In my former life as the editor of the industry journal Public Utilities Fortnightly, I interviewed the now CEO of Southern Company, Thomas Fanning, on many occasions.

In 2003, when he was chief financial officer, I hosted Fanning and Southern Company’s investor-relations team in the living room of my hotel suite at a conference in New York City. In explaining the company philosophy, he used The Art of War, by Sun Tzu. “Know yourself, know your enemy,” Fanning said.

In knowing themselves, Fanning said, “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.”

Fast forward 11 years. Southern’s bold initiatives of today seem at odds with this philosophy. The firm, a huge utility based in Atlanta, has made high-risk, multi-billion-dollar bets on technologies whose futures are in question due to proposed carbon dioxide limits and low natural gas prices. Specifically, those big bets center on coal and nuclear projects.

On the other hand, those projects are part of aggressive diversification. Southern Company is the only company in America, Fanning said, which is engaging in all energy sources. “We’re building new nuclear. We’re building 21st-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.”

So how should we reconcile Southern’s seemingly high-risk technology bets with its conservative culture? The answer is that by keeping its options open (a strategy called “optionality”), the company is being conservative. The company isn’t betting the farm—wind or otherwise—on any one technology.

And while this aggressive diversification will lead to occasional stumbles (more on them later), it also means its 4.4% dividend is more stable than those of most utilities that are tethered to one or two energy sources.

It has proven to be a remarkably flexible company in the face of a dramatically changing energy landscape. As Fanning has said, six years ago Southern produced about 70% of its energy from coal; two years ago Southern shed that to about 35%. Six years ago, 16% was produced from natural gas; two years ago, roughly 48% was produced from natural gas.

He continued, “We have taken this aircraft carrier and turned it in a big way. We can swing gas production from 35% to 55% of our energy production, and coal from 25% to 45% based on what the markets will deliver.”

 

Turbulent Years
It has been a stormy few years to be a Southern Company shareholder, given cost overruns on the nuclear and coal plant initiatives, higher debt, volatile earnings and possible costly emissions regulation on coal. But in the last few months the clouds seemed to have lifted over the nation’s fourth-largest utility as cost overruns have been brought under control, Georgia regulators have signaled their support, and a new plant is coming ever closer to coming online.

Investors breathed a sigh of relief recently when the Georgia Public Service Commission unanimously approved $389 million in spending for two nuclear reactors. The commission also accepted management’s current schedule for the project, which has the first of the two new reactors online in late 2017. 

Southern also reported in August that subsidiary Mississippi Power’s $5.5 billion Kemper County integrated gasification combined cycle project achieved a significant milestone: Its three power-generating turbines were put into commercial operation burning natural gas. Meanwhile, work continues on a project to turn coal into synthetic gas.

The coal-fired power plant, which will capture 65% of CO₂ emissions, is scheduled to be completed before the end of June 2015.

Meanwhile, the utility has had a strong second quarter, with adjusted earnings per share up 3% to $0.68 on higher electricity usage due to favorable weather and robust industrial activity. Revenue for the period was up 5.2% year over year.

Total retail sales increased by 2.1%, driven by a 3% increase in industrial sales. Industrial sales account for about a third of total revenue, and this improvement could be indicative of a broader economic recovery in the Southeast, which could mean even more increased earnings at Southern in the future. 

While we’ll continue to monitor Southern’s progress with its nuclear projects, the firm’s strong recent earnings performance—as well as the CEO’s greater emphasis on resource diversity—suggests the company has turned the corner and is poised to deliver significant shareholder value, including solid dividends, in the coming years. Southern Company is a buy up to $55.