01—Abstract
Summary
Summary of the 10-K filed March 31, 1998. Cited figures are marked; the original filing is the authoritative source.
The Southern Company's 1997 Form 10-K reports consolidated net income of $972 milliona, or $1.42 per share, down from $1.127 billion ($1.68 per share) in 1996.
Management attributes the decline mainly to a $111 millionb after-tax windfall profits tax assessed on its UK subsidiary SWEB, plus higher financing costs for the non-traditional business. Excluding that tax, earnings were roughly $1.1 billion. Operating revenues rose 21.8% to $12.6 billion, driven by Southern Energy's energy trading and marketing and international acquisitions, while retail revenues slightly declined on milder weather and load-management rate migration.
The traditional core utility business remained stable, with cost controls and steady demand offsetting weather-driven residential sales declines. The company is pursuing a major expansion beyond regulated utilities. In 1997 it completed the roughly $2.1 billionc acquisition of Consolidated Electric Power Asia (CEPA), took a 26% stake in a German utility for about $820 million, and formed a trading joint venture with Vastar Resources effective January 1998.
Management expects these non-traditional investments to carry higher returns but also higher risk, with CEPA slightly dilutive near term. Capital spending is budgeted at about $2.0 billiond per year in 1998-1999 and $1.6 billion in 2000, and the company plans to issue additional equity in 1998. Dividends were raised to 33.5 cents per quarter in early 1998, and the common equity ratio fell to 38.6%.
Key risks include competition and restructuring in the utility industry, a pending appeal of the SEC order authorizing non-traditional investments, a potential $29 million after-tax charge tied to Georgia Power's Rocky Mountain plant, pending FERC equity-return proceedings, and Phase II Clean Air Act compliance. Year 2000 remediation is estimated at about $85 million.
02—Key points
Key Highlights
- Net income fell to $972 million ($1.42/share) from $1.127 billion ($1.68/share), largely due to an $111 million after-tax UK windfall profits tax on SWEB; ex-tax earnings were about $1.1 billion.
- Operating revenues rose 21.8% to $12.6 billion, reflecting Southern Energy's energy trading growth and international acquisitions, while regulated retail revenues slipped 0.2% on mild weather.
- Non-traditional expansion accelerated: CEPA acquired for about $2.1 billion, a 26% German utility stake for about $820 million, and a Vastar energy-marketing joint venture effective January 1998.
- Capital construction budget of $2.0 billion in 1998 and 1999, and $1.6 billion in 2000; company plans additional equity issuance in 1998 and invests roughly $3.8 billion of retained earnings in EWGs/FUCOs against a $3.8 billion ceiling.
- Dividend raised to $0.335 quarterly in early 1998 (annualized $1.34), the seventh consecutive annual increase; 1997 payout ratio was about 91.5%.
- Common equity ratio fell to 38.6% (incl. short-term debt) from 45.1%, while market-to-book reached 186%; year-end book value was $13.91 per share.
- Material contingencies include a pending appeal of the SEC order enabling non-traditional investment, a potential ~$29 million after-tax Rocky Mountain write-off, FERC equity-return refunds of up to about $194 million, and an expected ~$162 million IRS tax refund (about $76 million interest).
03—Questions
Frequently Asked Questions
Why did Southern Company's earnings decline in 1997?
Net income fell $155 million to $972 million. The main driver was an $111 million after-tax windfall profits tax imposed on SWEB, the UK distribution subsidiary. Higher financing costs for the non-traditional business and milder weather also weighed on results, partly offset by continued cost controls. Excluding the UK tax, earnings were about $1.1 billion.
How significant is the non-traditional business to Southern Company's future?
It is becoming substantial. Southern Energy's assets reached about $11 billion at year-end 1997, and it contributed roughly 10% of consolidated net income excluding the windfall tax. Management sees potential for returns above those of rate-regulated operations, but acknowledges higher risk and expects heavy investment through 2000. Pending appeal of the SEC order that governs these investments is a key uncertainty.
Is the dividend sustainable given the heavy investment plans?
The company raised its quarterly dividend to 33.5 cents in early 1998, marking seven straight annual increases. The 1997 payout ratio was about 91.5% of reported earnings, which is high, though cash coverage was 2.8 times. Investors should watch whether earnings recover toward the approximately $1.1 billion underlying level and whether planned equity issuance dilutes per-share results.
What major capital and financing needs does the company face?
Construction spending is budgeted at about $2.0 billion in each of 1998 and 1999 and $1.6 billion in 2000, plus roughly $2.5 billion of debt maturities and sinking-fund requirements by 2000. Southern Energy projects are generally financed with equity from the parent plus non-recourse project debt. The company raised $360 million in common stock and about $1.3 billion in preferred securities during 1997 and plans further equity in 1998.
What are the main regulatory and litigation risks?
Key risks include: possible FERC refunds of up to about $194 million if equity returns are reduced; a potential roughly $29 million after-tax charge if the Georgia PSC's Rocky Mountain plant order is upheld on appeal; the appeal of the SEC order enabling non-traditional investments; appliance warranty litigation involving about 175,000 contracts; and Clean Air Act Phase II and new ozone standards that could require significant additional capital, largely recoverable through rates.
04—Continue