Business context and reporting period
Southern Company is a utility holding company with regulated electric utilities, wholesale power generation, and natural gas distribution and related businesses. This combined, unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022; comparisons are to the same 2021 periods unless noted. Results are seasonal and interim performance is not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenue | $8.378bn | $6.238bn | $22.232bn | $17.346bn |
| Operating income | $2.193bn | $1.723bn | $5.232bn | $4.029bn |
| Net income attributable to Southern Company | $1.472bn | $1.101bn | $3.611bn | $2.608bn |
| Diluted earnings per share | $1.35 | $1.03 | $3.36 | $2.44 |
| Net cash from operating activities | Not stated separately | Not stated separately | $5.017bn | $5.081bn |
- Revenue increased 34% in Q3 and 28% year to date; attributable net income rose 34% and 38%, respectively. Q3 operating margin was approximately 26.2% versus 27.6%; year-to-date margin was approximately 23.5% versus 23.2%.
- Management attributed earnings growth chiefly to lower after-tax Vogtle construction charges, higher retail electric revenues from rates, weather and sales growth, and higher gas revenues from rates and infrastructure investment. Higher non-fuel operating costs partly offset those gains.
- Fuel and purchased-power expenses increased $1.5bn in Q3 and $2.9bn year to date, largely from higher commodity costs and volumes. Much of these costs is recovered through regulated mechanisms and generally does not materially affect utility earnings, but recovery timing affects cash flow.
- Interest expense, net of capitalized amounts, was $511m in Q3 and $1.461bn year to date, up 13% and 8%, respectively. Management cited higher borrowings and interest rates.
- At September 30, cash, cash equivalents and restricted cash totaled $2.013bn. Current assets were $10.363bn versus current liabilities of $12.801bn, a $2.438bn shortfall. Unused committed bank credit was $7.596bn.
- Long-term debt was $50.427bn; securities due within one year were $3.241bn and notes payable were $1.398bn. Property additions were $5.502bn for the first nine months. Financing cash flow included $1.725bn from shares issued to settle Equity Unit purchase contracts. Common dividends paid were $2.166bn; the Q3 dividend was $0.68 per share.
Material changes and business developments
- Georgia Power’s Q3 net income rose to $858m from $536m, substantially reflecting lower Vogtle-related charges and higher retail revenues. The consolidated Vogtle line included a $70m credit in Q3 2022 versus a $264m charge in Q3 2021.
- Georgia Power’s share of the Vogtle Units 3 and 4 total project capital cost forecast was approximately $10.4bn, net of specified Toshiba receipts and customer refunds. Remaining estimated cost to complete at September 30 was $1.103bn. Unit 3 was projected for service by the end of Q1 2023 and Unit 4 by the end of Q4 2023.
- Southern Company Gas revenue rose, in part from higher gas-cost recovery and infrastructure-related rate increases. The comparison is affected by the July 2021 sale of Sequent and related 2021 gain and tax expense.
- Alabama Power completed its $179m acquisition of the Calhoun Generating Station on September 30, 2022. Southern Power placed the remaining capacity at its Garland and Tranquillity battery storage facilities in service during the first nine months.
- Southern Company issued approximately 25.2m common shares in August to settle Equity Unit purchase contracts. Shares outstanding at September 30 were approximately 1.089bn.
Outlook, commentary and risks
- The filing provides no consolidated full-year earnings or EPS guidance. Significant project and regulatory expectations include the Vogtle in-service dates and pending rate proceedings.
- Vogtle remains a major execution and cost-recovery risk. Construction productivity, labor availability, system turnover, testing, equipment performance, licensing and NRC review could delay completion. Each month of delay was estimated to add up to $15m of Georgia Power base capital costs for Unit 3 and $35m for Unit 4, plus related financing and other costs.
- Georgia Power settled its cost-sharing dispute with MEAG Power: MEAG retains its ownership interest, while Georgia Power expects to pay about $79m based on the current forecast and 20% of MEAG’s costs above that forecast. Separate OPC and Dalton litigation remains; Georgia Power could face up to approximately $300m of further pre-tax charges under the current forecast.
- Georgia Power’s 2022 base-rate filing requests increases of $889m in 2023, $107m in 2024 and $45m in 2025; the filing expected a Georgia PSC decision on December 20, 2022. Atlanta Gas Light sought a $53m annual increase, and Virginia Natural Gas sought $69m. Outcomes are uncertain.
- Alabama Power’s updated depreciation rates, effective January 1, 2023, were expected to increase annual depreciation expense by approximately $500m. Its higher fuel-cost recovery rate primarily increases cash recovery and is not expected to significantly affect net income.
- Management cited inflation, rising interest rates, supply-chain and labor constraints, possible recession, fuel-price volatility, weather, environmental compliance, and regulatory and litigation outcomes as factors that may affect costs, financing, demand and future results. Georgia Power had a $1.697bn deferred under-recovered fuel balance.
- Other notable uncertainties include a $28m Mississippi Power sales-and-use-tax assessment under appeal, a citizen suit challenging Alabama Power’s Plant Barry ash-pond closure plan, and Southern Company Gas’s planned sale of two storage facilities, for which it expected a fourth-quarter $125m pre-tax impairment charge.
Important facts for investors to verify
- Progress against the Vogtle Unit 3 and Unit 4 schedules, remaining cost forecast, recoverability of costs, and outcomes of the OPC and Dalton disputes.
- Decisions and effective dates for Georgia Power’s base-rate case and Southern Company Gas rate proceedings, along with actual fuel-cost recovery and related cash-flow timing.
- Debt refinancing needs, borrowing costs, credit ratings and continued access to committed credit; the filing reported current liabilities exceeding current assets by $2.438bn at the parent level.
- Whether the storage-facility sales close as expected and the amount and timing of the anticipated impairment.
- How inflation, commodity prices, regulatory requirements and the approximately $500m annual depreciation increase at Alabama Power affect future earnings and cash generation.