When investors think about The Southern Company (NYSE:SO) one big investment usually comes to mind: Vogtle. That's the only nuclear power plant construction project in the United States today, so it makes sense that investors are interested in what's going on. But there's so much more on tap at Southern. Here's what investors really need to know about this giant utility's growth plans.
Yes, it's important
There's no point in downplaying the significance of the Vogtle project to Southern's future. In fact, management spends a good portion of every conference call these days talking about the progress it has made on Vogtle units 3 and 4. (It's one project that consists of two nuclear power plants.) Investor interest is understandable because the project has had its share of headwinds.
Originally, it was being overseen by Westinghouse, which was also responsible for a nuclear project at SCANA. Both projects were over budget and behind schedule when Westinghouse declared bankruptcy in 2017. SCANA scrapped its nuclear ambitions, upsetting regulators and customers alike, and ended up being bought by Dominion Energy. There was some concern that Southern would go the same route, but it didn't. The giant utility stepped in and took over for Westinghouse, eventually agreeing to foot most of the cost of any future construction price increases.
Today, the project is running smoothly. In fact, Southern is still hoping to complete Vogtle 3 in early-to-mid-2021 based on the solid progress it is making today. That would be well in advance of the approved November 2021 start date. Focus would then shift to Vogtle 4, which is also progressing well. That nuclear power plant is expected to start up in early-to-mid-2022, ahead of the November 2022 date to which regulators are holding Southern. As of the end of 2019, the company believes the entire Vogtle project is roughly 85% complete.
More things to consider
Between 2020 and 2024, Southern expects to spend roughly $40 billion on capital investment projects. As a utility, that's what it has to do if it wants regulators to approve its rate requests. It's a simple trade off: Utilities get a monopoly in the regions they serve and, in exchange, have to submit to government oversight. Spending to upgrade assets (like storm hardening), ensure reliability (maintenance spending, for example), and expand to meet expected demand (such as new generation, like Vogtle) all tend to be viewed positively by regulators. Today clean energy spending is also on the "nice" list.
Vogtle hits a couple of these points, so positive progress on the project is fabulous news. But here's an interesting bit of information to digest: Vogtle will only account for around $2.8 billion in spending through 2024 based on current plans. That's roughly 7% of the $40 billion in capital spending Southern has on tap, a relatively small amount, overall. Investors are paying very close attention because of the troubles that Vogtle has seen, but there's a lot more going on at Southern today.
For example, roughly three quarters of the company's spending is going toward its electric utility businesses. Natural gas utility and pipeline investments will get about 20% of the total, with the rest going toward its contracted renewable power business and "other." Notably, Southern has been reluctant to put too much money to work in the contracted renewable power space because it believes the risk/reward picture isn't favorable today. That's not to suggest that it has stopped building renewable power assets, only that it isn't as willing to build them for others right now. In fact, CEO Thomas Fanning described the contracted renewable market as getting "tougher" during Southern's fourth quarter 2019 earnings conference call, highlighting that the company had plenty of internal investment opportunities that weren't as risky. The willingness to step back here is a sign of Southern's conservative nature, which should actually be viewed positively by most investors.
A key takeaway from all of that is that, because of its spending plans, Southern expects to grow its rate base on the electric side of the business by around 5% a year through 2024. On the natural gas side, which is notably smaller, it projects roughly 11% annualized growth. Looking at regulated assets as a whole, the growth rate is projected to be around 6%. As the rate base grows, so does Southern's earnings power. Overall, it is looking for earnings to increase between 4% and 6% a year over the next few years. A solid, though not spectacular, number.
Transmission and distribution investments make up roughly a third of the $40 billion worth of spending and roughly 45% of Southern's spending on the electric side of things. New generation (which includes Vogtle) is around 15% of the electric spend. Environmental investments come in at about 15%. And the rest is a mix of maintenance and nuclear fuel costs. Regulators are likely to view all of this spending as necessary. Within the natural gas business, around two-thirds of Southern's spending is on replacing old pipes with the rest earmarked for general maintenance and accommodating customer growth. All are looked at in a positive light by regulators.
There's obviously a lot of small details beneath this big-picture look at Southern's plans. However, when you get past Vogtle, the key takeaway is that this utility is actually pretty boring. It's doing all the right things to keep growing its business in a customer, regulator, and shareholder friendly way. Vogtle is, actually, a rare misstep. (Another recent shortfall was a failed effort to build a clean coal plant, which is now a very expensive natural gas power plant -- but that's in the rear view mirror now.)
Look past Vogtle if you're looking at Southern
After the current market sell off, Southern's stock is yielding around 5.3%. That's a fairly compelling dividend yield in the utility space, and it's worth taking a deep dive into the company if you are an income-oriented investor looking for a utility stock today. However, don't get too caught up on the Vogtle project. It is important to Southern's future, but there's a lot more going on that you need to know about.