Southern Company — Form 10-Q Summary
Business context and reporting period
Combined unaudited quarterly report for The Southern Company and its listed subsidiaries, covering the three months ended March 31, 2018, compared with the first quarter of 2017. The businesses include regulated electric utilities, wholesale power generation, and natural gas distribution and related services. Seasonal effects mean first-quarter results may not indicate full-year performance.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Operating revenues | $6.372 billion | $5.771 billion |
| Operating income | $1.376 billion | $1.252 billion |
| Consolidated net income attributable to Southern Company | $938 million | $658 million |
| Basic / diluted EPS | $0.93 / $0.92 | $0.66 / $0.66 |
| Cash dividends per common share | $0.58 | $0.56 |
| Net cash provided by operating activities | $1.509 billion | $896 million |
| Net cash used for investing activities | $1.995 billion | $2.797 billion |
| Net cash provided by financing activities | $629 million | $1.025 billion |
Operating margin was approximately 21.6% of revenue, versus 21.7% a year earlier. Income tax expense fell to $113 million from $315 million; the filing reports an effective tax rate of 10.8%, compared with 32.1%.
At March 31, 2018, cash and cash equivalents were $2.284 billion. Current liabilities exceeded current assets by $4.1 billion, primarily reflecting $3.2 billion of debt due within one year and $4.3 billion of notes payable. Long-term debt was $44.446 billion; including current debt and notes payable, these disclosed balances total approximately $52.0 billion. The company reported $8.098 billion of unused committed credit arrangements within $8.145 billion total commitments.
Material changes versus the prior comparable period
- Revenue increased 10.4%, while attributable net income rose 42.6%. Management attributed the earnings increase mainly to the lower federal tax rate under the Tax Reform Legislation, state tax benefits from Southern Power’s legal-entity reorganization, and colder-weather-driven retail electric revenues. The tax benefits and weather effects should be distinguished from recurring operating trends.
- Retail electric revenue grew $174 million, including a $144 million weather contribution; rates and pricing reduced revenue by $103 million, primarily reflecting tax-reform customer bill adjustments and lower Vogtle financing-cost recovery. Natural gas revenue rose $77 million, while other revenue increased $272 million, primarily due to PowerSecure storm-restoration work in Puerto Rico, with related costs also increasing.
- Operating cash flow increased $613 million, primarily from vendor-payment timing and fuel-cost recovery. Property additions were $1.781 billion, up from $1.488 billion.
- Interest expense rose to $458 million from $416 million, largely due to higher average debt. The first-quarter 2018 results also included a $42 million goodwill impairment at Southern Company Gas, a $44 million pre-tax Kemper closure charge, and approximately $50 million of Southern Power state tax benefits.
Outlook, management commentary, risks and unusual items
- Plant Vogtle: Georgia Power expects Units 3 and 4 to enter service in November 2021 and November 2022. Its forecast capital cost is $7.3 billion after Toshiba settlement payments and customer refunds, with $3.6 billion estimated remaining at March 31, excluding financing costs. Estimated total financing costs are $3.1 billion, of which $1.6 billion had been incurred. The forecast is not a cost cap; further schedule, cost, licensing, contractor, and regulatory risks remain. The Georgia PSC’s settlement is expected to reduce Georgia Power earnings by about $100 million in 2018 and an aggregate $585 million from 2019–2022. Two appeals of the construction order were pending.
- Kemper: Mississippi Power recorded $44 million in first-quarter pre-tax closure charges. Additional closure costs, including ash disposal, are estimated at up to $50 million pre-tax during the remainder of 2018 and 2019, excluding salvage. The combined-cycle and common facilities were dedicated as Plant Ratcliffe on April 27, 2018.
- Tax and regulation: State regulators approved or considered customer refunds, revenue adjustments, and capital-structure changes following federal tax reform. Georgia Power’s approved settlement provides $330 million of customer bill credits over 2018–2020 and defers approximately $700 million of excess deferred taxes for future regulatory treatment. Tax accounting remains provisional pending further guidance.
- Capital plans: System construction spending is estimated at $8.6 billion in 2018, then $7.8 billion in 2019, $7.2 billion in 2020, $6.8 billion in 2021, and $6.4 billion in 2022. Estimates are subject to revision and recovery in rates is not assured.
- Planned dispositions: Southern Company Gas expected to complete sales of Elizabethtown Gas and Elkton Gas for $1.7 billion by the end of Q3 2018. A sale of Pivotal Home Solutions for approximately $365 million was agreed in April and expected by the end of Q2 2018; the related $42 million impairment was recorded in Q1. Southern Power was pursuing a sale of a 33% interest in a holding company for substantially all of its solar assets, expected to close in mid-2018.
- Other risks: Fitch downgraded Southern Company to BBB+ and Georgia Power to A, with a negative outlook for Georgia Power. Management cited exposure to regulatory outcomes, environmental compliance costs, weather, fuel and commodity prices, construction execution, credit ratings, and litigation. A leveraged-lease lessee’s liquidity and operating issues could put an approximately $86 million receivable at risk; management said it was not impaired at quarter-end.
Important facts for investors to verify
- Progress against Vogtle’s stated budgets and in-service dates, remaining-cost estimate, regulatory cost recovery, and DOE loan-guarantee conditions.
- How much of the earnings increase is attributable to tax benefits, weather, revenue-recognition timing, and other nonrecurring items.
- Execution and regulatory approvals for the announced asset sales, actual proceeds, and use of proceeds.
- Near-term debt maturities, commercial-paper levels, credit availability, and the effect of ratings or regulatory decisions on financing costs.
- Final Kemper closure and reclamation costs, and outcomes of material legal and regulatory proceedings.