10-QPeriod: Q3 FY2003

SOUTHERN CO Quarterly Report for Q3 Ended Sep 30, 2003

Filed November 13, 2003For Securities:SOSOJESOJFSOJCSOJDSOMN

Summary

Southern Company (SO) reported solid financial results for the third quarter and the first nine months of 2003, demonstrating year-over-year growth in earnings per share. The company benefited from a growing customer base, effective cost control measures, and strong performance in its competitive generation business, particularly from hydro and coal-fired capacity due to mild summer weather and higher natural gas prices. The year-to-date results were also positively impacted by an $88 million after-tax gain from the termination of certain Power Purchase Agreements (PPAs) with Dynegy. Regulatory rate increases in Alabama and Florida further contributed to the improved financial performance. However, investors should note potential headwinds such as ongoing legislative and regulatory changes in the electric utility industry, environmental compliance costs related to the Clean Air Act, and the impact of Mirant's bankruptcy filing on contingent liabilities. The company's financial condition remained stable, with substantial capital expenditures for utility plant additions funded primarily through operating activities and net security issuances. Southern Company's liquidity was supported by significant unused credit arrangements, providing flexibility for ongoing operations and construction programs.

Key Highlights

  • 1Earnings per share (EPS) increased to $0.85 for Q3 2003 and $1.86 for the nine months ended September 30, 2003, compared to $0.84 and $1.63, respectively, in the prior year.
  • 2Consolidated net income for the nine months ended September 30, 2003, was $1.35 billion, up from $1.15 billion in the same period of 2002.
  • 3Retail sales revenue showed a slight increase of 0.3% for Q3 2003 and 1.9% year-to-date, driven by customer growth and regulatory rate increases.
  • 4Sales for resale increased significantly, especially due to the competitive generation business benefiting from favorable weather and market prices, as well as new plants coming online.
  • 5Other revenues and other electric revenues also saw substantial increases, partly due to new operations and PPA terminations.
  • 6Fuel expense increased by 10.9% for Q3 2003 and 13.3% year-to-date, primarily due to higher fuel costs and increased generation from new units.
  • 7Financing activities included issuing $2.8 billion in senior notes and $125 million in preferred stock, mainly to refund existing debt, alongside managing short-term debt and credit facilities.
  • 8The company continues to manage its exposure to market risks through hedging programs and fixed-price contracts.

Frequently Asked Questions

Southern Company's earnings growth in the third quarter of 2003 was driven by several factors, including growth in customer numbers, successful cost control initiatives, and strong performance from its competitive generation business. The mild summer weather and higher natural gas prices contributed positively to the competitive generation segment's profitability.

The termination of certain PPAs with Dynegy in the second quarter of 2003 resulted in a one-time after-tax gain of $88 million, which positively impacted the year-to-date earnings for 2003. This contributed significantly to the overall earnings improvement compared to the previous year.

Key financial considerations include ongoing capital requirements for utility plant additions, with approximately $1.2 billion needed by September 30, 2004, for debt redemptions and maturities. The company also faces potential contingent liabilities related to Mirant's bankruptcy filing. Environmental compliance costs under the Clean Air Act and potential regulatory changes are also noted as areas to monitor.

Southern Company maintained strong liquidity with approximately $583 million in cash and cash equivalents and $3.4 billion in unused credit arrangements at the end of the period. The company also continued to manage its debt by issuing new senior notes and preferred stock, primarily to refund higher-cost debt and fund ongoing construction programs.