Southern Co. (NYSE: SO) The Company has improved its energy generation mix. In 2015, Southern’s energy mix was 47% gas, 32% coal, 16% nuclear, and 5% renewables/other. This compares to a 2020 year-to-date mix of 52% gas, 16% coal, 17% nuclear, and 15% renewables/other. We view the shift toward renewables favorably, as utilities with renewable-generating assets tend to be viewed more favorably by regulators from a ROE perspective.
There are risks to the stock: management is working to move past significant delays and cost overruns at the company’s Vogtle nuclear plants, and COVID safety measures have made these efforts more expensive. On the positive side, we think that dividend income will help to offset any negative impact on EPS growth.
The beta on SO shares is 0.37.
Adjusted earnings missed the consensus estimate of $1.24 per share. The decrease was primarily driven by milder weather and higher depreciation and amortization. Total revenue came to $5.62 billion, down from $6.0 billion a year earlier due to unfavorable weather and lower fuel and other cost recovery revenues.
CEO Tom Fanning also said that the two Vogtle nuclear plants were on pace to meet or exceed their target in-service dates in November 2021 (the first plant) and November 2022 (the second plant.)
EARNINGS & GROWTH ANALYSIS
Retail Electric revenue declined 6.0% to $4.24 billion, and Wholesale Electric revenue declined 6.6% to $584 million. On the positive side, residential kilowatt-hour (KWH) retail sales rose 3.5% on a weather-adjusted basis. Commercial sales declined 5.1% and industrial sales declined 7.3% when taking weather into account.
Below the top line, depreciation and amortization expense rose 17.0% from the prior year to $889 million, as regulatory amortization increased substantially and depreciation rose to a lesser extent. Nonfuel operations and maintenance expense fell 0.8% to $1.29 billion.
Southern has outlined plans to improve its energy generation mix through coal plant retirements and an increased focus on renewables. Back in 2015, the company’s energy mix was 47% gas, 32% coal, 16% nuclear, and 5% renewables/other. This compares to a 2020 year-to-date mix of 52% gas, 16% coal, 17% nuclear, and 15% renewables/other. Southern is shifting its mix in order to achieve net zero greenhouse gas emissions by 2050. We are optimistic about the company’s progress to date.
FINANCIAL STRENGTH & DIVIDEND
S&P rates SO’s credit as A-/negative, Moody’s as Baa2/stable, and Fitch as BBB+/stable.
MANAGEMENT & RISKS
The CEO of Southern Co. is Thomas Fanning, who has also served as chairman and president since 2010. Andrew Evans has served as CFO and executive vice president since 2018.
In one example, the now written-off Kemper County ‘clean-coal’ plant resulted in more than $5.0 billion in cost overruns and damaged the company’s reputation. The facility will not become a clean coal plant, but will instead continue to produce electricity by burning natural gas, as it has done since 2014.
Southern Co. is a super-regional energy company in the Southeast and a leading U.S. electricity producer.
Our target price is $68, raised from $62.
On December 9 at midday, BUY-rated SO traded at $60.67, down $0.33.