Southern Company — Q2 2018 Form 10-Q Summary
Business context and reporting period
Southern Company filed this unaudited, combined Form 10-Q for the quarter and six months ended June 30, 2018. It covers the parent and its electric utilities, Southern Power, and Southern Company Gas. Comparisons are with the corresponding 2017 periods. Results are affected by seasonal energy demand and material construction and disposition activity.
Financial performance and liquidity
- Revenue: Q2 operating revenue was $5.63 billion, up $197 million year over year; first-half revenue was $12.00 billion, up $797 million. Q2 retail electric revenue declined 1.0% to $3.74 billion, while first-half retail electric revenue increased 1.9% to $7.31 billion. Higher “other revenues” largely reflected PowerSecure’s Puerto Rico storm-restoration work.
- Earnings: Q2 net loss attributable to Southern Company was $154 million ($0.15 per share), versus a $1.38 billion loss ($1.38 per share) in Q2 2017. First-half attributable net income was $784 million ($0.77 per share), versus a $723 million loss ($0.73 per share) in 2017. The comparison primarily reflects the much larger 2017 Kemper IGCC charges, partly offset in 2018 by a $1.06 billion pre-tax Vogtle charge.
- Operating income and costs: Q2 operating income was $63 million, compared with an operating loss of $1.65 billion a year earlier; first-half operating income was $1.44 billion versus a $397 million loss. Q2 interest expense rose 10.8% to $470 million. First-half interest expense rose 10.5% to $928 million, largely due to higher average debt.
- Cash flow: First-half cash from operations was $3.26 billion, up from $2.74 billion in 2017. Investing used $3.62 billion, including $3.83 billion of property additions; financing provided $236 million. Cash, cash equivalents, and restricted cash ended at $2.02 billion.
- Debt and liquidity: At June 30, the balance sheet reported $42.48 billion of long-term debt, $2.24 billion of debt due within one year, and $4.98 billion of notes payable. Current liabilities exceeded current assets by $2.75 billion. The company cited operating cash flow and access to credit markets and bank facilities as sources of liquidity; approximately $8.10 billion of committed credit arrangements was unused.
- Dividend and equity: The quarterly common dividend was $0.60 per share, compared with $0.58 in 2017. Common shares outstanding were approximately 1.014 billion at quarter-end.
Material changes and significant items
- Vogtle nuclear construction: Georgia Power raised its project capital cost forecast to $8.4 billion, net of the $1.7 billion Toshiba settlement and $188 million of customer refunds. The forecast includes $8.0 billion of base costs and $0.4 billion of contingency; remaining estimated capital cost was $4.4 billion, excluding approximately $350 million of expected capitalized financing costs. Unit 3 and Unit 4 are forecast to enter service in November 2021 and November 2022. Georgia Power does not intend to seek recovery of the $0.7 billion increase in base costs and recorded a $1.06 billion pre-tax ($0.8 billion after-tax) charge. Owners holding at least 90% of project interests were expected to vote on continuing construction in Q3 2018.
- Kemper: The 2017 comparison included approximately $3.0 billion of Q2 charges related to the suspended Kemper IGCC project. Mississippi Power recorded $45 million of first-half 2018 charges for mine and gasifier-related abandonment and closure work; additional closure costs were estimated at up to $25 million pre-tax through 2019.
- Asset-retirement obligations: Alabama Power increased its coal-ash closure obligation by approximately $1.2 billion following revised studies; Alabama Power also recorded an approximately $300 million increase for Plant Farley nuclear decommissioning. Further ash-pond cost revisions, including at Georgia Power, could be material.
- Dispositions: Southern Company agreed to sell Gulf Power for $5.75 billion less debt assumed at closing, estimated at about $1.4 billion; closing was expected in the first half of 2019, subject to approvals. Southern Power sold a 33% interest in its solar partnership for approximately $1.2 billion and recorded a $119 million impairment on Florida generating plants pending their sale. Southern Company Gas sold Pivotal Home Solutions in June, recording a $76 million net loss including tax expense, and completed sales of three gas utilities after quarter-end.
- Tax and regulatory actions: Tax Reform-related customer refunds and revenue deferrals reduced certain utility revenues, while the lower federal tax rate reduced tax expense. Alabama, Georgia, Gulf, and gas utility regulators also approved capital-structure or rate arrangements intended in part to address credit metrics.
Outlook, risks, and contingencies
- The filing provides no consolidated earnings-per-share guidance. Southern Company estimated system construction spending of $8.8 billion in 2018, followed by $8.2 billion in 2019, with substantial ongoing investment in Vogtle, environmental compliance, and utility infrastructure.
- Vogtle is the principal execution and recoverability risk: construction costs or timing could worsen, cost recovery remains uncertain, and failure to obtain the required owner vote could stop the project. Each additional month of delay was estimated to add about $50 million of base capital costs and $12 million of AFUDC to Georgia Power’s share.
- Other notable exposures include the approximately $143 million claim in Martin Product Sales’ Kemper-related arbitration; unresolved Vogtle-related appeals; uncertain future coal-ash closure costs and environmental requirements; and a FERC complaint seeking to reduce the traditional utilities’ 11.25% transmission ROE to no more than 8.65% and obtain refunds.
- Management identified weather, customer demand, fuel and commodity prices, interest rates, credit ratings, regulation, environmental compliance, project execution, and counterparties as factors that could affect results. A leveraged-lease exposure could reduce net income by approximately $86 million after tax if the lessee fails to meet payment obligations; management reported the investment was not impaired at June 30.
Important facts for investors to verify
- Progress on the Vogtle owner continuation vote, revised project costs and schedule, Georgia PSC recovery decisions, and availability of additional DOE-guaranteed financing.
- Whether estimated coal-ash and nuclear-decommissioning obligations change further, and the timing and regulatory recovery of related cash expenditures.
- Closing conditions, final proceeds, debt assumed, and regulatory approvals for Gulf Power and Southern Company Gas dispositions; also the financial effects of the Southern Power Florida plant sale.
- Cash generation, short-term borrowing needs, debt maturities, credit-rating developments, and the ability to fund the construction program while maintaining dividends.
- Outcomes of the Martin arbitration, Vogtle appeals, FERC transmission-ROE complaint, and other material regulatory or environmental proceedings.