Business Context and Reporting Period
This Form 10-Q is a combined quarterly report filed by The Southern Company and its subsidiary operating companies (Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, and Southern Power) for the period ended March 31, 2005. The Southern Company is a holding company for electric utilities serving the Southeastern United States. The report includes unaudited financial statements and management discussion and analysis for the consolidated entity and individual subsidiaries.
Key Financial Metrics (Consolidated)
| Metric | Q1 2005 | Q1 2004 |
|---|---|---|
| Total Operating Revenues | $2,864.5 million | $2,732.3 million |
| Operating Income | $569.1 million | $623.1 million |
| Consolidated Net Income | $323.0 million | $331.1 million |
| Diluted Earnings Per Share | $0.43 | $0.45 |
| Net Cash from Operating Activities | $170.8 million | $307.3 million |
| Net Cash Used for Investing Activities | ($551.2 million) | ($552.4 million) |
| Net Cash from Financing Activities | $389.0 million | $259.3 million |
| Cash and Cash Equivalents (End of Period) | $381.8 million | $325.5 million |
| Total Assets | $37,290.0 million | $36,962.1 million |
| Long-Term Debt | $10,655.5 million | $10,488.1 million |
Material Changes vs. Prior Period
- Earnings Decline: Consolidated net income decreased by $8.2 million (2.5%) primarily due to milder weather reducing energy sales, the expiration of certain provisions in Georgia Power's 2001 Retail Rate Plan, and higher non-fuel operation and maintenance costs.
- Revenue Growth: Total operating revenues increased by $132.1 million (4.8%). Retail revenues rose 5.8% driven by base rate increases and customer growth, partially offset by a 0.8% decrease in kilowatt-hour sales due to weather.
- Expense Increases:
- Fuel Expense: Increased $82.6 million (9.8%) due to a 10.7% rise in the average unit cost of fuel.
- Depreciation and Amortization: Increased $52.0 million (21.6%) largely due to the expiration of a credit to amortization expense under Georgia Power's 2001 Retail Rate Plan.
- Maintenance: Increased $56.6 million, including $45 million recorded by Alabama Power to restore its natural disaster reserve following Hurricane Ivan.
- Cash Flow: Net cash provided by operating activities decreased $136.5 million, primarily due to higher fuel costs (recoverable in future periods) and changes in working capital.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Dividends: The quarterly dividend was $0.3575 per share. In April 2005, the dividend was increased to $0.3725 per share.
- Capital Projects: Significant construction continues on Plant McIntosh Units 10 and 11 (Georgia Power and Savannah Electric).
- Acquisition: On April 8, 2005, Southern Power agreed to acquire Oleander Power Project for approximately $206 million, subject to regulatory approval.
Regulatory and Environmental Risks
- Environmental Regulations: The EPA issued final rules for Clean Air Interstate Rule (SO2/NOx) and Clean Air Mercury Rule. The financial impact depends on state implementation and legal challenges.
- Fuel Cost Recovery: Georgia Power filed for an 11.8% fuel cost recovery rate increase to address $455.4 million in under-recovered costs. Alabama Power increased its fuel billing factor in April 2005.
- Storm Damage: Gulf Power received approval to recover $51.7 million in Hurricane Ivan reserve deficiencies over 24 months.
- FERC Proceedings: A FERC proceeding regarding generation dominance in the retail service territory may require cost-based rates for certain wholesale sales if default mitigation measures are applied.
Contingencies and Unusual Items
- Mirant Litigation: Mirant Corporation (in bankruptcy) disclosed potential litigation against Southern Company to recover transfers made between 1999 and 2001. Southern Company intends to vigorously defend against these claims.
- Plant Wansley Litigation: Georgia Power is appealing a District Court order related to environmental litigation at Plant Wansley.
- Savannah Electric Restatement: Prior period financial statements for Savannah Electric were restated due to errors in unbilled revenue estimates. Controls were revised in February 2005.
Investor Verification Checklist
- Fuel Cost Recovery Status: Verify the outcome of Georgia Power's fuel rate case (expected May 2005) and the impact of the $455.4 million under-recovery.
- Environmental Compliance Costs: Monitor the implementation of the EPA's Clean Air Interstate Rule and Mercury Rule and their effect on capital expenditures.
- Mirant Litigation Outcome: Track the status of Mirant's bankruptcy proceedings and any filed lawsuits regarding intercompany transfers.
- FERC Market-Based Rate Authority: Assess the final FERC ruling on generation dominance and potential shifts from market-based to cost-based wholesale rates.
- Weather Sensitivity: Evaluate the impact of weather normalization on Q2 and full-year earnings projections given the Q1 decline.