Southern Company — Q1 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017, with comparison to Q1 2016. Southern Company is a regulated electric utility holding company with wholesale power, natural gas distribution and related businesses. The comparison is materially affected by the July 2016 acquisition of Southern Company Gas and the May 2016 acquisition of PowerSecure; those businesses were not included in the prior-year consolidated results for the full quarter.
Key financial metrics
- Revenue: $5.771 billion, up 44.6% from $3.992 billion. The increase primarily reflects Southern Company Gas and PowerSecure, as well as higher wholesale power revenue.
- Profit: Operating income was $1.306 billion, versus $940 million. Net income attributable to Southern Company was $658 million, or $0.66 per diluted share, compared with $489 million, or $0.53 per share. The increase in earnings included $239 million attributable to Southern Company Gas; results also benefited from renewable sales and tax credits, while absorbing higher interest and depreciation expense and Kemper charges.
- Margins: Operating margin was approximately 22.6%, versus 23.5%; net income attributable to Southern Company was approximately 11.4% of revenue, versus 12.3%. Acquisition-related changes in business mix limit comparability.
- Cash flow: Operating cash flow was $897 million, versus $878 million. Investing used $2.803 billion, including $1.020 billion for acquisitions and $1.488 billion for property additions. Financing provided $1.025 billion. Cash and equivalents ended the quarter at $1.094 billion, down from $1.975 billion at year-end.
- Debt and liquidity: Long-term debt was $42.786 billion; securities due within one year were $3.269 billion and notes payable were $2.818 billion. Current liabilities exceeded current assets by $3.9 billion, primarily due to upcoming debt maturities. Committed bank credit arrangements totaled $8.443 billion, of which $8.266 billion was unused. Approximately $3.3 billion of long-term debt maturities were due through March 31, 2018.
- Shareholder returns: Cash dividends were $0.56 per common share, up from $0.5425 in Q1 2016.
Material changes versus the prior comparable period
- Southern Company Gas contributed $1.530 billion of natural gas revenue and $239 million of attributable net income in Q1 2017; it was acquired after Q1 2016. Southern Power revenue rose with new renewable and natural gas facilities and higher short-term sales.
- Retail electric revenue increased only 0.5% to $3.394 billion. Rate and pricing increases were largely offset by milder weather and lower sales.
- Interest expense increased 69% to $416 million, primarily due to debt associated with the merger and growth investments. Depreciation and amortization rose to $716 million from $541 million.
- The company recorded $108 million of pre-tax estimated Kemper IGCC losses, versus $53 million a year earlier. Gulf Power also recorded a $32.5 million pre-tax write-down related to Plant Scherer Unit 3.
Outlook, commentary, risks and unusual items
- Plant Vogtle: Westinghouse and WECTEC filed for Chapter 11 bankruptcy on March 29, 2017. Georgia Power and the other owners said the contractor’s revised projected in-service dates—December 2019 for Unit 3 and September 2020 for Unit 4—were no longer achievable. A schedule, cost-to-complete and cancellation assessment was underway; incremental costs could materially exceed the value of the Toshiba guarantee. The interim work arrangement required Georgia Power, on behalf of the owners, to pay $5.4 million per week for specified services and cover certain contractor costs. Aggregate owner exposure under that arrangement and subcontractor lien actions was estimated at $470 million, including about $215 million attributable to Georgia Power; $245 million had been paid or accrued as of March 31.
- Kemper IGCC: Mississippi Power estimated total project cost at approximately $7.16 billion, with $5.75 billion subject to the cost cap; $6.93 billion had been incurred net of grants by March 31. The company expected the remaining plant to enter service by the end of May 2017, but continuing operating and system-integration challenges created schedule and cost risk. Further delay beyond May was estimated to add $25–$35 million per month in base costs, plus approximately $16 million monthly in AFUDC and $3 million monthly in other carrying, operating, consulting and legal costs. The required 2017 rate case was due by June 3; recovery of costs not currently in rates remained uncertain and could result in further material charges.
- Liquidity and credit: Management described consolidated financial condition as stable and expected access to operating cash flows, capital markets and bank facilities to support funding needs. Mississippi Power, however, expected maturities and capital needs to exceed its standalone resources and relied on Southern Company’s stated intent to provide loans or equity as needed. Moody’s downgraded Mississippi Power to Ba1; S&P revised the outlook for Southern Company and subsidiaries to negative, and Fitch placed Southern Company, Georgia Power and Mississippi Power on negative watch.
- Regulatory and legal matters: Gulf Power’s Florida rate-case settlement approved an estimated $54.3 million annual net customer impact beginning July 1, 2017 and included the Plant Scherer write-down. Southern Company and Mississippi Power faced litigation concerning Kemper, including a $100 million contract-related claim, and an SEC investigation concerning Kemper cost and schedule estimates and related controls. Management said the investigation was not expected to materially affect Southern Company’s financial statements, but outcomes of the broader matters remained uncertain.
- Demand and other uncertainties: Management cited weather, modest or declining electricity sales in some customer classes, economic conditions, fuel-price volatility, cost recovery, construction execution, environmental rules and potential tax reform as factors that could affect future results. The filing provides no consolidated earnings guidance or quantified full-year outlook.
Important facts for investors to verify
- Progress and updated cost, schedule, cancellation and funding assessments for Vogtle; the Contractor’s election regarding the construction agreement; and collectability of the Toshiba guarantee and Westinghouse letters of credit.
- Kemper’s sustained operating performance, final cost and in-service date, and the Mississippi PSC/FERC treatment of the 2017 rate case, deferred costs and any additional losses.
- Whether Southern Company Gas’s and PowerSecure’s contributions to earnings and cash generation persist, accounting for acquisition-related comparability and natural-gas market volatility.
- Upcoming debt maturities, refinancing and credit access, including Mississippi Power’s reliance on parent support and potential collateral requirements following ratings changes.
- Developments in the SEC investigation, Kemper-related litigation and regulatory proceedings, and any resulting financial statement or disclosure impact.