| Plant Vogtle in Georgia, home to $21 billion in cost overruns |
An examination of financial statements shows Southern Company is "drowning in debt" -- caused mostly by massive cost overruns at facilities in Mississippi and Georgia -- and resorted to accounting fraud as a means of maintaining stock prices and meeting expectations of investors and Wall Street analysts, according to a report this morning at DonaldWatkins.com. Here are other take-home findings from the report, which is the first in a three-part series, under the title "How The Southern Company Cooked Its Books In A Massive $27-Billion Accounting Fraud Scheme":
(A) Former Alabama Power CEO Mark Crosswhite was a central player in the fraud scheme, but records reveal virtually nothing about the role he played. Watkins, a longtime Alabama attorney and entrepreneur, says this likely is designed to protect Crosswhite from Southern Company's efforts to dump much of the blame for its financial problems on Crosswhite and Alabama Power, while seeking a non-prosecution agreement for itself from the U.S. Department of Justice;
(B) The accounting firm Deloitte & Touche was paid more than $17 million to audit Southern Company's books, but certified that it found nothing amiss. What repercussions could that have for Deloitte? The answer is not clear at the moment, but . . .
(C) Watkins points to provisions in the Sarbanes-Oxley Act of 2002 that could impose personal criminal liability on a dozen executives if they signed certifications that falsely claim Southern Company's books were free of fraud;
(D) A 2022 document reveals the continuation of Southern Company efforts to hide money laundering by intentionally misclassifying millions of dollars in vendor payments, Watkins reports;
(E) Watkins reveals grim financial numbers that apparently caused desperation to set in among Southern Company higher-ups.
How did Southern Company get into such dire shape? Watkins explains, noting that his examination focuses on documents from 2002, which was the last full year that the company filed 10-Qs (which are quarterly reports) and a 10-K (which is its annual report) with the U.S. Securities and Exchange Commission (SEC). Watkins describes the 2022 10-K, filed on February 15, 2023, as a "Trojan horse for Southern Company's accounting-fraud schemes." Watkins points to two "drivers" that led Southern Company into deep trouble:
The two main drivers of the Southern Company’s accounting-fraud schemes were: (a) the desire to pump up and maintain the company’s stock prices within the range of Wall Street forecasts and expectations, and (b) the need to meet or exceed the expectations of Wall Street analysts for the company’s utilities and power industry sector.
The Southern Company’s accounting-fraud concealment techniques begin in the Risk Factors section of the 10-K. (See, “Item 1A. Risk Factors,” pages I-15 to I-26.) The company disclaims virtually everything that negatively impacts earnings and profitability. The goal of this disclaimer is to give the Southern Company “wiggling room” to pull off the accounting fraud.
The disclosed "Risk Factors" also provide a seemingly innocuous distraction from the detection of the fraud, thereby deterring heightened scrutiny on (a) whether the Southern Company's system of internal controls was adequate to prevent accounting fraud, and (b) whether the reported numbers fairly present the true financial condition of the Southern Company, in all material respects.
No disclosure of any false, misleading, or inaccurate “material" fact is made in “Item 1B. Unresolved Staff Comments.” The signatory CEOs and CFOs simply swore that there were no unresolved issues in this category. (See, 10-K, p. I-26).
What was going on behind the scenes that drove Southern Company down a road to deception?
The drag on the Southern Company has been its growing debt load since 2017, which springs from construction cost overruns of $4 billion or more at its coal-gasification facility in Kemper, Mississippi, and $21 billion at its Vogtle Nuclear Plant Units 3 and 4 construction projects in Waynesboro, Georgia.
What is more, the Southern Company gave up and demolished its new Kemper facility in 2021, which caused a debt-financed loss of more than $7 billion.
This $28 billion in debt associated with the $21-billion cost overruns at Vogtle and the $7 billion loss at Kemper created a “Hole” in the financial records that the Southern Company had to fill, while keeping stock prices high and meeting or exceeding Wall Street expectations. Simply put, this was an impossible task.
