Southern Company — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 19, 2020. The filing is a combined annual report for Southern Company and several subsidiaries. Southern Company is a regulated electric and natural gas utility holding company, with wholesale generation and other businesses. Gulf Power was sold effective January 1, 2019, so reported 2019 comparisons are affected by that disposition.
Key financial results
| Metric | 2019 | 2018 |
|---|---|---|
| Operating revenue | $21.419 billion | $23.495 billion |
| Operating income | $7.736 billion | $4.191 billion |
| Net income attributable to Southern Company | $4.739 billion | $2.226 billion |
| Diluted EPS | $4.50 | $2.17 |
| Cash from operating activities | $5.781 billion | $6.945 billion |
| Cash used for investing activities | $3.392 billion | $5.760 billion |
| Cash used for financing activities | $1.930 billion | $1.813 billion |
Revenue declined 8.8%, largely reflecting the Gulf Power sale and lower fuel-cost recovery. Net income more than doubled, but the result was heavily influenced by a $2.6 billion pre-tax ($1.4 billion after-tax) gain on that sale and the absence of Georgia Power’s $1.1 billion pre-tax Vogtle construction charge recorded in 2018. These items limit the usefulness of headline earnings growth as a measure of recurring performance.
Other reported metrics: total assets were $118.7 billion; long-term debt was $41.8 billion, excluding amounts due within one year; common stockholders’ equity was $27.5 billion. Long-term debt represented 56.6% of capitalization excluding amounts due within one year. Cash and cash equivalents were $1.975 billion, and cash, cash equivalents, and restricted cash totaled $1.978 billion. The company paid $2.46 per share in dividends; the 2019 payout ratio was 54.2%.
Liquidity, cash flow and capital needs
- Operating cash flow fell $1.2 billion year over year, principally due to a $1.136 billion voluntary pension contribution and timing of vendor payments.
- At year-end, current liabilities exceeded current assets by $2.729 billion. Management said working capital needs could be met through operating cash flow, commercial paper, bank lines and other financing.
- Unused committed bank credit totaled $7.576 billion. Management expected each registrant’s dividends, capital spending and debt maturities over 2020–2022 to exceed operating cash flow, requiring external financing.
- Estimated system capital expenditures are $8.7 billion in 2020, then $7.3 billion in 2021, $6.8 billion in each of 2022 and 2023, and $6.2 billion in 2024. These estimates exclude certain potential costs and Southern Power growth spending.
- Southern Company declared a 62-cent quarterly dividend in January 2020. Future dividends remain subject to Board discretion, earnings and financial condition.
Material changes and significant items
- Gulf Power sale: Completed for approximately $5.8 billion cash, less $1.3 billion of assumed debt. The $2.6 billion pre-tax gain was the principal driver of 2019 earnings growth; the sale also reduced the company’s revenue and operating base.
- Plant Vogtle Units 3 and 4: Georgia Power’s estimated total project capital cost remained $8.4 billion for its ownership share, net of $1.7 billion received under the Toshiba settlement and about $188 million in customer refunds. At December 31, 2019, the remaining estimate to complete was $2.5 billion. Expected in-service dates remained November 2021 for Unit 3 and November 2022 for Unit 4; a February 2020 forecast reaffirmed them. Georgia Power had $3.8 billion outstanding under DOE-guaranteed facilities.
- Kemper: Mississippi Power recorded $24 million of 2019 charges for abandonment, closure and related costs. Mine reclamation was expected to be substantially complete in 2020; dismantlement and site restoration were expected to continue through 2024.
- Business portfolio: Southern Power sold Plant Nacogdoches in 2019 and sold Plant Mankato in January 2020. Southern Company Gas announced proposed sales of its Pivotal LNG and Atlantic Coast Pipeline interests for an aggregate $165 million, subject to closing conditions, and recorded a related Pivotal LNG impairment.
- Other impairments: Southern Company Gas recorded a $91 million pre-tax impairment for a Louisiana gas storage facility. Southern Company recorded a $17 million pre-tax leveraged-lease impairment after reducing expected lease cash flows.
Outlook, risks and contingencies
- Regulated rates: Georgia Power’s 2020–2022 rate plan provides estimated increases of $342 million, $181 million and $386 million, respectively. The plan sets a 10.50% retail ROE and a 9.50%–12.00% earnings range, with sharing of earnings above the range. These are approved rate-plan estimates, not consolidated earnings guidance.
- Construction execution and recovery: Vogtle remains exposed to labor productivity, contractor, procurement, testing, licensing and regulatory risks. Each month of schedule extension was estimated to add about $50 million of base capital costs and $12 million of AFUDC for Georgia Power’s share. Future cost recovery is not assured; uncollectible increases could require material charges.
- Environmental obligations: Coal-ash closure and monitoring costs, changing environmental rules, possible future greenhouse-gas requirements, and recovery of compliance costs through rates may affect cash flow and earnings. Alabama Power said a future ash-pond ARO estimate increase could be material.
- Kemper legal and regulatory exposure: The Department of Justice opened an investigation related to the project’s DOE grant closeout; the company said the outcome could materially affect the financial statements. Mississippi Power also faced a Kemper-related arbitration claim of about $143 million and a separate customer case alleging up to $23.5 million in under-refunds; outcomes were uncertain.
- Pipeline and storage exposure: Atlantic Coast Pipeline faced permit challenges and delays, while PennEast faced an adverse eminent-domain ruling and further permitting uncertainty. The filing warned of potential additional costs, delays, cancellation or impairment. Other Southern Company Gas storage assets could also face impairment if market values remain weak.
- Additional risks: Utility regulation and rate recovery, fuel and power prices, weather and storms, customer demand and conservation, counterparties, cybersecurity and physical security, credit ratings, capital-market access, and pension and nuclear decommissioning assumptions.
- Audit and controls: Deloitte issued unqualified opinions on Southern Company’s financial statements and internal control over financial reporting. The auditor identified rate regulation and Vogtle construction disclosures as critical audit matters.
Most important facts for investors to verify
- How much of 2019 earnings and EPS growth is attributable to the Gulf Power gain and other nonrecurring items, versus ongoing utility operations?
- Whether Vogtle meets its current cost, schedule, licensing and fuel-loading milestones, and how much remaining cost Georgia Power can recover from customers.
- Whether operating cash flow, available credit, planned debt and hybrid issuance, and subsidiary funding are sufficient for projected capital spending, maturities and dividends.
- Final outcomes and potential financial exposure from the Kemper investigation, claims and Mississippi Power proceedings.
- Whether the proposed Pivotal LNG and Atlantic Coast Pipeline sales close on expected terms, and whether pipeline permitting or storage-market developments cause further impairments.
- Whether coal-ash ARO estimates, environmental compliance costs, rate recovery and pension assumptions change materially.