Southern Company Scrambles to Raise Cash

From Expansion to Contraction in 36 Months; Southern Company Scrambles to Raise Cash               – by Glenn Fydenkevez

With its landmark $8 billion-dollar acquisition of gas utility AGL Resources in 2015, Southern Company (NYSE: S0) became one of the two largest utilities in the US. The very next year the company purchased a 50% stake in oil infrastructure leader, Kinder Morgan, for $1.5 billion. Southern was also accumulating wind and solar assets at an impressive clip. Clearly, the company was engaged in an aggressive expansion program. 

All that, however, is ancient history. Today Southern is selling assets as fast as they ever bought them. 

The contraction started inauspiciously last year with the $1.4 billion sale of some its natural gas distribution concerns in New Jersey and Maryland. Since then the pace of the retrenchment has been quickening. 

Southern recently announced that it intends to dispose of virtually all of its Florida assets in a $5.1 billion-dollar sale to Next Era Energy, Inc (NYSE: NEE). The transaction will entail Southern giving up Gulf Power, a company they’ve owned for nearly 100 years, as-well-as perennial cash cow, Florida City Gas. The proceeds, the company says, will allow the energy giant to reduce debt by more than $3 billion.

Southern CEO, Tom Fanning, has further indicated that plans are in the works raise an additional $1 billion by selling a significant stake in the firm’s solar energy holdings. He’s also exploring leveraging the value of their renewable energy businesses through tax equity financing; a tax credit scheme akin to the popular Affordable Housing Tax Credit program used in the commercial real estate industry.  

It’s clear to energy investors that Southern Company is in urgent, if not desperate, need of cash. No one can imagine that the firm would not have preferred to hold on to most of the assets it’s currently unloading. 

Southern’s cash flow problems began with the recent changes in U.S. Tax laws, which were not favorable to regulated utilities.  The firm’s capital needs became critical last year when it abruptly aborted its highly publicized plan to build a state-of-the-art clean coal power generating facility in Mississippi. Shutting down that project necessitated a $6.2 billion-dollar write-down which had not been planned for. 

All the while, Southern was (and is) moving forward with its ambitious plan to build a nuclear plant – a feat that has not been attempted in the US since 1977 – in Georgia. As might have been expected but apparently was not, the project has experienced massive cost overruns and reoccurring construction and administrative delays. The estimated price tag of this huge undertaking is now well over $25 billion and climbing. 

Fanning has estimated that Southern’s average equity need will remain near $1.5 billion a year for the foreseeable future. Unfortunately, other than selling valuable assets that he and shareholders wish they could keep, he has not indicated where he expects to come up with that kind of money. 

Southern remains a low volatility stock. The dividend seems healthy and appears fairly safe for now. That being said, until the company absorbs the remnants of the Mississippi coal plant write-down, finishes selling whatever else it plans to sell, and can explain where it’s going to get the multiple billions it needs to fulfill its nuclear ambitions, investors may want to look elsewhere for a viable utility holding.