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SOUTHERN CO Annual Report, Year Ended Dec 31, 2004

Filing Date
Filed March 1, 2005
Period End
December 31, 2004
In the record · 2016–202610-K1110-Q328-K206

SO filed 11 annual reports (10-K), 32 quarterly reports (10-Q) and 206 current reports (8-K) between 2016 and 2026.

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01—Abstract

Summary

Summary of the 10-K filed March 1, 2005. Cited figures are marked; the original filing is the authoritative source.

Southern Company's 2004 Form 10-K (filed March 1, 2005, though management's report is dated February 28, 2005) covers a combined filing for the holding company and its seven operating subsidiaries.

The parent reported record 2004 net income of $1.53 billiona, up 3.9% from 2003, with basic EPS of $2.07 and a 15.4% return on equity against a 14.5% target. Electric operating revenues rose 6.7% to $11.5 billion, driven by retail sales growth of 3.6% and a 12.7% rise in average unit fuel cost, while operating income grew modestly. The company's core businesses are six retail and wholesale utilities serving roughly 4 million customers across the Southeast, with Southern Power operating about 4,775 MW of market-based generation under long-term contracts.

The main investor concerns are regulatory and environmental. FERC is examining Southern Company's generation dominance within its own retail territory, and new market-based sales there face refund risk. The EPA's New Source Review civil actions against Alabama Power, Georgia Power and Savannah Electric remain pending, and a carbon dioxide nuisance suit names Southern Company.

Fuel cost pressure is also building: Georgia Power's under-recovered fuel balance reached $390 millionb, prompting a request for an 11.7% fuel rate increase. Savannah Electric disclosed a material weakness in internal control over unbilled revenue estimates, which led to restated 2002 and 2003 results. Mirant-related bankruptcy claims and IRS disputes over leveraged leases and synthetic fuel credits add contingent exposure.

On the positive side, the company reversed a $37 millionc synthetic fuel tax reserve after an IRS audit closed, raised its dividend to $0.3575 per quarter, and reported 229 consecutive quarterly dividend increases or maintenances. Southern Company said it did not expect an equity offering in 2005 and was developing a share repurchase program to offset stock compensation issuances.

02—Key points

Key Highlights

  1. Record 2004 consolidated net income of $1.53 billion (+3.9%), basic EPS $2.07 versus $2.03 in 2003, and ROE of 15.4% above the 14.5% target.
  2. Electric operating revenues rose 6.7% to $11.5 billion on retail growth, while fuel and purchased power costs increased $624 million on higher gas and coal prices.
  3. FERC opened a proceeding on Southern Company's generation dominance in its retail territory; new market-based sales after February 27, 2005 are subject to refund to cost-based levels.
  4. Georgia Power requested an 11.7% fuel rate increase after under-recovered fuel costs reached $390 million as of January 31, 2005.
  5. Savannah Electric restated 2002–2003 results for unbilled revenue errors and reported a material weakness in internal controls.
  6. Pending EPA New Source Review suits, a carbon dioxide nuisance lawsuit, and Mirant bankruptcy-related claims create contingent liability risk.
  7. Quarterly dividend of $0.3575 per share declared, with a payout ratio of 68.2% against a 70% target; no equity issuance planned for 2005.

03—Questions

Frequently Asked Questions

  1. How strong was Southern Company's 2004 financial performance?

    Net income reached a record $1.53 billion, up 3.9%, with basic EPS of $2.07 and ROE of 15.4%, both ahead of internal targets. Growth came from higher retail energy sales and customer additions, though higher fuel costs partly offset gains.

  2. What are the biggest regulatory risks facing the company?

    FERC's review of generation dominance in Southern Company's retail service territory could force cost-based pricing on some wholesale sales, which may be lower than negotiated market rates. Rate outcomes at the Georgia PSC, including the pending fuel rate request, also drive near-term earnings.

  3. Does the company face environmental liabilities?

    Yes. EPA civil actions alleging New Source Review violations at coal plants remain open, with penalties of up to $32,500 per day per violation possible. Compliance spending on NOx, mercury, and fine particulate rules is expected to rise, and a carbon dioxide nuisance suit names Southern Company, though plaintiffs seek no damages.

  4. Are there any internal control or accounting issues?

    Savannah Electric identified errors in its unbilled revenue estimates dating back to 1999 and restated 2002 and 2003 financials. Management concluded the failure would constitute a material weakness, and it has changed its estimation methodology. Southern Company's own internal controls were judged effective.

  5. What is the dividend and capital allocation outlook?

    The company declared a $0.3575 quarterly dividend, its 229th consecutive quarter of payments equal to or above the prior quarter. It expects no equity offering in 2005 and is developing a share repurchase program to offset dilution from stock compensation plans.

04—Continue

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