It has been a turbulent year to be a Southern Company (NYSE: SO) shareholder, given cost overruns on the firm’s nuclear and coal plant initiatives, higher debt and equity issuance, volatile earnings, and the prospect of costly emissions regulation on coal.

Only last October, Utility Forecaster downgraded the stock to “hold” as a result of these challenges. By March, however, the clouds seemed to lift over the Atlanta, Georgia-based utility, and UF restored the firm to a “buy.”

And while on balance we are pleased to have Southern Company in the portfolio again, there are some lingering concerns.

To be sure, there has been progress on multiple fronts, including various performance metrics that had been down by double digits have since turned double-digit positive in the last 6 months (See Chart A).

At the same time, we’re troubled that the company reported additional cost overruns in its first-quarter earnings release, as well as the delay of the Kemper integrated gasification combined cycle (IGCC) plant’s in-service date until 2015.

But this concern has been balanced by encouraging growth in revenue and earnings, with solid sales numbers across Southern’s four-state territory, along with a 3.4 percent dividend increase. We also liked that the Vogtle nuclear project is back on track, as well as the US Department of Energy’s decision to guarantee $6.5 billion in loans for its construction.

Chart A: Southern Company Has Delivered Major Improvements to Earnings 

Created with YCharts 

In order to get a better perspective on the firm and perhaps allay our most recent concerns, last week your correspondent attended the 2014 Deloitte Energy Conference, held in Washington, D.C., and had a front-row seat for Southern Company CEO Thomas A. Fanning’s presentation of the challenges his company and the industry face, and what he’s doing to deliver future value to shareholders.

Before He Was a Caesar

In my former life as the editor of the industry journal Public Utilities Fortnightly, I had the privilege of interviewing Fanning on many occasions, even before he became CEO of Southern.

In fact, ironically, back in 2003, I once hosted Fanning and Southern Company’s entire investor relations team in the living room of my hotel suite, when we couldn’t find a suitable alternate location for the interview.

On that occasion, Fanning, who was Southern’s CFO at that point, lauded the traditional vertically integrated model, offering what he described as Southern’s strategic philosophy. “Do you know the old Sun Tzu saying, ‘Know yourself, know your enemy?’” he asked, quoting from the famed treatise on strategy and combat, Sun Tzu’s “The Art of War.”

Fanning was quoting chapter and verse of the corporate philosophy spearheaded by the firm’s CEO at the time. “We like to say we’re genetically conservative. We like the low-risk end of the spectrum. We talk about our strategy in the super Southeast being the business we know, with the customers we know, in the place we know.”

But fast-forward 11 years, and Southern’s present-day initiatives seem at odds with this philosophy. Indeed, the firm has made high-risk, multi-billion-dollar bets on various technologies whose future is now in question, namely coal and nuclear, due to proposed CO2 regulations and low natural gas prices.

Then, there’s the company’s “All of the Above” strategy, as described by Fanning at the conference, which refers to President Obama’s past comments on promoting all energy resources. Southern’s CEO talked of researching and investing in a full portfolio of resources, whether in storage, solar or other renewable technologies, while adding many more natural gas installations, which has already moved the firm’s resource orientation toward natural gas.

“Southern Company is the only company in America, I’m proud to say, engaging in the full portfolio. We’re building new nuclear. We’re building 21^st century coal. We made an enormous shift in natural gas. We are the fifth-largest solar company. We do wind. We run the largest biomass plant. And we’re a leader in energy efficiency,” Fanning said.

But some have argued a more “genetically conservative” approach would have been to drop the riskier projects and make more focused bets. Beyond that, some industry veterans have observed that the risk-averse utility culture puts executives at a disadvantage when making such high-risk bets, since their relative inexperience managing such ventures increases the odds of failure.

Of course, one could also argue that a “genetically conservative” strategy means a company that spreads its bets across as many technologies as possible, assuming it has the resources to do so.

And Southern Company certainly does have significant resources. Nevertheless, any venture capitalist will tell you that barely two in 10 technology investments ever truly succeed, and these odds do not change much whether you’re in Silicon Valley or Atlanta.

So how should we reconcile Southern’s seemingly high-risk technology bets with its conservative culture, and investor concern over more cost overruns?

