01—Abstract
Summary
Summary of the 10-K filed February 25, 2010. Cited figures are marked; the original filing is the authoritative source.
Southern Company (SO) reported its 2009 annual results in this 10-K filed February 25, 2010.
The Company is a holding company whose primary business is electricity sales in the Southeast through four traditional operating companies (Alabama Power, Georgia Power, Gulf Power, Mississippi Power) and Southern Power, a wholesale generation subsidiary. Net income after preferred dividends was $1.64 billiona in 2009, down $99 million from 2008, and basic EPS was $2.07 versus $2.26 a year earlier. The decline was driven largely by a $202 million charge to settle litigation with MC Asset Recovery (tied to the Mirant bankruptcy), lower kilowatt-hour demand from the recession, and unfavorable weather.
Excluding the settlement, EPS was $2.32b. The dividend payout ratio was 83.3% for 2009 (74.2% excluding the settlement), above the company's stated 65%-70% target, and the 2009 dividend was $1.7325 per share. The filing highlights substantial forward capital spending: the construction program is estimated at $4.9 billion in 2010, $5.3 billion in 2011, and $6.2 billion in 2012, including new nuclear units at Plant Vogtle, the proposed Kemper County IGCC plant, and environmental controls.
Georgia Power's Vogtle 3 and 4 project was certified at a $6.4 billionc in-service cost, and the DOE offered a conditional loan guarantee of roughly $3.4 billion. Key risks include EPA New Source Review litigation, pending federal greenhouse gas and coal combustion byproduct regulation, rising pension and medical costs, and dependence on regulatory recovery of fuel and storm costs.
Credit ratings remained investment grade, with Moody's revising Southern Company's outlook to negative in September 2009. For investors, the key tradeoff is a stable, regulated earnings base and a long dividend record (249th consecutive quarterly dividend declared in January 2010) against elevated capital needs, a payout ratio above target, and meaningful environmental and nuclear-construction risk.
02—Key points
Key Highlights
- 2009 net income after preferred dividends of $1.64 billion, down $99 million (about 5.7%) from 2008; basic EPS $2.07 vs. $2.26; EPS excluding the $202 million MC Asset Recovery settlement was $2.32.
- Electric operating revenues fell 8.0% to $15.6 billion, driven by lower kilowatt-hour sales (down 6.8% total energy sales) amid the recession and unfavorable weather.
- Dividend payout ratio of 83.3% for 2009 (74.2% excluding the settlement) exceeded the company's 65%-70% target; the quarterly dividend was raised to $0.4375 per share.
- Construction program estimated at $4.9B (2010), $5.3B (2011), and $6.2B (2012), including new Vogtle nuclear units, the Kemper IGCC project, and environmental compliance spending.
- DOE offered Georgia Power a conditional loan guarantee of up to about $3.4 billion for Plant Vogtle Units 3 and 4, subject to NRC licensing and other conditions.
- Environmental and regulatory exposure remains significant, including EPA New Source Review suits against Alabama and Georgia Power, pending greenhouse gas and coal combustion byproduct rules, and possible unit retirements.
- Credit ratings remain investment grade; Moody's revised Southern Company's outlook to negative in September 2009 while S&P and Fitch maintained stable outlooks.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 25, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $15.74B$17.13B | −8.1% |
| Operating Expenses | $12.47B$13.62B | −8.4% |
| Operating Income | $3.27B$3.51B | −6.8% |
| Net Income | $1.71B$1.81B | −5.5% |
| EPS (Basic) | $2.07$2.26 | −8.4% |
| EPS (Diluted) | $2.06$2.25 | −8.4% |
| Shares Outstanding (Basic) | 795.00M771.00M | +3.1% |
| Shares Outstanding (Diluted) | 796.00M775.00M | +2.7% |
05—Questions
Frequently Asked Questions
Why did Southern Company's earnings decline in 2009?
Net income fell $99 million mainly because of a $202 million charge to settle the MC Asset Recovery litigation, along with lower retail and wholesale sales from the recession, unfavorable weather, and higher depreciation and interest expense. Partial offsets came from higher customer charges at Alabama Power, increased environmental cost recovery at Georgia Power, lower operations and maintenance costs, and higher non-taxable AFUDC equity.
Is the dividend sustainable given the high payout ratio?
The 2009 payout ratio of 83.3% (74.2% excluding the settlement) is above the stated 65%-70% target. The company has paid dividends since 1948 and raised its quarterly dividend to $0.4375 per share, its 249th consecutive quarter of non-decreasing dividends. Continued dividend growth depends on recovering rising costs through rates and on earnings recovering from the 2009 recession-related decline.
What are the biggest capital spending commitments?
Southern Company's construction program is estimated at $4.9 billion in 2010, $5.3 billion in 2011, and $6.2 billion in 2012. Major projects include two new AP1000 nuclear units at Plant Vogtle (certified at a $6.4 billion in-service cost, reduced to about $4.4 billion after Georgia's financing act), the proposed Kemper County IGCC plant, and environmental controls such as scrubbers.
What environmental risks could affect the company's financials?
The EPA has filed New Source Review civil actions against Alabama Power and Georgia Power, and proposed greenhouse gas regulation and coal combustion byproduct rules could require substantial spending or early retirement of coal units. The company says these costs could be substantial, but it expects most compliance costs to be recovered through regulated rates, and the outcome cannot yet be determined.
How strong is the company's financing position?
The company had about $690 million in cash and $4.8 billion of unused bank credit at year-end 2009, and it accessed equity markets, including about $613 million net from at-the-market issuances. Its credit ratings are investment grade, though Moody's moved the outlook to negative. Long-term debt was about $18.1 billion excluding current maturities, and the common equity ratio was about 43.6%.
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