
- Plant Vogtle Units 3 and 4: The contractor’s preliminary proposed adjustment attributable to Georgia Power was approximately $400 million in 2008 dollars, which Georgia Power disputed. Construction schedule and design issues remained under negotiation; an NRC inspection identified rebar details at Unit 3 that were not consistent with the design document, with corrective actions under discussion. Legal challenges to the licenses and design certification were pending.
- Environmental compliance requirements, including the EPA’s MATS rule and proposed water and coal-ash rules, could require substantial investment, retirements, fuel changes, or transmission work. Costs, timing, reliability effects, and recovery through regulated rates remained uncertain. The EPA’s appeal in the Alabama Power New Source Review case and other environmental litigation also remained unresolved.
- Southern Company was discussing a restructuring of a leveraged-lease project because of concerns about the lessee’s credit and asset residual value. If restructuring failed and the project were abandoned, the potential after-tax impairment was approximately $90 million.
- Other financing and liquidity items include approximately $1.9 billion required through March 31, 2013 for debt maturities and announced redemptions. Mississippi Power’s cash flows also reflect heavy Kemper construction spending and financing reliance, including new debt and parent contributions.
Important facts for investors to verify
- Whether lower demand and weather effects persist, and how fuel-cost recovery and rate changes affect cash flow versus earnings.
- Kemper’s updated cost-to-complete, schedule, cost-cap treatment, regulatory approvals, DOE financing, and completion of the SMEPA transaction.
- Vogtle contractor claims, construction schedule, corrective actions for inspection findings, and the outcome of legal challenges.
- Timing and recoverability of environmental-compliance spending and the outcomes of the EPA and other litigation matters.
- Debt maturities, capital-market access, credit-rating collateral requirements, and the sustainability of dividends alongside the construction program.