Having observed Thomas Fanning’s thinking for more than a decade, and understanding how utilities work, the “All of the Above” strategy is a more nuanced approach than it seems on the surface. The CEO’s intent is to give Southern an advantage in different market price and regulatory scenarios, a concept known as optionality.

The Strategy of Optionality

As he stood before the conference audience last week, about to give his speech, something about Fanning’s demeanor had noticeably changed since I first met him those many years ago as a CFO. Perhaps it’s the weight of the responsibility he now carries, but he wears a new intensity on his face that has replaced the relatively carefree but nonetheless driven CFO of years ago.

In listening to his speech, I heard him argue from a number of different positions, which suggests he is speaking to various constituencies within his firm as well as on the outside. Although the arguments sometimes seemed contradictory on their face, they did converge in one clear direction once it became apparent that the business model he’s advocating is one of optionality rather than the any particular technology. And knowing that can give investors some confidence that the company won’t bet the farm on any one technology.

And while there’s no doubt he is a big supporter of new nuclear and IGCC coal technologies, the Vogtle and Kemper projects, respectively, were on the drawing board before he became CEO. Although he inherited these legacy projects from his predecessors, he’s still obligated to execute on them.

The fact that Fanning is having Southern’s in-house research team focus on technologies such as energy storage, as well as continuing to push the firm in various other technology directions, reinforces the idea that though he still advocates for nuclear and coal, he is becoming more agnostic on which technology will prevail.

Whether this more muscular agnostic view was born over the last year from the intense scrutiny the firm has faced–due to the cost overruns and delays–would be anyone’s guess. But I’m sure Fanning would say diversity has been the plan all along, but has been overshadowed by the problems with Vogtle and Kemper.

But we would hope that once the troubling situations with the new nuclear and coal plants are contained, the optionality approach, or greater diversification in resources, will start to help Southern Company’s valuation improve against its peers.

Chart B: Betting on the Comeback Kid’s Long-Term Strategy

Created with YCharts 

Moreover, we’re encouraged by this stronger emphasis on neutrality. Perhaps it also means that if cost overruns or other financial detriments resulting from the aforementioned plants exceeded certain thresholds, he would finally pull the plug on these projects.

As previously noted, Fanning’s energy technology agnosticism, as he described it, has been seemingly driven by the benefits of optionality: “Six years ago, [Southern] produced about 70 percent of [its] energy from coal; two years ago [Southern] shed that to about 35 percent from coal. Six years ago, 16 percent was produced from natural gas; two years ago, roughly 48 percent was produced from natural gas.”

He continued, “We have taken this aircraft carrier and moved it in a big way. And not only has that shift created optionality. We can swing gas production from 35 percent to 55 percent of our energy production, and coal from 25 percent to 45 percent based on what the markets will deliver.”

For example, Fanning detailed how customers enjoyed $100 million in fuel savings during the polar vortex this past winter by using his coal plants when natural gas prices spiked.

Furthermore, his strong view on technology neutrality was seemingly unshaken even when looking at technologies with different costs. Although the Southern CEO believes central station power is more efficient, he does not believe that rooftop solar is disruptive. Taking what he described as a customer-centric view, he said that Southern Company ought to put solar on rooftops if customers want them, regardless of the economics.

Interestingly, natural gas is the one area where he believes caution is warranted. Of course, Fanning noted the irony, given the fact that Southern has already made a big bet on natural gas and is moving the company away from coal.

Nevertheless, he said there are a number of reasons why the industry should be cautious. For example, Fanning pointed out:

1. We don’t yet know the ultimate environmental consequences of fracking.
2. There still isn’t enough infrastructure to support the shale revolution.
3. It’s unclear how unfettered energy exports will affect price volatility.
4. We don’t know whether natural gas will be dominated by manufacturing and transportation.
5. Utilities have only recently started to grapple with how to manage price volatility.

But that being said, Fanning reiterated his answer to the question of what he believes will be the winning future utility resource mix, “It is natural gas. It is renewables. It is energy efficiency. It is 21^st century coal. It is nuclear. All of these things, every one of them has a place in the portfolio. This is the dominant solution.”

While we’ll continue to monitor Southern’s progress with its Vogtle and Kemper projects, the firm’s strong recent earnings performance, as well as the CEO’s greater emphasis on resource diversity, suggest the company has turned the corner and is poised to deliver significant shareholder value in the coming years.