10-QPeriod: Q2 FY2012

SOUTHERN CO Quarterly Report for Q2 Ended Jun 30, 2012

Filed August 6, 2012For Securities:SOSOJESOJFSOJCSOJDSOMN

Summary

Southern Company (SO) reported a mixed financial performance for the second quarter and first half of 2012. While net income saw a slight increase in the second quarter compared to the prior year, year-to-date net income declined due to factors like milder weather impacting revenues and increased operations and maintenance expenses. Revenue declines were notably seen in retail and wholesale segments, driven by lower energy sales and, in some cases, lower pricing. However, positive contributions came from rate increases and higher usage in certain customer segments, along with an insurance recovery. The company's financial condition remained stable, supported by strong operating cash flow. Significant investments were made in property, plant, and equipment, particularly for generation, transmission, and distribution facilities. Debt levels increased due to senior note issuances, while the company also managed its capital structure through debt redemptions and equity issuances. The company highlighted its ongoing focus on environmental compliance, with significant projected capital expenditures for meeting new EPA regulations, including the MATS rule. Additionally, large-scale construction projects like Plant Vogtle Units 3 and 4 and the Kemper IGCC continue to be a major focus, with associated complexities and regulatory reviews impacting financial projections and operational plans.

Financial Statements
Beta
Revenue$4.18B
Operating Expenses$3.04B
Operating Income$1.14B
Net Income$639.00M
EPS (Basic)$0.71
EPS (Diluted)$0.71
Shares Outstanding (Basic)872.00M
Shares Outstanding (Diluted)880.00M

Key Highlights

  • 1Net income for Q2 2012 increased slightly to $623 million ($0.71/share) from $604 million ($0.71/share) in Q2 2011, but year-to-date net income decreased to $991 million ($1.14/share) from $1.03 billion ($1.20/share) in the prior year.
  • 2Total operating revenues for Q2 2012 were $4.18 billion, down from $4.52 billion in Q2 2011, primarily due to decreases in retail and wholesale revenues.
  • 3Fuel and purchased power expenses decreased significantly year-over-year, driven by lower fuel costs (especially natural gas) and reduced generation volumes.
  • 4Operations and maintenance expenses saw an increase, attributed to higher pension costs and other employee benefits.
  • 5The company's construction program, notably Plant Vogtle Units 3 and 4 and the Kemper IGCC project, involves substantial capital expenditures and ongoing regulatory oversight.
  • 6Environmental compliance remains a significant area of focus, with updated estimates for capital expenditures related to EPA regulations like the MATS rule.
  • 7Mississippi Power's financing activities were significantly impacted by the issuance of new long-term debt and a large refundable deposit related to the Kemper IGCC project, alongside increased capital contributions from Southern Company.

Frequently Asked Questions

In the second quarter, net income saw a slight increase primarily due to revenue increases from rate adjustments, elimination of a tax-related adjustment at Alabama Power, and an insurance recovery. However, year-to-date net income declined due to milder weather impacting revenues, higher operations and maintenance expenses, increased depreciation, and higher interest expense, partially offset by some of the same positive factors seen in the second quarter.

These large-scale projects represent significant capital expenditures and ongoing investments. The Kemper IGCC project, in particular, faces regulatory challenges and uncertainties regarding rate recovery, impacting Mississippi Power's financial results and cash flows. Plant Vogtle also involves complex construction, potential cost overruns, and regulatory approvals, with legal challenges to licensing also noted.

The company is actively assessing and preparing for compliance with new environmental regulations, particularly the EPA's Mercury and Air Toxics Standards (MATS) rule and proposed water and coal combustion byproduct rules. These initiatives are expected to require substantial capital expenditures over the next several years, and the company is working to estimate these costs while seeking regulatory recovery mechanisms.

Financing activities in the first half of 2012 were marked by increased long-term debt issuances across various subsidiaries to fund construction programs and general corporate purposes. Mississippi Power saw a significant increase in financing cash flow due to senior note issuance and receipt of a large deposit related to the Kemper IGCC. Southern Company also experienced an increase in capital contributions from its parent. Debt redemptions also occurred, indicative of active capital structure management.