Southern Company — Q3 2010 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2010; filed November 5, 2010. The combined filing covers Southern Company and its utility and generation subsidiaries. Financial amounts below are consolidated Southern Company unless otherwise noted; unaudited.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenue | $5.320 billion | $4.681 billion | $13.685 billion | $12.233 billion |
| Operating income | $1.459 billion | $1.415 billion | $3.332 billion | $2.791 billion |
| Net income after subsidiary preferred dividends | $817 million | $790 million | $1.822 billion | $1.394 billion |
| Diluted EPS | $0.97 | $0.99 | $2.19 | $1.76 |
| Cash dividends per common share | $0.4550 | $0.4375 | $1.3475 | $1.2950 |
- Revenue increased 13.6% in Q3 and 11.9% year to date. Retail revenue growth reflected weather, rate changes, fuel-cost recovery, and stronger industrial sales; fuel recovery generally offsets fuel expense and does not materially increase earnings.
- Net income after subsidiary preferred dividends rose 3.5% in Q3 but diluted EPS declined from $0.99 to $0.97, alongside higher average shares outstanding. Year-to-date earnings rose 30.7%, primarily because 2009 included a $202 million MC Asset Recovery settlement charge, as well as weather, rate and sales effects.
- Operating margin was approximately 27.4% in Q3 versus 30.2% a year earlier, and 24.3% year to date versus 22.8%. Higher fuel, operations and maintenance, and depreciation costs affected quarterly results.
- For the first nine months, operating cash flow was $3.527 billion, investing cash outflow was $3.006 billion, and financing cash inflow was $48 million. Property additions were $2.894 billion. Cash and cash equivalents ended September at $1.259 billion.
- At September 30, total current assets were $6.609 billion and current liabilities $5.994 billion. Long-term debt was $18.198 billion; securities due within one year were $1.984 billion and notes payable were $348 million.
- Southern Company reported $4.780 billion of unused committed bank credit and approximately $1.3 billion of cash and cash equivalents. Management described financial condition as stable and said working-capital needs could be met with cash, credit lines and commercial paper.
Material changes and management commentary
- Year-to-date earnings benefited significantly from the absence of the prior-year $202 million settlement charge. Other reported drivers included warmer second- and third-quarter weather, colder first-quarter weather, Alabama rate increases, and higher industrial sales.
- Weather-adjusted retail energy sales increased 1.4% in Q3 and 2.5% year to date. Industrial sales were stronger, while commercial sales declined modestly.
- Operations and maintenance expense rose $200 million in Q3 and $324 million year to date. The Q3 increase included a $40 million additional Alabama Power natural-disaster reserve accrual. Depreciation and amortization rose $95 million in Q3, partly reflecting added plant and lower Georgia Power cost-of-removal liability amortization.
- Southern Company issued $610 million of common stock in the first nine months and $2.796 billion of long-term debt, while redeeming $1.871 billion of long-term debt. Approximately $2 billion was expected to be needed through September 2011 for debt maturities and announced repurchases or redemptions.
- Moody’s downgraded Southern Company’s senior unsecured rating to Baa1 from A3 and its short-term rating to P-2 from P-1; Fitch revised Southern Company’s outlook to negative. Management noted that a downgrade could affect capital-market access and, under specified ratings, collateral requirements.
Outlook, significant projects and risks
- The filing gives no specific consolidated earnings or EPS guidance. Management emphasized uncertainty around economic recovery, electricity demand, weather, fuel costs, regulatory cost recovery, capital-market access and construction spending.
- Georgia Power requested a $615 million annual base-rate increase effective January 2011, based on a proposed 11.95% retail return on equity. Georgia PSC Staff proposed a $436 million increase using a 10.5% return and opposed several proposed recovery tariffs. The final outcome was pending; the Commission’s order was scheduled for December 21, 2010.
- Georgia Power filed for an approximately $218 million annual tariff increase, effective January 2011, to recover financing costs for Plant Vogtle Units 3 and 4. Construction, licensing and legal challenges remain; management said known design-review concerns were not then expected to alter projected commercial-operation dates.
- Mississippi Power’s Kemper IGCC project received state certification, with a construction cost cap of up to $2.88 billion subject to prudence review for costs above $2.4 billion and specified exemptions. The company reported $195.5 million spent through September 30. DOE grants total $270 million, and the IRS allocated $279 million in Phase II tax credits; eligibility depends on project timing and other requirements, including capturing and sequestering at least 65% of carbon dioxide. Appeals, permitting and cost-recovery issues remain unresolved.
- Environmental regulation could require substantial additional compliance spending, including rules concerning air emissions, greenhouse gases and coal-combustion byproducts. Management warned that unrecovered costs could affect earnings, cash flow, financial condition and generation decisions.
- EPA New Source Review litigation against Alabama Power narrowed to three remaining claims, with any trial set for October 2011. Other carbon-dioxide litigation and tax matters also remain unresolved. The filing states that outcomes and potential effects are uncertain.
- Tax timing items include an estimated $243 million positive 2010 cash-flow effect from a repair-cost tax accounting change, subject to IRS review, and an estimated $309 million reduction in 2010 tax payments from bonus depreciation. The filing records an unrecognized tax benefit for the repair-cost method change.
- Alabama Power’s approved change to nuclear-outage accounting is expected to reduce reported 2011 outage expense by approximately $50 million, with deferred costs amortized in later periods.
Important facts for investors to verify
- Whether Georgia Power’s requested rate increase and proposed cost-recovery mechanisms are approved, and the resulting customer, earnings and cash-flow effects.
- Kemper IGCC and Plant Vogtle final costs, construction schedules, cost recovery, financing, grant and tax-credit conditions, and legal or regulatory outcomes.
- How much earnings growth reflects recurring operations versus weather, regulatory accounting and the prior-year settlement comparison; also monitor share dilution and EPS.
- Environmental compliance exposure and the ability of subsidiaries to recover prudent costs through rates.
- Debt maturities, rating developments, available credit facilities and potential collateral needs; assess liquidity alongside the large construction program.
- IRS review and ultimate realization of repair-method tax benefits, bonus depreciation and disputed Georgia state tax credits.