With construction of Vogtle Units 3 and 4 dragging on for 10 years, there was no legitimate way to turbo charge the Southern Company’s operating revenues enough to plug the “Hole” created by the debt-financed cost overruns at Kemper and Vogtle. Plus, the rapidly growing debt load was sucking the profitability out of the Southern Company's consolidated operations beyond anybody's expectations.
Why is it important for financial documents of a publicly traded company to be accurate? For one, they affect a lot of people -- and involve a lot of money, Watkins reports:
Shareholders, investors, lenders, state and federal regulators, and the Southern Company's institutional co-owners in the Vogtle Units 3 and 4 construction projects must rely upon the completeness, accuracy, and truthfulness of the matters asserted in the company's 10-K for 2022. Two of the Southern Company's three co-owners of the Vogtle project are in litigation with the company over the staggering cost overruns at Vogtle.
Here is Southern Company's grim reality today:
The Southern Company is drowning in debt, and it is leveraged to the hilt. The 10-K for 2022 is dripping with accounting fraud. In light of the company's barely manageable debt load, alone, it is shocking that Deloitte & Touche gave the Southern Company a "clean" audit opinion for 2022.
In 2017, the Southern Company's aggregate corporate debt load was only $45 billion.
Today, Southern Company shareholders are essentially "bondholders" who receive an annual yield that is slightly higher than long-term Treasuries. They have no real equity in the company's assets, which are basically hocked out to major institutional lenders.
The Southern Company has survived as an ongoing enterprise in recent years by robbing Peter (its affiliates) to pay Paul (the Southern Company). CEO Tom Fanning has been stripping cash out of the company's registered and non-registered affiliates at an alarming rate.
Upon close examination, Tom Fanning has run the Southern Company into the ground with two white elephant construction projects -- Kemper and Vogtle. The Kemper facility has been demolished and the Vogtle project is tied up in legal challenges regarding the Southern Company's fitness to hold a combined "Owner/Operator" license from the Nuclear Regulatory Agency.A. A Cover for Crosswhite?
The retired Alabama Power CEO seems to be in hiding mode at the moment, perhaps because his "friends" at Southern Company have proven not to be so friendly, as Watkins explains:
The fraud embedded in the 10-K for 2022 (and prior years 10-Ks) involved senior-management executives like Mark Crosswhite, who had a significant role in Alabama Power's internal controls over financial reporting. Crosswhite, the former CEO of Alabama Power, "retired" on December 31, 2023. The "Retirement and Consulting Agreement" Southern Company CEO Tom Fanning executed with Mark Crosswhite on December 7, 2022 is reproduced in the 10-K, at Exhibit 10(a)15.
The Agreement, which pays Mark Crosswhite $125,000, has no specified duties. Under the Agreement, Crosswhite is supervised and managed by Tom Fanning. It is basically a "keep your mouth shut" agreement.
Mark Crosswhite's participation in the accounting-fraud scheme is NOT disclosed in any section of the 10-K, even though his "Retirement and Consulting Agreement" is. Despite the Agreement, Crosswhite did NOT sign the 10-K for 2022. His successor-in-office (Jeff Peoples), who assumed office on January 5, 2023, wound up signing the 10-K on February 15th, 2023.
Mark Crosswhite is reportedly cooperating with federal investigators, who are probing the Southern Company's decades-long crime spree, in exchange for full immunity. This appears to be a pro-active defensive move by Crosswhite to protect himself from the Southern Company's efforts to isolate, package, and dump much of its illegal activity on Alabama Power Company and Crosswhite, while the Southern Company seeks a non-prosecution agreement from the U.S. Department of Justice. During a February 16, 2023, earnings call, Southern Company CEO Tom Fanning all but blamed Crosswhite for everything wrong with Alabama Power and the Southern Company.
B. "D" is for Deloitte
One of the most curious parties in this sad tale is Deloitte & Touche, the internationally known accounting firm that conducted what appears to be a major botch job on Southern Company's books. If one were handing out grades, Deloitte would be lucky to receive a "D" for this auditing mess. "F" probably would be the proper grade. Writes Watkins:
It should be noted that the Southern Company paid Deloitte & Touche, via its affiliates, at least $17,245,000 in 2022 to audit its financial books and records. (See, K-10, p. III-2). Deloitte & Touche reported no disagreements with the Southern Company regarding accounting and financial disclosures. (See, 10-K, p. II-256). Apparently, Deloitte & Touche was not looking to bite the hand that was feeding it since the firm actually certified the phony numbers in the 10-K as fair and accurate.Deloitte & Touche had the responsibility for detecting fraud within the 10-K. The existence of accounting fraud is a "material" fact, which must be disclosed. The auditing firm claimed that "the financial statements [in the 10-K] present fairly, in all material respects, the financial position of Southern Company as of December 31, 2022 and 2021." See, 10-K, II 72-75.
