Southern Co., the Atlanta-based energy giant known for being well-run and financially robust, has been wrestling with an unusual number of high-profile setbacks lately.
Construction challenges at a subsidiary's new coal power plant in Mississippi cut into the company's profits, led to a new president at Mississippi Power and a warning of a possible credit downgrade.
Closer to home, Southern’s Georgia Power subsidiary has been hit with lawsuits and costly delays on its nuclear expansion project near Augusta that consumers could wind up paying for.
Southern also has come under fire from a broad political spectrum that includes environmentalists and conservatives for not being more aggressive with solar, wind and other renewable fuels. The debate is expected to resurface again this week when hearings continue on Georgia Power's 20-year energy plan.
“At the end of the day, they are going to be just fine,” said David Parker, a Tampa-based utility analyst for Robert W. Baird & Co. “But with tepid waters, investors are just nervous people. We feel like we’re one shoe falling from being back in the recession, and that just creates more uncertainty.”
As one of the nation’s largest utilities, Southern spends billions of dollars a year on projects that include the newly developed coal and nuclear plants. The company has 4.4 million customers in Georgia, Alabama, Florida and Mississippi.
“Southern has high capital expenditures,” Parker said. “That elevates risk. At the end of the day, they are going to have to perform really well.”
Some of these issues bubbled up recently at Southern’s annual shareholders meeting where Tom Fanning, the company’s chairman, president and chief executive officer, reviewed 2012 financial numbers that many businesses could only hope for. They included:
— A dividend of $2.03 a share annually that has increased for 12 consecutive years.
— Total shareholder return that has outperformed the Standard & Poor’s 500 Index.
— An a 11.8 percent return on equity.
“This company has the highest level of financial integrity,” said Fanning, a well-respected leader in the energy and utility industry. Fanning, 56, last week was named one of three vice chairmen for the utility industry group, Edison Electric Institute.
Much of Southern’s financial strength comes from owning regulated utilities in the four, growing Southeastern states. The companies are required to serve all residential and business customers in their territority, but get a guaranteed profit and the ability to recoup costs from consumers in exchange.
As a whole, Southern and its utilities spend about $5.5 billion on capital projects each year, Fanning said. That translates to a hefty payback for investors because the company’s utilities are allowed to recoup the costs of those capital projects, plus earn a profit.
"What you get out of Southern is a profile that is regular, predictable and sustainable, and in my view, that's what we seek to give you, our shareholders," Fanning said at the annual meeting. "Achieving these returns with a low-risk profile is an objective of ours."
Southern, however, has been in the middle of juggling two big risks. The company is building a new-generation power plant in Mississippi that converts coal to natural gas to reduce emissions. And it’s constructing the nation’s first two reactors from scratch in nearly 30 years at its Plant Vogtle operation in Waynesboro.
The risks have costs to the company and to consumers.
The Vogtle nuclear project will take about 19 months longer to complete than originally expected and cost about $740 million more than originally thought, Georgia Power has said. Project delays also have triggered lawsuits between Vogtle's main contractors and the group of utilities building the reactors.
Georgia Power’s liability in those suits totals $425 million, but the utility maintains it is not responsible for the delays or costs associated with them.
“We’ve been through some real struggles. … We expected challenges. And the way we manage through them, that’s our job,” said Buzz Miller, executive vice president of nuclear development for Georgia Power and its sister company, Southern Nuclear. “We’re managing it the best we can to keep overall prices down for customers.”
Georgia Power executives tout long-term savings for customers from the project. Low interest rates and production tax credits will benefit the utility’s 2.4 million customers, saving a total of $2 billion over the next several decades, the company says.
But critics worry that more cost increases are on the way.
Meanwhile, the cost of the Kemper County, Mississippi, project has increased 19 percent to $3.42 billion, Southern said in financial documents filed last month. The amount of money Mississippi Power can recoup from consumers is capped at $2.88 billion because of a settlement the company reached with state utility regulators. That meant Southern was responsible for the additional costs, reducing its first-quarter earnings by $333 million.
“That was a bitter pill for us to swallow, but I think it was appropriate. That shows, I think, appropriate corporate responsibility,” Fanning said, calling the project “a very attractive economic proposition for the state.”
The cost increases and associated regulatory fallout that came with it helped lead to the abrupt retirement of the president of Mississippi Power, Ed Day. Replacing him is Southern’s top lawyer, Ed Holland, who has a long history with the company as an attorney and utility executive.
A few days later, the Standard & Poor’s credit-rating agency lowered Southern’s outlook to “negative” from “stable,” because of risks associated with Kemper. Still, Southern’s credit rating remains at A.
Moody’s Investors Service followed suit, putting Mississippi Power’s ratings on review for a possible downgrade in the future.
“The review of Mississippi Power’s ratings reflects the regulatory, financial, economic and execution challenges facing the utility as it continues construction of the large and complex Kemper integrated coal gasification combined cycle plant,” said Michael Haggarty, Moody’s senior vice president, in a statement released May 30.
“The Kemper project, I think was a surprise — that it’s been as much of a challenge as it was,” said Paul Patterson, a utility analyst with Glenrock Associates. “The Vogtle situation, considering the size and the scope of the project, I don’t think it’s as much of a surprise to have issues with the contractors and the schedule. These are big, complicated projects.”
Meanwhile, Southern lags in any significant use of renewables, something that the Sierra Club and other clean-energy advocates have raised repeatedly. What’s more, some on the politically conservative side of the fence, including leaders of the Atlanta Tea Party Patriots, as well as GOP member and state utility regulator Bubba McDonald, also have become vocal in calling for the utility to use more solar.
Fanning said he thinks renewables in the Southeast will remain a “niche” through the end of the decade.
“We’re moving ahead with great dispatch,” he said, defending the company’s use of solar and wind.
Southern’s wholesale power unit has invested in solar projects outside of the company’s Southeast territory as part of a partnership with Ted Turner. In Georgia, Georgia Power has plans to boost the amount of solar it distributes to its customers tenfold over the next few years, although that still would provide less than 2 percent of the utility’s electricity.
Critics say the utility is not doing enough and point to state regulations, supported by Georgia Power, that allow it to stand in the way of solar's growth. Some states let private solar companies lease panels to homeowners and businesses, and then sell that electricity at a fixed rate. In Georgia, that is not allowed, which has restricted solar's growth, critics say.
Southern “continues to get pushed on all these different sides,” said Parker, the Baird utility analyst. “If you’re Tom (Fanning) trying to steer this for all of the stakeholders, you come across as a ‘you hate the environment’ kind of a guy. The utility’s peril is they have to plan for 10 years out. Southern has done a really good job at that.”
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