The utility business isn't the safe haven it used to be for investors. Coal and nuclear power plants are being shut down regularly, renewable energy has upended the traditional electricity business, and earnings are taking a hit as a result.
Challenges facing the industry are hitting utility giant Southern Co (NYSE:SO) as well. The company was once one of the growth utilities in the U.S., and now it's heading in the other direction.
In the first quarter of 2015, Southern Company's revenue dropped 9.9% from a year ago to $4.18 billion as retail and wholesale revenues plunged. Some of the decline can be attributed to bad weather, which was a catalyst for a 4.2% decline in residential demand and a 1.1% decline in commercial demand.
Lower fuel costs helped overcome some of the revenue decline, but it wasn't enough to maintain profits. Even after pulling out charges for Mississippi Power's Kemper integrated gasification combined cycle project, earnings declined 12.3% to $514 million, or $0.56 per share.
The days of consistent growth are numbered in the utility space, and new technologies are starting to eat into overall demand. Most of Southern Company's regions are perfect for solar energy, which allows customers to reduce utility demand by producing their own energy. That will take an adjustment to the long-term business plan, something Southern Company has begun to do.
Recognizing the future of energy
What could determine Southern Company's success or failure in the next few years is how it adjusts to new technologies like solar, which are reducing demand for wholesale electricity. In recent months, the company has stepped up its activity in this space, buying or developing 412 MW of solar power plants that have defined power purchase agreements, nearly quadrupling its exposure to solar since October.
The bigger challenge will come from a recently passed bill that will allow homeowners to buy power from solar installers through power purchase agreements. Opening up the solar lease and power purchase agreement market could make Georgia a top-10 solar state almost overnight. For subsidiary Georgia Power, that's a big threat to its overall demand and stability.
I'll also be looking to see how Southern Company and its subsidiaries utilize energy storage in the future. Not only is solar energy disrupting utilities, energy storage is making it possible for residential and commercial customers to further lower their bills. But if they exploit these new technologies properly, management could build a utility ready to embrace the future of energy rather than fight it.
Not a buy today
Given the direction Southern Company's earnings are headed and the challenges the company faces in the future, I don't see it as a good buy right now. Shares are trading at 16 times trailing earnings, and earnings are on the decline. That's not a compelling value in an industry that's being disrupted right in front of our eyes. That's why I'm not bullish on Southern Company today.