Southern Company (SO) — Q2 2023 Form 10-Q
Business context and reporting period. This combined, unaudited filing covers Southern Company and five subsidiaries for the quarter and six months ended June 30, 2023, compared with 2022. Businesses include regulated electric utilities, wholesale power generation, and natural gas distribution and related services. Interim results are seasonal and are not necessarily indicative of full-year results.
Key financial metrics
| Southern Company consolidated | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Operating revenue | $5.748 billion | $7.206 billion | $12.228 billion | $13.854 billion |
| Operating income | $1.290 billion | $1.655 billion | $2.509 billion | $3.039 billion |
| Net income attributable to Southern Company | $838 million | $1.107 billion | $1.700 billion | $2.139 billion |
| Diluted EPS | $0.76 | $1.03 | $1.55 | $2.00 |
| Operating cash flow | Not separately stated | Not separately stated | $2.900 billion | $3.579 billion |
- Margins: Operating margin was approximately 22.4% in Q2 2023 versus 23.0% in Q2 2022; net income attributable to Southern Company as a share of revenue was approximately 14.6% versus 15.4%.
- Cash and investment: June 30 cash and cash equivalents were $2.123 billion. First-half property additions were $3.898 billion; dividends paid were $1.506 billion.
- Debt and liquidity: Long-term debt was $55.134 billion, current securities due within one year were $4.063 billion, and notes payable were $1.647 billion. Unused committed bank credit was $7.466 billion across the reporting companies. Current liabilities exceeded current assets by $2.261 billion.
- Other balance-sheet measures: Total assets were $137.116 billion and stockholders’ equity was $34.648 billion at June 30, 2023. Construction work in progress was $11.992 billion.
Material changes versus the prior comparable period
- Q2 revenue fell 20.2% and net income attributable to Southern Company fell 24.3%; first-half revenue fell 11.7% and attributable net income fell 20.5%.
- Management attributed lower earnings chiefly to higher depreciation and amortization, lower retail electric revenues amid milder weather and changes in rates and pricing, and higher interest expense. Lower income taxes and lower non-fuel operations and maintenance costs partly offset the declines.
- Retail electric revenue declined $930 million in Q2 and $944 million year to date. Lower fuel and other cost-recovery revenue was a major component; these revenues generally track recoverable fuel costs and typically do not materially affect earnings. Fuel and purchased-power expenses also declined substantially as commodity prices and volumes fell.
- Depreciation and amortization rose 21.8% in Q2 and 23.1% year to date, primarily reflecting higher depreciation rates at Alabama Power and Georgia Power. Net interest expense rose 25.0% and 25.5%, respectively, reflecting higher rates and borrowings.
- Subsidiary results were mixed: Alabama Power net income after preferred dividends was $312 million for Q2 (down from $383 million); Georgia Power net income was $471 million (down from $608 million); Mississippi Power net income was $40 million (down from $45 million). Southern Power-attributable income was $85 million (down from $98 million), while Southern Company Gas net income was $85 million (down from $115 million).
Outlook, management commentary, risks and unusual items
- Plant Vogtle: Unit 3 entered commercial service on July 31, 2023, after quarter-end. Georgia Power’s 45.7% share of the forecast capital cost to complete Units 3 and 4, including contingency, was approximately $10.593 billion; the remaining estimate at June 30 was $649 million. Unit 4 was projected to enter service in late Q4 2023 or Q1 2024. A delay beyond March 2024 could add up to $45 million per month in Georgia Power base capital costs, plus related financing and other costs. Management cautioned that further schedule and cost changes remain possible.
- Georgia Power recorded $407 million of pre-tax charges through 2022 for Vogtle cost-sharing and tender provisions. Separate litigation involving OPC and Dalton remains unresolved; potential further pre-tax charges could be up to approximately $345 million based on the current forecast. An adverse final cost determination could result in additional charges, and recovery of future cost increases is not assured.
- Georgia Power increased annual fuel billings by approximately $1.1 billion, effective June 1, 2023, to recover a $2.2 billion under-recovered fuel balance over three years. Fuel-rate changes are expected to affect operating cash flows, not net income materially. Unit 3 and shared-facility base rates increased by $318 million annually effective August 1, 2023.
- Other regulatory matters: Nicor Gas recorded a $38 million pre-tax charge after Illinois regulators disallowed $32 million of 2019 infrastructure investment and related returns. Nicor Gas sought rehearing; reviews of later investment years remain pending and further disallowances could be material. Atlanta Gas Light requested a $53 million annual base-rate increase for 2024; a Virginia Natural Gas stipulation proposes a $48 million increase, subject to a final regulatory order.
- Environmental and legal exposure: Alabama Power faces litigation and an EPA notice concerning closure of the Plant Barry ash pond; the outcome could materially affect its asset-retirement estimates and cash flows. Proposed federal rules on coal-plant wastewater, coal combustion residuals, and greenhouse gases may result in significant compliance costs. Other disclosed unresolved matters include Plant Scherer claims and a Mississippi Power tax audit assessment.
- Financing and outlook: Southern Company issued $1.725 billion of convertible notes and $1.5 billion of senior notes during the first half. The filing provides no specific consolidated earnings guidance. Management cited inflation, higher interest rates, recession risk, fuel and labor costs, regulatory recovery, construction execution, weather, and demand as factors affecting future results. S&P revised the outlook for Southern Company and its subsidiaries to positive on August 2, 2023.
Important facts for investors to verify
- Progress, final testing, costs, and in-service timing for Vogtle Unit 4, including possible cost-sharing or tender outcomes and whether additional costs are recoverable from customers.
- Regulatory decisions on Nicor Gas’s rehearing and later infrastructure-investment reviews, and any resulting charges or rate effects.
- Cash-flow effects and recovery timing for Georgia Power’s under-recovered fuel balance, alongside elevated construction spending and debt maturities.
- Potential cost, liability, or cash-flow effects from Plant Barry CCR matters and proposed environmental rules.
- Whether weaker Q2 earnings reflect primarily pass-through commodity and weather effects or sustained pressure from depreciation, financing costs, and customer demand.