Southern Company (SO)

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Eric Apfel

Thomas Shyr

With over 42,000 Megawatts of generation capacity, Southern Company (NYSE: SO) is the second largest electric utility by market cap in the United States, supplying electricity to 4.4 million customers in the Southeast. Southern's customer base is located primarily in Alabama, Georgia, Florida, Mississippi, and the Carolinas.^[1]

Southern Company, like other electric utilities, benefits from being a natural monopoly in that community resistance and the huge cost of building new power plants provide significant barriers to entry for competitors. Additionally, customers have little choice when it comes to who they buy electricity from since their choices are limited by geographical proximity to power companies. However utilities' pricing power is limited as rate hikes are checked by government regulation, which makes Southern vulnerable to energy policy changes. Weather also plays an important role in Southern's business. Other risks to Southern are specific to its geographic region - extremely hot seasons can put strain on an already aging grid while severe weather like hurricanes can wreak havoc on generation facilities as well as transmission services.

Company Overview

Southern Company is responsible for $5.4 billion in transmission assets including more than 27,000 miles of transmission lines, 3,400 substations, and more than 300,000 acres of right of way.^[2] This makes Southern Company one of the largest electric utilities in the United States and one the largest producers of electricity in the Southeast by generation capacity.^[3]

Through its partnerships and subsidiaries, Southern's energy portfolio includes coal, nuclear, and hydroelectric power generation. Southern Co. plans, designs, builds, operates, and maintains its systems to meet growing demand, and has budgeted $2.3 billion in transmission expenditures through 2008.^[4] Southern Co. also operates a wireless telecommunications service through their subsidiary, SouthernLINK Wireless.

Business and Financial Metrics

Southern Company supplies electricity to 4.4 Million customers in the Southeastern United States and has a generation capacity of 42,000 Megawatts. In 2009, Southern posted total revenues of $15.74 billion, which was a substantial decline from its 2008 total revenues of $17.13 billion. This in turn had a negative impact on Southern's net income. Between 2008 and 2009, Southern's net income declined from $1.74 billion in 2008 to $1.71 billion in 2009.

Business Segments

Traditional Operating Companies

This segment owns all generation and transmission facilities and supplies both wholesale and retail customers with electricity. Southern Company's Traditional power companies include Alabama Power Company, Georgia Power Company, Gulf Power Company and Mississippi Power Company.

Southern Power

This segment's primary responsibility is the wholesale of surplus electricity (5,400 MW^[5]) to other electric utilities in the region.

Key Trends and Forces

Government Regulation

Both the Federal Government and local government play an enormous role in the heavily regulated energy industry. Especially for utility companies, rates are almost entirely set by regulatory boards, and Southern Company's rates are no exception. Under the Federal Power Act, utility companies' rates are subject to approval by state Public Service Commissions or PSC's. Southern Co.'s cost recovery limits (the amount of storm damage, environmental compliance, and fuel costs Southern Co. can pass on to its clients in addition to its base rate) are also set by PSCs.^[6] New regulations in response to the threat of climate change are a threat to Southern's bottom line, especially with 70% of their electric generation coming from coal^[7].

GDP Growth

One of the most important factors driving Southern's revenue is GDP growth. As the economy expands, electricity demands increase as manufacturing, business, and consumption expands. Although Southern's revenues are closely tied to GDP growth, electric utilities are considered counter-cyclical since electricity is a necessity. In the face of a major recession, the main risk to long-term cash flows is in Southern Co.'s ability to finance its acquisitions.

Population Growth

Southern Co.'s customer base is mostly driven by population growth, particularly in Alabama and Georgia. As local populations expand, Southern Co. gains new retail customers, which drives revenues. The company serves retail customers outside of Alabama and Georgia, but most of its operations outside these two states involve wholesale power.

Weather

Inclement weather can have a large impact on Southern's earnings. For instance, in 2005, Southern Co. spent twelve days repairing and replacing 322 transmission towers, 2,500 miles of power lines, 10,376 power poles, and 65 percent of local transmission facilities that were destroyed by hurricane Katrina.^[8] Southern Co. estimated the total recovery cost of Hurricane Katrina to be $302.4 million. Hurricanes and other severe weather can be huge setbacks for large utilities, especially Southern Co. with its 120,000 acres of serviced territory in the Southeast, an area at high risk of hurricane damage. More frequently, however, hot weather and the accompanying spike in consumption from mass air conditioning can be a problem for some electric utilities.

Competition

Southern Company is one of the largest electric utilities in the United States, and the largest in the Southeast. Due to its sheer size in its territory, Southern is well protected from competitors for its retail clients. Southern produces such high levels of excess capacity that they rarely have to purchase any power from competitors. Still it faces fierce competition in its wholesale business, particularly in areas where competitors are expanding capacity. Its top local competitors are as follows:

• Duke Energy Corporation (DUK): Generating 28,000 MW and supplying over 3.9 Million customers with electricity, Duke and Southern compete for wholesale in their common regions, particularly in the Carolinas.^[9]
• Florida Light & Power Group: FPL generates 37,500 MW and serves over 8.7 million customers along the east coast of Florida.^[10]
• Entergy (ETR): Entergy generates approximately 30,000 MW of electricity and serves 2.7 million people from Texas to Arkansas.^[11]

References

1. ↑ Southern Co. Megawatt Profile
2. ↑ Southern Co. Company Megawatt Profile
3. ↑ Southern Co. Megawatt profile
4. ↑ Southern Co. Company Megawatt Profile
5. ↑ Southern Co. Generation Capacity
6. ↑ Southern Co. 10-K 2007 pg. I-10
7. ↑ Southern Co. climate change presentation pg. 6
8. ↑ Hurricane Katrina Damage
9. ↑ Duke Energy Business Segments
10. ↑ FPL Group Profile
11. ↑ Entergy Profile