Southern Co.: risky projects undercut profits, stock price

Rogelio V. Solis | 2:01 p.m. Friday, February 10, 2017

With the region’s economy growing and its job market still drawing transplants, giant utility Southern Co. should be enjoying fair weather.

A recent decision by Georgia regulators to let subsidiary Georgia Power pass on to customers most overrun

Workers vehicles fill parking lots at Mississippi Power’s Kemper County energy facility near DeKalb, Miss., in this 2012 photo. Delays and cost overruns at the “clean coal” plant have weighed on Southern Co.’s bottom line. (AP Photo/Rogelio V. Solis, File)

costs at its Plant Vogtle nuclear project was an added boost financially.

Yet clouds keep lingering – and in some cases building — over Atlanta-based Southern.

The deal on overruns with the Georgia Public Service Commission solved only one problem dogging a couple of big, high-risk projects Southern has launched over the past decade. And now a new worry has popped up, topping the list of issues:

* Financial troubles at Toshiba Corp., which owns the firms building the Vogtle plant, could cause more headaches for Georgia Power and Southern. The Japanese firm is expected to report on Tuesday that it lost up to $6 billion on its construction contracts for Vogtle and another nuclear project in South Carolina. It plans to quit building new nuclear plants. While Toshiba has said it will finish its U.S. projects, it’s unclear whether it will be able to live up to those commitments if losses worsen.

* Mississippi Power, another Southern subsidiary, still hasn’t been able to get its “clean coal” Kemper plant — the first of its kind — to run properly. The project’s costs have nearly tripled to $7 billion, including $2.7 billion out of Southern’s pocket, and it’s more than two years behind schedule.

* Meanwhile, Southern faces slowing growth at its traditional electric utilities due to growing use of solar power and more efficient lights and appliances.

To be sure, Southern is still a highly profitable behemoth utility. It reported a nearly $2.4 billion profit last year and is in no danger of a financial crisis. But its slowing profit growth and small stock gains haven’t exactly been wowing investors, either.

An investment in Southern’s stock, including dividends, has gained roughly 30 percent over the last five years — less than a third of the S&P 500 index’s 92 percent return, and well under the Dow Jones Utilities Average rise of almost 50 percent.

Southern revenue and profits generally have been flat since 2010, partly because of the financial hit from cost overruns at the Kemper plant.

‘Execution risk’

Southern’s slowing growth has spurred the company to do some big, costly acquisitions.

“The growth outlook at (Southern’s) four electric utilities has slowed considerably (with no material catalysts in sight) so management was forced to look elsewhere,” said Wells Fargo analyst Neil Kalton in a recent report.

Southern has spent billions expanding into wind and solar energy and natural gas distribution. Thanks to the U.S. petroleum boom from “fracking,” or hydraulic fracturing and advanced drilling techniques, natural gas has become a cheaper, cleaner fuel than coal, which still provides a third of Southern’s power.

Southern completed an $8 billion buyout last year of Atlanta gas utility AGL Resources and spent another $1.5 billion on a 50-50 joint venture with pipeline company Kinder Morgan.

Southern expects most of its near-term growth to come from these non-regulated businesses. Indeed, the gas business added $518 million to Southern’s third-quarter revenue, or 60 cents of every new dollar of sales.

But the strategy still faces “execution risk,” Kalton said.

Among the risks: more potential problems with the Kemper and Vogtle projects; a possible slowdown in the wind and solar business because federal tax incentives are ending; or snags in future gas pipeline projects, which can generate controversy. (Witness the Keystone XL pipeline project, and the pipeline protest at Standing Rock Indian Reservation in North Dakota.)

Southern’s top executives argue that its new strategy will boost the company’s growth and lower its risk, but “we are not yet convinced,” said Kalton.

Southern said its strategy has allowed it to become the nation’s second-largest energy company, with 9 million customers and an unbroken record of steady or rising dividend payments to investors since 1948.

“Southern Co. has a long track record of being fiscally sound and responsible – for customers and shareholders,” Southern spokeswoman Lauren Claffey said. She noted that Southern was able to raise $20 billion on Wall Street last year while maintaining strong ratings for bonds it issues.

Southern reports full-year 2016 results on Feb. 22.

Bad news from Tokyo

Southern made a huge bet on a new push for nuclear power when it decided in 2008 to add two reactors at Plant Vogtle — the nation’s first new reactor project in three decades.

The project soon busted the original budget and schedule. Now, the latest potential headache comes from across the Pacific.

Citing the cost overruns at Vogtle and SCANA’s South Carolina plant, Toshiba is expected to report huge losses that could require a government bailout, according to press reports in Japan.

Shares of Toshiba, a conglomerate that makes everything from TVs and laptops to nuclear reactors, have plunged more than 40 percent since December. Standard & Poor’s cut its rating last month on Toshiba bonds — already in junk territory — citing the potential huge losses on U.S. nuclear contracts.

The Tokyo company owns Westinghouse, the supplier that designed reactors for the Vogtle expansion and SCANA’s project.

To Continue: http://www.myajc.com/business/risky-projects-cloud-over-southern/xN9JVwBLXvowSKZSr3vxhM/

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