In our inaugural Live Web Chat with Utility Forecaster subscribers last month, one person wondered why Safety Ratings for some holdings had fallen so dramatically under our new Safety Rating System.

Part of the answer is that our new system is more conservative than it was previously, though, of course, it still adheres to our longstanding fundamental principles.

In the case of Southern Company (NYSE: SO), however, the other part of the answer is the fact that it’s in the midst of a large capital spending program including two major projects–the construction of a clean-coal plant in Kemper, Miss., and the expansion of its existing Vogtle nuclear plant in Georgia– that have been repeatedly behind schedule and over budget.

To be sure, as my colleague Richard Stavros observed, “Large capital expenditure programs are a normal part of utilities’ business operations and welcome as these initiatives mean more earnings in the future.”

Assuming regulators are willing to pass costs along to ratepayers, these investments can boost earnings when they’re subsequently recaptured via rate base. At the same time, we can’t ignore the risk they pose to the balance sheet in the near term.

For Southern’s Kemper Project, this risk has been underscored repeatedly in recent months, above and beyond the regular quarterly financial reckonings resulting from this $6.2 billion budget buster.

In February, the Mississippi Supreme Court ruled that state regulators had raised rates without properly assessing whether Kemper’s costs had been prudently incurred.

Southern has long enjoyed a cozy relationship with regulators–or what industry insiders and analysts refer to as “constructive” regulatory relations–and the Mississippi Public Service Commission had dutifully hiked rates by 15% in 2013 and 3% in 2014 to help Kemper recover construction costs.

But in accordance with the February legal decision, earlier this week state regulators ordered Southern subsidiary Mississippi Power to refund an estimated $350 million in rate increases that it has collected since 2013, while rolling back rates to their former levels.

The size of this hit was essentially already known in February, causing the stock to drop about 5% over a several-day period.

Unfortunately, sometimes the same bad news can bite twice: This latest announcement prompted Standard & Poor’s to place “A”-rated Southern and its utility subsidiaries on CreditWatch with “negative implications,” and the resulting flurry of headlines caused the stock to drop as much as 2.4% in the next market session.

Importantly, S&P said, “We do not expect the consolidated financial profile to be greatly affected by any rate rollbacks and refunds.” Rather, the ratings agency is more concerned about how Southern manages its overall regulatory risk.

While the rollback in rates is slated to occur with the August billing cycle, the size and pace of the refunds have yet to be determined. Mississippi Power is expect to issue a refund plan to state regulators in the next couple of weeks, and the commissioners will vote on it in early August.

The long-haired Mississippi businessman who initiated the lawsuit that led to this ruling has said he’ll cut his ponytail once he banks his refund check. In the past, he’s colorfully described Kemper, which would be the nation’s first carbon capture and storage coal-fired power plant, as a “science experiment.”  

Interestingly, he’s also running as a Democrat for one of the three seats on the state public service commission. If elected, he obviously won’t be a friend of Southern.

For those keeping score, this was actually the second major financial setback for the Kemper project this year, which has already seen more than $2 billion in costs written off as unrecoverable.

In May, an electric cooperative that had partnered with Mississippi Power on Kemper decided to pull out of the project due to the seemingly never-ending delays and cost increases. The utility repaid the cooperative $275 million plus interest for its stake in early June.

Southern has been a Core Holding in our Growth Portfolio for more than 20 years. Over that period, the stock has generated a staggering total return of more than 970%, blowing away the S&P 500 by nearly 400 percentage points.

But that impressive performance masks a deterioration that’s occurred over the past 10 years, during which Southern has lagged both the broad market and the major utility benchmarks by a significant margin on both a price and total-return basis. And that divergence is even wider over shorter-term time periods of five years and less.

To its credit, Southern has steadily hiked its dividend, with payout growth averaging 3.7% annually over the past five years. With a forward yield of nearly 5%, it would be hard for most income investors to say no to investing in this utility giant while interest rates remain at historic lows.

Although the stock has struggled in recent years due to the company’s operating woes, we wouldn’t bet against it over the long term. After all, Southern is one of the few utilities that’s willing to adapt to the rapidly changing operating environment, and it has the balance-sheet strength to do so.

But we also don’t have infinite patience for a stock that has gained a paltry 25% over the past five years. Southern is not only testing its relationship with regulators, it’s also testing its relationship with shareholders.