Southern Company 10-Q Summary
Business context and reporting period. This combined, unaudited Form 10-Q covers Southern Company and its utility and power subsidiaries for the quarter and nine months ended September 30, 2015. The core business is regulated electricity sales in the Southeast, alongside Southern Power’s wholesale generation business. Comparisons below are against the corresponding 2014 periods.
Financial performance and position
| Metric | Third quarter 2015 | Nine months 2015 |
|---|---|---|
| Operating revenue | $5.40 billion, up 1.2% | $13.92 billion, down 3.7% |
| Operating income | $1.65 billion, up 29.1% | $3.70 billion, up 20.2% |
| Net income after subsidiary preferred dividends | $959 million, up 33.6%; diluted EPS $1.05 vs. $0.80 | $2.10 billion, up 24.8%; diluted EPS $2.30 vs. $1.87 |
| Operating margin | 30.5% vs. 23.9% | 26.6% vs. 21.3% |
| Operating cash flow | Not presented by quarter in the supplied text | $5.09 billion vs. $4.69 billion |
| Investing cash flow | Not presented by quarter in the supplied text | $(4.88) billion vs. $(4.16) billion |
| Financing cash flow | Not presented by quarter in the supplied text | $191 million vs. $225 million |
At September 30, cash and cash equivalents were $1.11 billion. Total assets were $75.22 billion; current assets were $6.27 billion and current liabilities $9.69 billion. Long-term debt was $22.33 billion, with $3.31 billion of securities due within one year and $1.49 billion of notes payable. The common dividend was $0.5425 per share for the quarter, up from $0.5250. The filing describes Southern Company’s financial condition as stable, while noting current liabilities exceeded current assets primarily because of debt maturities.
Material changes and key developments
- Lower Kemper IGCC cost-overrun charges and higher retail base rates were the main drivers of consolidated earnings growth. Kemper charges were $150 million pre-tax in Q3 2015 versus $418 million in Q3 2014, and $182 million year to date versus $798 million.
- Retail revenue rose 3.1% in Q3 but fell 1.9% year to date. Lower fuel-cost recovery revenue and lower wholesale revenue weighed on the year-to-date comparison; fuel-cost recovery generally offsets fuel expense and primarily affects cash flow.
- Non-fuel operations and maintenance expense increased $76 million in Q3 and $294 million year to date, including higher employee benefits and generation costs, as well as $11 million of merger-related costs.
- Southern Power’s attributable net income rose to $102 million in Q3 from $64 million and to $181 million year to date from $128 million, supported by new power purchase agreements and tax credits, including from solar projects.
- Georgia Power recorded a $75 million out-of-period reduction in retail revenue in Q2 related to billing errors affecting a small number of commercial and industrial customers; net income decreased about $47 million. The company concluded the error was not material to affected periods.
Outlook, risks, contingencies, and unusual items
- Kemper IGCC: Mississippi Power’s total current project estimate was $6.43 billion, including $5.11 billion in costs subject to the $2.88 billion cost cap, net of DOE grants and excluding specified exceptions. Southern Company had recorded $2.23 billion in cumulative pre-tax charges through September 30 for estimated costs above the cap. The remaining gasification facilities were expected in service in the first half of 2016, but the company anticipated the date could fall after April 19, 2016, potentially requiring repayment of about $235 million of utilized tax credits. Beyond June 2016, estimated additional base costs were $25–$30 million per month, plus other carrying and project costs. Further cost changes could be material.
- Kemper recovery and liquidity: A Mississippi Supreme Court decision required termination of the Mirror CWIP rate and refunds of collections. Refunds of about $369 million, including carrying costs through September 30, were scheduled to begin in November. Interim rates designed to collect about $159 million annually were approved subject to refund; a final order was scheduled by December 8, 2015. Mississippi Power had $500 million of notes payable, $429 million of securities due within one year, and material upcoming loan maturities and refund obligations; it relied substantially on Southern Company for financing.
- Plant Vogtle: Current expected in-service dates for Units 3 and 4 were Q2 2019 and Q2 2020. An October 2015 settlement term sheet proposed revised completion dates and about $350 million of payments by Georgia Power based on its ownership share, including about $120 million already paid. Settlement depended on Westinghouse’s proposed acquisition of the contractor’s construction subsidiary; if that acquisition failed, litigation and potentially substantial claims could continue. Construction costs, schedule, licensing, and rate recovery remain risks.
- AGL Resources merger: The announced cash acquisition was expected to require about $8.2 billion, including purchase consideration and financing and transaction costs, and Southern Company would assume AGL Resources’ debt. Southern Company planned approximately $7 billion of debt and $1 billion of equity initially, plus about $2 billion of additional equity through 2019. An $8.1 billion bridge facility was available if long-term financing was unavailable; it was undrawn at September 30. Completion, expected in the second half of 2016, depended on shareholder and regulatory approvals and other conditions. Ratings outlooks were weakened following the announcement, and shareholder litigation was pending.
- Other risks: The filing identifies environmental compliance costs and recovery, coal ash retirement obligations, proposed CO₂ and water rules, FERC market-power proceedings, fuel and electricity demand variability, construction execution, and access to capital as material uncertainties. Southern Company recorded about $700 million of incremental CCR-related asset retirement obligations in Q2. Credit rating downgrades during 2015 included Mississippi Power and Southern Company; management reported compliance with bank covenants.
Most important facts for investors to verify
- Updated Kemper cost-to-complete, commissioning timetable, cost-cap exposure, final rate recovery, Mirror CWIP refunds, and status of the $235 million tax-credit contingency.
- Whether the Vogtle settlement and contractor acquisition closed, whether the revised schedule and Georgia Power payment were finalized, and any subsequent project cost or licensing changes.
- Merger approval status, final financing mix and terms, total assumed AGL Resources debt, and implications for Southern Company’s credit ratings and leverage.
- Mississippi Power’s ability to refinance 2016 maturities and fund refunds and construction, including expected support from Southern Company.
- Updated environmental compliance and CCR obligations, regulatory recovery decisions, and the outcome of FERC market-based-rate proceedings.
- Resolution and customer or earnings impact of Georgia Power’s billing correction; the filing states it was not material to the affected periods.