10-QPeriod: Q1 FY2012

SOUTHERN CO Quarterly Report for Q1 Ended Mar 31, 2012

Filed May 7, 2012For Securities:SOSOJESOJFSOJCSOJDSOMN

Summary

Southern Company (SO) reported a decrease in net income for the first quarter of 2012 compared to the same period in 2011, primarily driven by milder weather conditions leading to lower retail revenues and increased depreciation from new generation and environmental projects. While total operating revenues declined, the company saw increases in retail revenue from rate adjustments and improved industrial KWH sales across its subsidiaries. Fuel and purchased power expenses also decreased due to lower fuel costs. The company continues to invest significantly in its construction programs, including major projects like Plant Vogtle Units 3 and 4 and the Kemper IGCC facility. These projects, along with ongoing environmental compliance initiatives and potential regulatory changes, represent key factors influencing future earnings and capital expenditures. Southern Company maintains a stable financial condition with access to capital markets to fund its operations and growth. Investors should note the ongoing legal proceedings concerning environmental regulations, particularly with the EPA, and climate change litigation. While management believes these matters will not have a material adverse effect, they represent potential risks. The company also highlighted the positive impact of bonus depreciation on future cash flows.

Financial Statements
Beta
Revenue$3.60B
Operating Expenses$2.84B
Operating Income$766.00M
Net Income$384.00M
EPS (Basic)$0.42
EPS (Diluted)$0.42
Shares Outstanding (Basic)868.00M
Shares Outstanding (Diluted)877.00M

Key Highlights

  • 1Southern Company's net income decreased by 12.8% to $368 million ($0.42 EPS) in Q1 2012 compared to $422 million ($0.50 EPS) in Q1 2011, mainly due to milder weather affecting revenues and increased depreciation costs.
  • 2Retail revenues decreased by 9.0% to $3.1 billion, driven by a $113 million decrease due to milder weather, although rate increases and improved industrial sales provided some offset.
  • 3Total operating expenses decreased by 10.0% to $2.8 billion, primarily due to a significant reduction in fuel costs by 27.9% ($412 million) owing to lower fuel prices and generation mix changes.
  • 4The company's construction program remains a significant focus, with property additions totaling $1.23 billion in Q1 2012, reflecting ongoing investments in new generation facilities like Plant Vogtle and the Kemper IGCC.
  • 5Cash provided from operating activities decreased substantially to $568 million in Q1 2012 from $998 million in Q1 2011, impacted by increased fossil fuel stock and changes in accrued taxes.
  • 6Southern Company's balance sheet showed an increase in total property, plant, and equipment by $845 million, primarily due to construction activities, and a corresponding increase in long-term debt by $404 million.
  • 7The company declared a common stock dividend of $0.4725 per share, an increase from the prior year's $0.4550 per share, and announced an increase in the next quarterly dividend to $0.49 per share.

Frequently Asked Questions

The primary reason for the decrease in net income was milder weather conditions that reduced retail revenues, coupled with an increase in depreciation expense related to new generation and environmental projects, and higher operations and maintenance expenses. Lower energy revenues at Southern Power also contributed.

Southern Company continued significant investments in its construction program, with property additions totaling $1.23 billion for the quarter. Key projects include the development of Plant Vogtle Units 3 and 4 and the Kemper IGCC facility, which contributed to an increase in total property, plant, and equipment on the balance sheet.

The company is closely monitoring federal and state environmental statutes and regulations, including the EPA's Mercury and Air Toxics Standards (MATS) rule and proposed water and coal combustion byproducts rules. Compliance costs are expected to be significant and could impact future earnings if not fully recovered through rates. The short timeframe for compliance with MATS could affect electric system reliability and increase costs.

Fuel expenses decreased significantly by 27.9% ($412 million) compared to the prior year's quarter. This reduction was primarily due to a lower average cost of fuel and purchased power, a shift to lower-cost natural gas generation, and decreased overall demand, partially offset by increased KWHs purchased.