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Will 2016 Be Southern Company's Best Year Yet?

By Reuben Gregg Brewer - Jan 21, 2016 at 1:05PM

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Southern Company has been treading water for years, but it could turn things around in 2016.

Southern Company (SO 1.17%) is one of the nation's largest utilities, operating mainly in the southeast. However, it's faced notable headwinds in recent years, some of its own making, which helps explains why shares haven't moved much since 2012. But with some self-inflicted wounds set to start healing in 2016, this could be the year Southern breaks out of the rut?

A changing industry
The first big challenge Southern has been facing is a changing power industry. Coal is increasingly out of favor, natural gas in favor, and renewable power sources like wind and solar trumping everything else, at least in terms of public popularity. The thing is, for most of its life, Southern has been a giant coal burner, which has put it at an image disadvantage in recent years, if nothing else.

Southern's changing fuel options. Image source: Southern Co.

But it's been working hard to shift gears. Coal is still an important fuel, but it can switch more easily now between coal and cleaner-burning natural gas. That should be a huge image boost, though it really allows the company to pick the cheapest fuel -- which is more likely why it's been investing in natural gas. There's more on the gas front, however, because Southern is also in the midst of buying AGL Resources (NYSE: GAS), a gas utility, to strengthen its position in the natural gas space. That deal has to clear regulatory hurdles, but Southern believes it will close in 2016. The acquisition will double its customer base.

Part of this switch to cleaner alternatives, however, has involved building new power plants. And on that score, Southern has made some mistakes with two large investments: one, a clean coal power plant outfitted with carbon capture technology and the other, a nuclear power plant. Both have been more expensive to build than anticipated and have faced construction delays.

These are self-inflicted wounds that have cost shareholders directly via impairment charges. Worse, these two projects have hung around Southern's neck like a weight, often pulling its share price down as negative news comes out. But, like the AGL deal, real progress is expected in 2016.

The coal plant is scheduled to come online in the middle of the year. Better yet, the technology, which Southern owns a piece of, is already being considered for use by a South Korean utility. And the nuclear plant, while still years away from completion, is pretty much starting 2016 fresh after Southern reworked the bullpen of construction companies on the project. That removes any contentious and distracting legal wrangling over the project's many issues. Hopefully, it will also lead to better execution.

Making some nuclear progress. Image source: Southern Co.

And along with all of these things, Southern is investing more in clean power. What it's doing in solar and wind is a drop in the bucket compared to the above issues, but at least it helps some with the company's dirty power image. Put all of these things together, and 2016 could be the year things start to look up for Southern.

About time!
For long-suffering shareholders, that means a potential sigh of relief. For those watching the 4.6% yielding utility, it means now could be a good time to take a second, or perhaps third, look at Southern as it begins to take on some positive overtones for a change.

Execution will remain the vital thing to watch, but as 2016 starts out, Southern appears to be more in control than it has been in a few years. And if that turns out to be true, 2016 could be the year Southern breaks out of its funk. Which, in turn, would make 2016 the company's best year yet, as it not only expands its business materially through the AGL buy, but starts to show real progress on some of its largest-ever construction projects.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Southern Company. 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.

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