01—Abstract
Summary
Summary of the 10-K filed February 25, 2009. Cited figures are marked; the original filing is the authoritative source.
Southern Company's 2008 Form 10-K (filed February 25, 2009) reports consolidated net income of $1.74 billiona, essentially flat versus 2007 ($1.73 billion), with basic EPS of $2.26 (diluted $2.25) versus $2.29 (diluted $2.28) in 2007.
Results were pressured by milder summer weather, higher non-fuel O&M and depreciation, and a $83 millionb after-tax charge (11 cents per share) for settling the IRS SILO leveraged lease litigation. Excluding that charge, EPS was $2.37 against a $2.37 target, and the company points to retail rate increases under Alabama's Rate RSE and Georgia's 2007 Retail Rate Plan as supporting growth. Retail energy sales fell 2.1% as the economy weakened, with industrial sales down 3.7%, and fuel and purchased power costs rose 20% to $7.6 billion, though fuel costs are largely passed through to customers.
The company faces a large construction and regulatory agenda: a 2009 construction budget of about $5.7 billionc, including $1.4 billion of environmental spending, plus proposed new nuclear units at Plant Vogtle 3 and 4 (Georgia Power's share about $6.4 billion, with in-service targets of 2016 and 2017), and the proposed $2.2 billion Kemper County IGCC plant. Major overhangs include EPA New Source Review litigation, the Mirant bankruptcy-related MC Asset Recovery suit seeking over $2 billion (partially resolved in early 2009), carbon dioxide nuisance suits, and FERC market-power proceedings.
Dividends rose to $1.6625d per share in 2008, and the company has increased its quarterly dividend for 245 consecutive quarters, with a stated payout target of 65% to 70% (actual 2008 payout was 73.5%). For investors, the central themes are steady regulated earnings and dividend growth, offset by a heavy capital program, rising fuel and environmental costs, a weak near-term sales outlook, and significant legal and regulatory uncertainty.
02—Key points
Key Highlights
- Net income of $1.74 billion (up $8 million) and basic EPS of $2.26 versus $2.29 in 2007; EPS excluding the $83 million SILO leveraged lease charge was $2.37, meeting its target.
- Retail electric operating revenues rose 11% to $14.1 billion on rate increases under Alabama Rate RSE and Georgia's 2007 Retail Rate Plan, plus higher fuel recovery, but retail energy sales fell 2.1% on the economic slowdown.
- Fuel and purchased power expense rose 20% to $7.6 billion, largely passed through to customers under fuel clauses, with the average cost of generated fuel up 20% year over year.
- 2009 construction program estimated at $5.7 billion (about $1.4 billion environmental), with 2010 and 2011 estimates of $5.1 billion and $5.8 billion.
- Proposed Plant Vogtle Units 3 and 4 (about 2,200 MW combined) with Georgia Power's share about $6.4 billion; Georgia PSC certification decision expected March 2009. The Kemper County IGCC plant (582 MW, about $2.2 billion) was also filed with Mississippi PSC.
- Dividend increased to $1.6625 per share for 2008 (245th consecutive quarterly dividend at or above the prior level); the 73.5% payout ratio exceeded the company's 65% to 70% target.
- Significant legal exposure: EPA New Source Review suits, carbon dioxide nuisance cases, and the MC Asset Recovery suit seeking over $2 billion related to the Mirant spin-off, which was partly resolved in February 2009.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 25, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $17.13B$15.35B | +11.6% |
| Operating Expenses | $13.62B$12.03B | +13.3% |
| Operating Income | $3.51B$3.33B | +5.4% |
| Net Income | $1.81B$1.73B | +4.2% |
| EPS (Basic) | $2.26$2.29 | −1.3% |
| EPS (Diluted) | $2.25$2.28 | −1.3% |
| Shares Outstanding (Basic) | 771.00M756.00M | +2.0% |
| Shares Outstanding (Diluted) | 775.00M761.00M | +1.8% |
05—Questions
Frequently Asked Questions
Did Southern Company's earnings grow in 2008?
Only marginally. Net income rose $8 million to $1.74 billion, but basic EPS fell to $2.26 from $2.29 because of a higher share count. Excluding an $83 million after-tax charge tied to the IRS SILO litigation settlement, EPS would have been $2.37, which management says met its target. Rate increases were offset by milder summer weather, higher depreciation, and higher non-fuel operating costs.
How is the company's dividend holding up?
Southern paid $1.6625 per share in 2008, up from $1.595 in 2007, and declared 42 cents per share for the first quarter of 2009, the 245th consecutive quarter of a dividend equal to or higher than the prior quarter. However, the 2008 payout ratio of 73.5% (70.1% excluding the SILO charge) is above the stated 65% to 70% target, and management noted the need to fund a large construction program.
What are the biggest capital needs and risks ahead?
The company expects about $5.7 billion of construction spending in 2009. Key projects include the proposed Vogtle nuclear expansion, which requires Georgia PSC certification and NRC approval, and the Kemper County coal gasification plant. Environmental compliance adds about $1.4 billion in 2009. A pension trust contribution could be significant as early as 2011, and the company has a heavy reliance on debt and commercial paper for funding.
How much exposure does the company have from the Mirant litigation?
MC Asset Recovery, a Mirant creditor vehicle, seeks monetary damages of more than $2 billion plus interest in a fraudulent-transfer and illegal-dividend suit. On February 5, 2009, the court denied Southern's summary judgment motion on certain fraudulent conveyance and dividend claims but granted it on others, including restitution and alter ego claims. Management believes the claims lack merit, but the ultimate outcome cannot be determined.
Is the company exposed to weak demand?
Yes. Retail energy sales fell 2.1% in 2008, with industrial sales down 3.7% and residential sales down 2.0% as the economy slowed and weather was milder. Management expects recessionary conditions to weigh on sales growth and wholesale capacity revenues at Southern Power in the near term, and it cannot predict the timing of recovery.
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