When Southern Co (NYSE:SO) reported earnings in late July the company showed just how an improving economy was having a positive impact on results. Energy sales rose year over year to residential, commercial, and industrial customers and that helped drive a 3% increase in net income to $629 million, or $0.69 per share.
But when I listened to the conference call I was more interested in how the company was transitioning to the new threats in energy, namely from renewable energy. Renewables could be a threat or a benefit to utilities in the future and how Southern Company handles this potentially transformative technology will tell a lot about what investors can expect long-term. Here were my biggest takeaways from management's comments.
Southern company's core business is strong
"For the first time in a decade, we've experienced two consecutive quarters of growth in all three retail customer classes: residential, commercial and industrial. In particular, we are encouraged by the developing strength of the residential sector, fueled in large part by healthy growth in the housing sector."-Thomas Fanning, CEO
Growing demand is key to Southern Company's business and at a time when consumers are beginning to explore on-site generation and efficiency is becoming a bigger focus it's not easy to assume demand will grow. But that's what has happened for Southern company, which is a positive for near term earnings.
The fleet is getting cleaner
"Our coal burn near record lows, our natural gas consumption is increasing and our gas burn is expected to increase to an average of 1.8 Bcf per day this year. This compares with our average gas burn of 1.5 Bcf per day over the last three calendar years."-Thomas Fanning, CEO
Following a broader trend in energy, Southern Company is burning less coal and more natural gas while building renewable energy assets. This lowers the risk in the portfolio with EPA regulations coming down the pipeline and has also been a way to lower costs. Look for these trends to continue as coal becomes a less important piece of America's energy future.
Renewable energy is key to the future
"As we suggested last quarter, Southern Power has now confirmed solar and wind projects to account for all of its placeholder capital in 2015. The project pipeline remains robust and we could potentially exceed our forecasted placeholders for both 2015 and 2016."-Thomas Fanning, CEO
Southern Company, and Georgia in particular, hasn't been terribly progressive when it comes to renewable energy despite having strong solar assets in the state. But that's changing and the company may actually put in more renewable energy assets than previously planned thru 2016.
Even though many of these renewable projects will sell to the non-regulated wholesale electricity market, they carry a much lower risk than other non-regulated power facilities because they will have long-term power purchase agreements with other utilities; therefore de-risking the portfolio for Southern. At the very least, investors should take some comfort knowing management is trying to find ways to make money off new forms of energy.
Building a new renewable energy business model
"Georgia Power also launched its new solar sales and installation service on July 1. Through a variety of solar programs, Georgia Power will add thousands of solar panels to the Georgia landscape for customers who desire that option."-Thomas Fanning, CEO
One of the new concepts Georgia Power is testing is installing and owning solar systems on customers' rooftops. This is similar to the business model of SolarCity or Vivint Solar, but with the utility owning the solar system instead of those solar companies.
It's an interesting concept but it's unknown how successful it will be or if regulators will be OK with utilities owning rooftop solar systems across the country. What's encouraging is that Southern Company is at least trying to find ways into rooftop solar instead of just looking at it as a threat from outside companies.
The renewable portfolio is going to be big
"The Southern Company system expects to own or purchase the output of more than 3,200 megawatts of renewable resources, including 46 solar facilities in seven states by the end of 2016."-Thomas Fanning, CEO
This comment puts some context to the quotes above. 3.2 GW of renewable energy assets is about enough to power 525,000 homes and when it's completed it will be a big part of the energy portfolio. Southern Company isn't going to be the same company it is now by the end of 2016 and for investors that's a good thing.
Changes afoot in utilities
Across the country utilities are trying to figure out how to adapt to new forms of energy that are competing with the old business model. Southern Company may be figuring out how and at the same time its core businesses are performing well.
With the new strategic vision for the company and a 4.7% dividend yield this could be one of the top stocks in the utility space for many years to come and is certainly one for investors to keep on their radar.
Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Southern Company. The Motley Fool recommends and owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.