Deloitte & Touche also opined that: "Southern Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013). . . .
Neither Deloitte, nor Southern Company, explained in the 10-K how Deloitte & Touche audited vendor payments in excess of $1 million in cases where the contracts were secret, the deliverables were maintained off-site, the vendor payments were made without invoicing, and the contractual services were continuously renewed or otherwise extended through 2022.
Likewise, neither Deloitte, nor the Southern Company, has ever explained or disclaimed the fraud scheme that was detailed in notes made by vendor Joe Perkins on April 6, 2017. These notes recorded an off-site meeting between a Southern Company senior-management executive and a longtime vendor of the company. The fraud discussion captured in these notes has NOT been reported in any 10-Q or 10-K from 2017 going forward.
Yet, [hand-written notes from Matrix LLC's Joe Perkins] point the finger directly at the "bad decisions at SO"and the failure of the board of director's Audit Committee to properly monitor and audit the Southern Company's construction cost overruns for the Kemper and Vogtle projects that eventually totaled more than $27 billion in the aggregate by 2022.
According to confidential "insider" sources, these notes were withheld from Deloitte & Touche, even though they were "material" to the 10-Ks for 2017 and each successive year.
Additionally, the Southern Company's 10-K for 2022 continues a years-long pattern and practice of intentionally misclassifying millions of dollars in vendor payments to hide money laundering for legally impermissible activities and special clandestine work orders that violate company operational policies, as well as the Code of Ethics cited in the 10-K, at p. III-1.
Again, neither the Deloitte & Touche audit, nor the Southern Company's 10-K for 2022, address the nature, scope, or need for these multi-million dollar clandestine expenditures in any section of the 10-K. The Southern Company could have identified and properly classified these expense payments, but the company elected to conceal them from its auditors, shareholders, investors, lenders, and regulators. . . .
Based upon my review of these 10-Ks and 10-Qs and my personal experience in the HealthSouth accounting-fraud case, all of the 10-Qs and 10-Ks filed by the Southern Company in the past five years reek of accounting fraud. These SEC filings will need to be amended and restated.
The individuals who signed these certifications on the Southern Company’s 10-K for 2022 are: (a) Thomas A. Fanning (CEO) and Daniel S. Tucker (CFO), for the Southern Company; (b) J. Jeffrey Peoples (CEO) and Philip C. Raymond (CFO), for Alabama Power Company; (c) Christopher C. Womack (CEO) and Aaron P. Abramovitz (CFO), for Georgia Power Company; (d) Anthony L. Wilson (CEO) and Moses H. Feagan (CFO), for Mississippi Power Company; (e) Christopher Cummiskey (CEO) and Gary Kerr (CFO), for Southern Power Company; and (f) Kimberly S. Greene (CEO) and David P. Poroch (CFO), for Southern Gas Company.
D. Reality Bites
As of December 31, 2022, the Southern Company was a $59 billion revenue enterprise that was saddled with $55.2 billion in long-term debt and $7.6 billion in credit lines. Its reported $62.8 billion in debt obligations and credit facilities exceeded its stated revenues of $59 billion by $3.8 billion. What is worse, the Southern Company and its affiliates only had $1.9 billion in "Cash on Hand," as of December 31, 2022.
Could anyone figure out a way to lawfully make the company look profitable in the face of such grim real numbers? Apparently not, writes Watkins:
Facing a constant need for investment capital, a growing debt crisis, and nightmarish cost overruns at Vogtle, cooking the financial books and records at the Southern Company became the company's answer to these growing problems.
Stay tuned for Part 2, Southern Company: Using Smoke and Mirrors to Look Profitable.