Southern Company — Q2 2020 Form 10-Q Summary
Business context and reporting period
Quarter ended June 30, 2020; unaudited combined filing for Southern Company and its subsidiaries, including Alabama Power, Georgia Power, Mississippi Power, Southern Power, and Southern Company Gas. The businesses principally generate and sell electricity and distribute natural gas. Comparisons below are to the same 2019 period unless noted. Management cautions that interim results are seasonal and are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $4.620 billion | $5.098 billion | $9.638 billion | $10.510 billion |
| Operating income | $1.058 billion | $1.342 billion | $2.321 billion | $5.033 billion |
| Net income attributable to Southern Company | $612 million | $899 million | $1.480 billion | $2.982 billion |
| Diluted EPS | $0.58 | $0.85 | $1.39 | $2.84 |
| Net cash from operating activities | — | $2.847 billion | $2.513 billion |
At June 30, cash and cash equivalents were $1.879 billion; long-term debt was $45.138 billion and securities due within one year were $1.596 billion. Current liabilities exceeded current assets by $265 million. The company reported $7.675 billion of unused committed bank credit. Six-month property additions were $3.202 billion; cash dividends paid were $1.332 billion. Southern Company’s quarterly dividend was $0.64 per share, up from $0.62 a year earlier.
Material changes versus the prior comparable period
- Q2 revenue declined 9.4% and attributable net income declined 31.9%. Six-month attributable net income fell 50.4%, primarily because 2019 included a $2.5 billion pretax ($1.3 billion after-tax) gain on the Gulf Power sale.
- Q2 retail electric revenue was down $358 million. COVID-related commercial and industrial demand weakness, milder weather, and lower fuel-cost recoveries more than offset higher rates and pricing. Weather-adjusted commercial and industrial electricity sales declined 11.5% and 14.0%, respectively.
- Q2 operating results included a $149 million pretax Vogtle construction charge ($111 million after tax) and a $154 million pretax leveraged-lease impairment ($74 million after tax). Depreciation and amortization rose $118 million year over year, while other operations and maintenance expense fell $117 million.
- Operating cash flow increased to $2.847 billion for the first half, but investing activities used $2.655 billion, compared with $1.002 billion provided in the prior-year period, which included substantial asset-sale proceeds.
Outlook, commentary, risks and unusual items
- COVID-19: Management said retail electric sales at quarter-end remained approximately 3%–4% below pre-pandemic projections. Commercial and industrial usage, customer payment behavior, operating cash flow, and construction productivity remain exposed to the duration and severity of the downturn.
- Plant Vogtle: Georgia Power’s share of the project forecast was $8.5 billion, including contingency, with $1.9 billion estimated remaining to complete as of June 30. The forecast is net of $1.7 billion of Toshiba payments and about $188 million in customer refunds; financing costs are additional. Georgia Power continued to expect regulatory-approved in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4, despite an updated work plan and productivity challenges. Its estimated COVID-related incremental costs are $70 million–$115 million. A schedule extension was estimated to add about $50 million in base capital costs and $10 million in AFUDC per month, based on Georgia Power’s ownership share. Unrecoverable forecast increases could require further charges.
- Rates and regulation: Mississippi Power’s settlement reduced annual retail rates by approximately $16.7 million, or 1.85%, effective April 2020. Georgia Power’s fuel-billing reductions total approximately $740 million over two years, plus a $44 million interim reduction. Alabama Power received partial approval for new capacity, including a 720-MW Plant Barry combined-cycle unit estimated at $652 million, subject to a cost recovery limit and further regulatory process.
- Environmental liabilities: Alabama Power increased its asset-retirement obligation by approximately $462 million for ash-pond closure estimates. Further revisions and regulatory approvals may affect costs; recovery through rates is important to limiting financial impact.
- Other exposures: Southern Company disclosed a DOJ investigation relating to Kemper and litigation concerning Kemper, including a $143 million arbitration claim against Mississippi Power; adverse outcomes could be material. Southern Company Gas’s PennEast Pipeline faces legal and permitting uncertainty, with approximately $300 million of expected project costs. The filing also warns of a potential impairment of $263 million of PowerSecure goodwill if pandemic effects become significant.
- No specific consolidated earnings guidance was provided in the supplied filing text. Management described capital-market access as adequate and financial condition as stable at quarter-end, while noting that future financing costs and the ultimate pandemic impact remain uncertain.
Most important facts for investors to verify
- Whether Vogtle meets the November 2021 and November 2022 in-service dates, and whether revised costs remain recoverable from customers.
- How COVID-19 affects commercial and industrial demand, customer collections, cash flows, and the recovery of deferred costs.
- Whether Alabama Power’s ash-pond closure estimates rise further and whether regulators permit full cost recovery.
- Progress and potential liabilities in the Kemper-related investigation, arbitration, and litigation, and developments in PennEast’s legal proceedings.
- Debt maturities, access to short- and long-term financing, and continued capacity to fund construction and dividends.