Southern Company (SO 0.62%) has become one of the biggest utilities in the country, and it faces many of the challenges common to its industry these days. Electricity demand isn't growing like it once was, there are new environmental regulations on power plant emissions, and the growth of renewable energy has thrown a wrench in the traditional utility business model.
That's why listening to what management has to say about its outlook is important for investors. Here are the five biggest things from Southern Company's earnings call after its third-quarter report was released.
The Vogtle court battle is in the past
"We've entered into an agreement to settle the commercial litigation associated with Vogtle units 3 and 4, and better position the project for the remaining months of its construction." -- Thomas Fanning, CEO
The Vogtle nuclear plant expansion is billions over budget and years behind schedule. That led to litigation between Southern Company and the contractors who are building the project. Truthfully, most of the conflict was between two contractors: Chicago Bridge and Iron Company and Westinghouse. Most of those issues were resolved when Westinghouse bought CBI's nuclear business.
The settlement of these disputes is really a weight off Southern Company, and should pave the way for the expansion to be completed in mid-2020. Given the delays thus far, that's probably a best-case scenario.
Kemper is coming along
"During our earnings call one year ago, we announced that the combined cycle was in service, and that the remaining construction schedule for Kemper had been extended into the first half of 2016, and that we plan to take a very methodical approach to the completion and start-up of the remainder of that facility. Today, those decisions are benefiting the entire project." -- Arthur Beattie, CFO
The clean coal Kemper plant in Mississippi is one of the most expensive built on a per kW basis, and like Vogtle, it has gone through its own planning and budget issues. But it too appears to be moving toward completion at a steady rate.
If both Vogtle and Kemper get completed and Southern Company can start generating solid returns on them, it will allow the company to shift to more stable forms of power generation like renewable energy, where most of the company's focus is today.
Growth is slow but steady
"The Southeastern economy continues to grow, supported by robust employment growth, a steady recovery in the housing sector, stronger than expected consumer spending, and continued in-migration into our region. As a result, we experienced positive growth in retail sales in the third quarter, as total weather-adjusted retail sales increased 0.2% over the third quarter of 2014 and 0.6% on a year-to-date basis." -- Beattie
Electricity consumption from utilities in the U.S. has traditionally grown by 1% to 2% a year as the economy grows. But that's changed recently thanks to advances in efficiency and the growing use of solar energy, which has allowed more customers to become energy generators.
Still, a little growth is welcome news for Southern Company. Even those small growth numbers should keep its core regulated business from taking steps backward.
Renewable energy is the new focus
"So far this year, Southern Power has announced 12 new renewable projects, with an ownership stake in these facilities of just over 1,000 megawatts." -- Fanning
If there's one major shift Southern Company has made over the past year, it's putting a new, more intense focus on renewable energy. These projects are primarily being built by its Southern Power subsidiary, which buys projects with long-term contracts to sell electricity to utilities.
Renewable energy is actually a way to de-risk the current utility business model because of those long-term contracts, and the structures Southern Company is using create tax savings as well. Look for Southern Company to be one of the most aggressive buyers of renewable energy projects over the next few years, which will help grow its cash flow in a sector that's just looking for consistent ways to make money.
More renewables are coming
"Strong relationships, tax appetite and a proven ability to close transactions has made Southern Power an attractive partner for acquisitions in the renewable market. As a result, Southern Power is now projected to have capital investments totaling $2.3 billion for 2015." -- Beattie
When I say this is a growth opportunity, I mean there are literally billions of dollars behind renewable energy at Southern Company. I could see the company eventually expanding its renewable business to a size that would compare to its regulated business, and with a strong return on investment.
In many ways, marrying a profit-making regulated utility with investments in renewable energy projects that need tax equity investors is a logical business move. And Southern Company is better off for making this transition earlier than most of its competitors.
