Business Overview

Southern Company (NYSE:SO) operates through three primary business segments: the traditional electric operating companies, Southern Power, and Southern Company Gas. The traditional electric operating companies, which include Alabama Power, Georgia Power, and Mississippi Power, are vertically integrated utilities that provide electric service to customers in the Southeastern United States. Southern Power develops, constructs, acquires, owns, and manages power generation assets, including renewable energy and battery energy storage projects, and sells electricity at market-based rates in the wholesale market. Southern Company Gas distributes natural gas through its natural gas distribution utilities and is involved in several other complementary businesses, including gas pipeline investments and gas marketing services.

Financials

Southern Company is a diversified energy company that has consistently delivered strong financial performance, with annual net income of $3,976,000,000, annual revenue of $25,253,000,000, annual operating cash flow of $7,553,000,000, and annual free cash flow of -$1,542,000,000 in its latest fiscal year.

In the first quarter of 2024, Southern Company reported adjusted earnings per share (EPS) of $1.03, which was $0.24 higher than the first quarter of 2023 and $0.13 above the company's estimate. The primary drivers of this performance were investments in the company's state-regulated utilities and less mild weather in the first quarter of 2024 compared to the corresponding period in 2023, partially offset by higher interest expense and depreciation.

Retail electric revenues in the first quarter of 2024 were $3.9 billion, compared to $3.6 billion in the first quarter of 2023. This increase was primarily due to higher rates and pricing, sales growth, and colder weather, partially offset by lower fuel and other cost recovery revenues. Wholesale electric revenues decreased from $599 million in the first quarter of 2023 to $571 million in the first quarter of 2024, primarily due to decreases in energy and capacity revenues.

Natural gas revenues in the first quarter of 2024 were $1.7 billion, compared to $1.9 billion in the first quarter of 2023. This decrease was primarily due to lower gas cost recovery associated with lower natural gas prices and lower demand due to warmer weather, partially offset by rate increases and a change in timing of revenues at Nicor Gas.

Liquidity and Capital Resources

Southern Company and its subsidiaries maintain strong liquidity positions, with $7.6 billion in unused committed credit at March 31, 2024. The company plans to continue to meet its future capital needs through operating cash flows, borrowings from financial institutions, and debt, hybrid, and/or equity issuances.

Outlook

Southern Company is well-positioned to capitalize on the significant growth opportunities within its service territories, particularly in the Southeastern United States. The company is seeing strong economic development activity, with recent investment announcements representing the second highest first quarter on record. This growth is driven by a diverse mix of sectors, including automotive suppliers, data centers, and mixed-use developments.

To meet this growing demand, Southern Company's subsidiaries have received constructive regulatory approvals, such as Georgia Power's 2023 Integrated Resource Plan (IRP) update, which authorized the company to develop, own, and operate additional natural gas and battery energy storage resources. The company is also investing in its transmission and distribution infrastructure to support the growing load.

Southern Company's management has provided an adjusted EPS estimate of $0.90 per share for the second quarter of 2024. The company's long-term earnings growth target remains in the 5% to 7% range, and management believes the recent growth opportunities have the potential to provide an upward bias to this outlook.

Risks and Challenges

While Southern Company's growth prospects are promising, the company faces several risks and challenges, including:

Regulatory environment: The company's ability to recover prudently incurred costs and earn a reasonable return on its investments is dependent on maintaining constructive regulatory relationships in its various jurisdictions.

Fuel and commodity price volatility: Fluctuations in the prices of natural gas, coal, and other commodities can impact the company's operating costs and profitability.
Environmental regulations: Compliance with evolving environmental laws and regulations, such as those related to coal combustion residuals and greenhouse gas emissions, can result in significant capital expenditures.
Weather and climate-related events: Severe weather and natural disasters can disrupt the company's operations and lead to increased restoration costs.
Cybersecurity threats: The company's critical infrastructure and information systems are vulnerable to potential cyber attacks, which could disrupt operations and result in financial and reputational damage.

Conclusion

Southern Company's diverse portfolio of regulated electric and natural gas utilities, combined with its competitive wholesale power generation business, positions the company for continued success. The company's strong financial performance, robust growth opportunities, and disciplined approach to capital allocation make it an attractive investment proposition for investors seeking exposure to the regulated utility and energy infrastructure sectors.

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