When Southern Co reported earnings in late July the company showed just how an improving economy was having a positive impact on results. Energy sales rose year over year to residential, commercial, and industrial customers and that helped drive a 3% increase in net income to $629 million, or $0.69 per share.
But when I listened to the conference call I was more interested in how the company was transitioning to the new threats in energy, namely from renewable energy. Renewables could be a threat or a benefit to utilities in the future and how Southern Company handles this potentially transformative technology will tell a lot about what investors can expect long-term. Here were my biggest takeaways from management's comments.
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Southern company's core business is strong
Growing demand is key to Southern Company's business and at a time when consumers are beginning to explore on-site generation and efficiency is becoming a bigger focus it's not easy to assume demand will grow. But that's what has happened for Southern company, which is a positive for near term earnings.
The fleet is getting cleaner
Following a broader trend in energy, Southern Company is burning less coal and more natural gas while building renewable energy assets. This lowers the risk in the portfolio with EPA regulations coming down the pipeline and has also been a way to lower costs. Look for these trends to continue as coal becomes a less important piece of America's energy future.
Renewable energy is key to the future
Southern Company, and Georgia in particular, hasn't been terribly progressive when it comes to renewable energy despite having strong solar assets in the state. But that's changing and the company may actually put in more renewable energy assets than previously planned thru 2016.
Even though many of these renewable projects will sell to the non-regulated wholesale electricity market, they carry a much lower risk than other non-regulated power facilities because they will have long-term power purchase agreements with other utilities; therefore de-risking the portfolio for Southern. At the very least, investors should take some comfort knowing management is trying to find ways to make money off new forms of energy.
Building a new renewable energy business model
One of the new concepts Georgia Power is testing is installing and owning solar systems on customers' rooftops. This is similar to the business model of SolarCity or Vivint Solar, but with the utility owning the solar system instead of those solar companies.
It's an interesting concept but it's unknown how successful it will be or if regulators will be OK with utilities owning rooftop solar systems across the country. What's encouraging is that Southern Company is at least trying to find ways into rooftop solar instead of just looking at it as a threat from outside companies.
The renewable portfolio is going to be big
This comment puts some context to the quotes above. 3.2 GW of renewable energy assets is about enough to power 525,000 homes and when it's completed it will be a big part of the energy portfolio. Southern Company isn't going to be the same company it is now by the end of 2016 and for investors that's a good thing.
Changes afoot in utilities Across the country utilities are trying to figure out how to adapt to new forms of energy that are competing with the old business model. Southern Company may be figuring out how and at the same time its core businesses are performing well.
With the new strategic vision for the company and a 4.7% dividend yield this could be one of the top stocks in the utility space for many years to come and is certainly one for investors to keep on their radar.
The article 5 Things Southern Co's Management Wants You to Know originally appeared on Fool.com.
Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Southern Company. The Motley Fool recommends and owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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