Alabama Power: going for a spin?
Southern Company might be planning to cleanse its dirty books by seeking a spinoff of Alabama Power, according to a report today from DonaldWatkins.com. Watkins, a longtime Alabama attorney and businessman, reports under the headline "Southern Company Reportedly Seeks Spinoff of Alabama Power":
On March 5, 2023, we reported that the Southern Company might be in the midst of an M&A transaction to (a) cleanse its financial books and records of the existing accounting fraud and (b) pump up the company's stock prices as CEO Tom Fanning departs the company, which is expected on May 24, 2023.
The company's February 15, 2023, 10-K filing discloses the possibility of merger and acquisition (M&A) transactions in vague terms in several sections of the financial report. These sections were included as "fig-leaf" provisions to provide cover for an M&A transaction, should one occur.
We have received reports from multiple sources that an M&A transaction is in process. Reportedly, the Southern Company is spinning off Alabama Power Company to Florida-based NextEra Energy for an undisclosed amount. We have not been able to independently confirm the identity of the purchaser.
NextEra is the largest electric-utility holding company in the U.S. by market capitalization. NextEra is also the parent company of Florida Power & Light and Gulf Power Company.
Southern Company's stock price was $67.13 per share, as of March 21, 2023. NextEra's was $75.36 per share.
Who has been at the center of the M&A process? Watkins points to a man named Jim Kerr:
The Southern Company's General Counsel is James Y. (Jim) Kerr, II. He is scheduled to become the CEO and President of Southern Gas Company, effective on March 31st. Mr. Kerr has reportedly worked closely with Tom Fanning for several months to shepherd this M&A transaction to a successful closing.
Jim Kerr currently serves as executive vice president, chief legal officer, and chief compliance officer for Southern Company -- a position he has held since 2014. Mr. Kerr's job is to make sure that the Southern Company maintains full compliance with all federal, state, and local laws and industry regulations.
As general counsel and chief compliance officer, Mr. Kerr also reviews Southern Company regulatory filings like the Form 10-K for 2022 that was filed with the U.S. Securities and Exchange Commission on February 15, 2023. In this regard, Jim Kerr would have reviewed the Sarbanes-Oxley "Certification of Chief Executive Officer" signed by Jeff Peoples for Alabama Power. [See, Exhibit 31(b)1 of the hyperlinked Form 10-K].
Peoples' Sarbanes-Oxley certification attests to the accuracy, completeness, and truthfulness of Alabama Power's financial condition for 2022, and it was based upon Jeff Peoples' knowledge as CEO.
Mark Crosswhite worked as Alabama Power's CEO for 11 months of 2022. Crosswhite actually held the title of CEO through December 31, 2022. Jeff Peoples did not assume the CEO position until January 5, 2023.
Yet, Mr. Kerr accepted a Sarbanes-Oxley certification from Jeff Peoples that contained the following material statements and representations knowing that they would be relied upon by shareholders, investors, and Wall Street lenders.
Kerr and Peoples, it appears, cut a corner, and that could prove to be dangerous for investors, Wall Street analysts, and others who rely on the accuracy of financial statements, as Watkins explains -- using Kerr's own words:
I have reviewed this annual report on Form 10-K of Alabama Power Company;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer [the Chief Financial Officer] and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared.
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors [Deloitte & Touche] and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: February 15, 2023 /s/J. Jeffrey Peoples J. Jeffrey Peoples Chairman, President and Chief Executive Officer
Why does this raise a suspect eye? Watkins makes the answer clear:
It would have been literally impossible for Jeff Peoples, who only became CEO on January 5, 2023, to perform the Sarbanes-Oxley-related CEO duties and responsibilities for 2022 that are described in his certification. Prior to becoming CEO, Peoples was executive vice president of Customer and Employee Services at Alabama Power, where he oversaw customer services, marketing and economic development strategy and operations. In addition, he was responsible for Alabama Power’s labor relations, human resources, safety, wellness, health and disability management functions.
The matters entailed in Peoples' certification are not mere ministerial functions. They are substantive matters that attest to the financial integrity of the numbers in the 10-K.
The level of knowledge required for a Sarbanes-Oxley certification is typically derived from a host of meetings between the signatory CEO and the company's operating officers, controllers, and accounting managers, as well as the head of internal audit over the course of the year in question. This function cannot be adequately performed by a newly installed CEO on an after-the-fact basis or be delegated to someone else to affirm. After all, the certification imposes personal criminal liability on the signatory CEO and Chief Financial Officer.
