01—Abstract
Summary
Summary of the 10-K filed February 25, 2011. Cited figures are marked; the original filing is the authoritative source.
Southern Company's 2010 Form 10-K (filed February 25, 2011) reports a stable year driven by weather-related demand, with consolidated net income after preferred dividends of $1.975 billiona, up from $1.643 billion in 2009, and basic EPS of $2.37 versus $2.07.
Revenue rose to $17.5 billionb from $15.7 billion, reflecting colder first and fourth quarters, warmer second and third quarters, and higher industrial sales. The company paid a quarterly dividend of 45.50 cents, and its payout ratio reached 76% against a targeted 70%. The filing highlights a heavy capital program: base construction spending of roughly $4.9 billion in 2011, $5.1 billion in 2012, and $4.5 billion in 2013, driven by Plant Vogtle Units 3 and 4 (nuclear), the Kemper IGCC in Mississippi, Southern Power's gas and biomass projects, and environmental retrofits.
Management flags material regulatory and environmental risks, including potential EPA rules on greenhouse gases, coal ash, and mercury (MACT) that could force unit retirements, an EPA New Source Review lawsuit against Alabama Power, and cost-cap and approval uncertainty for Kemper. Moody's downgraded Southern Company to Baa1 in August 2010, and the company's credit-rating sensitivity is a stated risk. For investors, the key takeaways are solid earnings growth and a dividend that exceeds the stated payout target, offset by rising capital needs, a potentially costly environmental compliance path, and project execution risk on new generation.
02—Key points
Key Highlights
- Consolidated net income after preferred dividends rose 20% to $1.975 billion in 2010 from $1.643 billion in 2009, driven by weather and rate increases.
- Basic EPS was $2.37 (diluted $2.36), up from $2.07 in 2009, and above the internal target range of $2.30 to $2.36.
- Operating revenues increased 10.9% to $17.456 billion; retail revenues rose to $14.8 billion, and wholesale revenues were $2.0 billion.
- Base construction program of approximately $4.9 billion (2011), $5.1 billion (2012), and $4.5 billion (2013), including Plant Vogtle 3 and 4 and the Kemper IGCC.
- Dividend of $1.8025 per share paid in 2010 (45.50 cents quarterly); the payout ratio of 76% exceeded the 70% target.
- Environmental exposure: $8.1 billion invested in retrofits through 2010, with potential incremental compliance costs of $74 million to $289 million in 2011 and up to $1.9 billion by 2013.
- Credit rating pressure: Moody's downgraded Southern Company to Baa1 in August 2010, and collateral requirements apply to certain contracts if ratings fall further.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 25, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $17.46B$15.74B | +10.9% |
| Operating Expenses | $13.65B$12.47B | +9.5% |
| Operating Income | $3.80B$3.27B | +16.3% |
| Net Income | $2.04B$1.71B | +19.4% |
| EPS (Basic) | $2.37$2.07 | +14.5% |
| EPS (Diluted) | $2.36$2.06 | +14.6% |
| Shares Outstanding (Basic) | 832.00M795.00M | +4.7% |
| Shares Outstanding (Diluted) | 837.00M796.00M | +5.2% |
05—Questions
Frequently Asked Questions
How did Southern Company's 2010 earnings compare with 2009, and what drove the change?
Net income after preferred dividends was $1.975 billion, up $332 million, or about 20%. The increase came mainly from colder weather in Q1 and Q4 and warmer weather in Q2 and Q3, higher industrial sales, and rate increases at Alabama Power under Rate RSE and Rate CNP Environmental. Partly offsetting this were higher operations and maintenance expenses and depreciation.
What are the biggest capital spending commitments investors should watch?
The construction program totals about $4.9 billion in 2011, $5.1 billion in 2012, and $4.5 billion in 2013. Major projects include two new AP1000 nuclear units at Plant Vogtle (Georgia Power's share is 45.7%, with a DOE loan guarantee sought for up to $3.4 billion), the Kemper IGCC in Mississippi (subject to a cost cap of about $2.4 billion, with potential increase to $2.88 billion), and Southern Power's Cleveland County and Nacogdoches plants.
How significant is the environmental regulatory risk?
It is substantial. The EPA is pursuing New Source Review litigation against Alabama Power, and new rules on greenhouse gases, coal combustion byproducts, and mercury (MACT) could require costly controls or early retirement of coal units. Southern Company says potential compliance costs for coal ash regulation could be substantially higher than the EPA's estimates. Costs are generally expected to be recoverable through rates, but recovery is not guaranteed.
Is the dividend sustainable at current payout levels?
The company paid $1.8025 per share in 2010 and declared 45.50 cents quarterly in January 2011, its 253rd consecutive quarter of non-decreasing dividends. The 2010 payout ratio was 76%, above the 70% target, so future dividend growth depends on continued earnings growth and the outcome of large capital and regulatory items.
What do the credit rating changes mean for the company?
Moody's lowered Southern Company's senior unsecured rating to Baa1 from A3 in August 2010, and also downgraded Georgia Power, Gulf Power, and Mississippi Power. Fitch revised Southern Company's outlook to negative in September before returning it to stable in December. Lower ratings raise borrowing costs and can trigger collateral obligations under some contracts, and the filing notes further downgrades could increase financing costs.
06—Continue