The Southern Company (SO -1.56%) is one of the largest regulated utilities in the United States. It has a long history of success behind it, with a heavy corporate emphasis on operating in a conservative manner. One notable highlight here is the company's 76 consecutive years of dividends being paid at equal or higher rates. The company's moves in the renewable power space are a testament to how it has achieved such steady success.
Southern isn't afraid to go against the grain
The headline-grabbing investment at Southern today is its Vogtle 3 and Vogtle 4 nuclear power projects. These two reactors are just about complete after project delays and massive price overruns. In fact, nuclear power was significantly out of favor for just about the entire time Southern was building these plants. That didn't stop the company, as it recognized that reducing carbon emissions would require the type of carbon-free power that a nuclear power plant produces.
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Nuclear power appears to be coming back into favor again, which puts Southern's decision to stay the course, despite repeated hardships along the way, in a much more positive light.
But that's not the only decision that management has made that seems to run counter to the broader utility sector. The company also chose to shift away from investing in clean energy assets, like solar, in the middle of the last decade.
The reason was pretty simple: Southern's focus is on assets with long-term contracts with financially strong counter parties. And the returns available need to make financial sense for Southern. With a surge of capital investment in the clean energy sector, the math no longer worked. Returns were falling and counter-party strength was weakening. It chose to let others get caught up in the investment frenzy.
As the chart above shows, Southern seems to have avoided an unrealistic period in the clean energy space.
Southern dips its toes back into clean energy
The interesting thing is that Southern just bought two solar projects, both of which are still in the development phase. Located in Texas and Wyoming, these projects will have a combined capacity of 350 megawatts. The decision to get back into renewable power marks a notable shift in the company's approach to the sector.
And yet nothing has really changed at Southern. Both of the solar projects are backed by long-term contracts with high quality customers. The company noted in the news release for each acquisition that, "Once operational, the electricity and associated renewable energy credits generated by the facility will be sold under a 20-year power purchase agreement."
One of the key factors in that statement is "associated renewable energy credits." The big change of late has been government incentives, most notably in the Inflation Reduction Act (IRA). The pullback in the clean energy sector (which materially reduced the irrational exuberance that had taken hold) along with the improved government incentives has made investing in the space palatable again for risk-averse Southern Company. It wouldn't be surprising to see the company continue to invest in the space.
In early 2024 Southern expects to bring the second of the two Vogtle plants online. That is projected to increase cash flow from operations by around $700 million per year as the nuclear power plants start to produce revenue. Some of that cash will be used to invest in other capital investment projects, like the two solar plants Southern just bought.
Southern is about to chart a new course
This utility is on the verge of turning an important corner, and the recent solar investments are just a sign of what is likely to come. If you have been looking for a utility stock, Southern is operating from a position of strength today that will improve further once Vogtle 4 is attached to the grid. With a 3.9% dividend yield, it looks like investors have caught on to the shift in Southern's prospects. But for long-term investors that are looking for a reliable dividend payer, it might still be worth a closer look.