If the financial numbers in the 10-Ks and 10-Qs are wrong, a publicly traded company can collapse overnight like Silicon Valley Bank did earlier this month, or the way HealthSouth did in 2003.
Jim Kerr knew, or reasonably should have known, that Jeff Peoples' Sarbanes-Oxley certification for the Southern Company's second largest revenue affiliate -- Alabama Power Company -- is false and misleading.
Unfortunately, for Southern Company shareholders, investors, and bankers, Peoples' Sarbanes-Oxley certification is only one readily understandable example of accounting fraud in just one Southern Company affiliate for just one of four regulatory filings required for 2022. In these economically challenging times, this example would be considered "low hanging fruit" for a competent federal prosecutor.
The jointly-filed 10-Ks and 10-Qs for the prior years are also rife with a plethora of accounting fraud schemes and techniques. Based upon my review of the Southern Company's 10-Ks and 10-Qs and my personal experience in the HealthSouth case, they all need to be amended and restated.
All of this indicates the Alabama Power M&A process is deeply flawed. Instead of resolving some of the company's problems, it could make them worse:
The Southern Company's reported spinoff of Alabama Power is a technique for exporting liabilities arising from an accounting-fraud scheme and other unlawful acts from a host company to third-party business entity. This technique comes straight out of the HealthSouth $2.7-billion accounting fraud handbook.
As you can see from Jeff Peoples' false Sarbanes-Oxley certifications, Jim Kerr’s role as general counsel and chief compliance officer was central to either detecting accounting fraud, or enabling it. Did Jim Kerr fail Jeff Peoples and the Southern Company in this critical role? Apparently, he did.
Like the general counsel in the HealthSouth case, Mr. Kerr’s involvement in the transactions that facilitated, enabled, and/or fueled the Southern Company’s massive, long-running, multi-affiliate accounting-fraud schemes deserves heightened scrutiny by board members, utility regulators, and U.S. Department of Justice officials.
Despite his role as the company's chief compliance officer, neither Mr. Kerr, nor anyone working under his direction and supervision, has ever contacted us to request any information that we may voluntarily share with the company regarding the accounting-fraud schemes at the Southern Company. Even after we published the handwritten notes made by Southern Company contractor Joe Perkins during an April 6, 2017 off-site meeting that outlined the broad areas of the accounting fraud, we never heard from Mr. Kerr.
As we reported on March 5, 2023, the accounting-fraud schemes arose from the $25 billion in cost overruns at the Southern Company’s Kemper, Mississippi and Vogtle power plants. The aggregate amount of the fraud over the past decade appears to be at least $27 billion.
Even though the Southern Company is seeking a non-prosecution agreement from the U.S. Department of Justice, no attorney from the King & Spalding law firm that is handling this DOJ matter for the company has reached out to us for the pertinent information in our possession that may help them document the nature and scope of the accounting fraud.
Of particular concern in this matter is whether Mr. Kerr knew, or reasonably should have known, the Southern Company’s true reason for pursuing the Alabama Power spinoff transaction, and whether Kerr gaslighted board members when discussing the purpose of this transaction with them?
At the moment, it appears the Alabama Power spinoff could wind up leaving someone holding a smelly load of baggage, Watkins reports:
If consummated, the spinoff of Alabama Power would allow the Southern Company to bundle most of its known racketeering problems with some of its accounting-fraud baggage and pawn these liabilities off on the purchaser. The Southern Company will leave it to purchaser to clean-up the ranks of senior-management executives at Alabama Power and terminate the contracts of shady vendors like Matrix, LLC, and its owner, Joe Perkins.
It is unknown at this time whether a business valuation firm has performed a “fairness opinion” for the purchaser on Alabama Power’s revenue potential, assets, and liabilities and has become aware of the accounting fraud embedded within the Southern Company’s consolidated 10-Q and 10-K regulatory filings.
Despite its legendary lawlessness, growing legal problems, and mounting financial liabilities, Alabama Power remains one of the Southern Company’s most profitable affiliates. In 2022, Alabama Power grossed more than $7.8 billion in operating revenues. Only Georgia Power, with nearly $11.6 billion in operating revenues in 2022, was a more profitable affiliate.
What is more, Alabama Power is the only utility company in America where taxpayers guarantee the company’s shareholders a minimum return on their equity. Despite a 21% increase in operating revenues for 2022 (over its revenues for 2021), Alabama Power still gouged its customers with crippling rate increases in 2022.
To date, this spinoff transaction has NOT closed, and the Southern Company has NOT secured a non-prosecution agreement from the Department of Justice.
