Southern Co. (SO), the $47 billion Georgia-based regulated electric company, reported impressive 44.6% year-over-year first-quarter revenue growth to $5.77 billion and 34.6% profit growth to $658 million in May (11.4% margin vs. 12.2% in the year earlier period).
Southern recorded $1.53 billion added revenue in the recent quarter brought by its natural gas business that was not present the year prior resulting in even higher overall business growth.
"Each of our major business units had a great start to the year.
"Despite headwinds from unseasonably warm weather during the first two months of the year, our traditional electric and gas operating companies performed well, and they are on track to deliver on their targets for 2017 and beyond. In fact, Southern Company Gas, including its seven premiere state-regulated gas utilities, performed exactly as expected." - Chairman, President and CEO Thomas A. Fanning
Valuations
Southern traded near par with its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio 17.8 times vs. the industry median of 17.6 times, a price-book (P/B) ratio of 1.9 times vs. 1.6 times and a price-sales (P/S) ratio of 2.13 times vs. 1.7 times.
The company also had an appealing 4.78% dividend yield with 84% payout ratio.
Average 2017 revenue and earnings-per-share expectations indicated forward multiples of 2.1 times and 16 times.
Total returns
Southern has failed to generate any positive returns to its shareholders so far this year with (-)1.61% total losses vs. the broader Standard & Poor's 500 index's 11.05% (Morningstar). In the past five years, the company provided returns of 3.97% (annualized) vs. the index's 15.06%.
Southern Company
According to filings, Southern was incorporated under the laws of Delaware on Nov. 9, 1945.
Southern owns all of the outstanding common stock of Alabama Power, Georgia Power, Gulf Power and Mississippi Power, each of which is an operating public utility company. The traditional electric operating companies supply electric service in the states of Alabama, Georgia, Florida and Mississippi (2).
In addition, Southern Company owns all of the common stock of Southern Power Co., which is also an operating public utility company. Southern Power constructs, acquires, owns and manages generation assets, including renewable energy projects, and sells electricity at market-based rates in the wholesale market.
Further, Southern completed an $8.0 billion merger with Southern Co. Gas in July 2016. Southern Company Gas is an energy services holding company whose primary business is the distribution of natural gas in seven states - Illinois, Georgia, Virginia, New Jersey, Florida, Tennessee and Maryland - through the natural gas distribution utilities. Southern Co. Gas is also involved in several other businesses that are complementary to the distribution of natural gas.
Southern also owns 100% of SCS, Southern LINC, Southern Holdings, Southern Nuclear, PowerSecure and other direct and indirect subsidiaries (1).
(10-Q filing)
Only Southern's Southern Co. Gas was available for segment presentation in the recent quarter.
Sales and profits
In the past three years, Southern had revenue growth average of 5.2%, profit growth average of 13.4%, and profit margin average of 12.2% (Morningstar).
Cash, debt and book value
As of March, Southern had $1.09 billion in cash and cash equivalents and $48.9 billion in debt with debt-equity ratio of 1.95 times vs. 1.43 times the year earlier period. Overall debt climbed $19.2 billion while shareholder equity increased by $4.3 billion.
Of Southern's $109.8 billion assets 6.5% were identified as goodwill and intangible assets while book value has increased by 22% year over year to $27.3 billion.
Cash flow
As of the first quarter, Southern's cash flow from operations rose by 2.2% to $897 million from a year-earlier period. In addition to higher profits, the company recorded higher cash flow from its deferred income taxes, receivables and natural gas for sale.
Capital expenditures were $1.49 billion leaving Southern with (-)$591 million in free cash outflow vs. (-)$994 million in outflows in the same period last year. Despite the outflows, the company had allocated $1.02 billion in its Southern Power's acquisition of Bethel wind facility in Texas. In addition, the company also provided $574 in dividend payouts to both shareholders and noncontrolling interests.
Southern also raised $186 million from share issuance in the quarter while $769 million in debt net repayments.
In review, Southern generated (-)$3.7 billion in free cash outflow, $19.84 billion in borrowings (net repayments) and $6.6 billion in shareholder payouts in the past three fiscal years.
Conclusion
Southern recorded higher overall profits compared to last year, probably brought by its acquisition of Southern Co. Gas. Despite the appealing payout yield, the company has a highly leveraged balance sheet. Cash flow generation was also not very impressive in recent years.
Meanwhile, 16 analysts have an average price target of $50.84 per share vs. $47.26 at the time of writing. Applying three-year revenue growth and P/S multiple averages followed by a 30% margin indicated a value of $35.8 a share.
In summary, Southern Company is a pass.
Notes
1. Company filings
SCS, the system service company, has contracted with Southern Co., each traditional electric operating company, Southern Power, Southern Co. Gas, Southern Nuclear, SEGCO and other subsidiaries to furnish, at direct or allocated cost and upon request, the following services: general and design engineering, operations, purchasing, accounting, finance and treasury, tax, information technology, marketing, auditing, insurance and pension administration, human resources, systems and procedures, digital wireless communication and other services with respect to business and operations, construction management and power pool transactions. Southern LINC provides digital wireless communications for use by Southern Co. and its subsidiary companies and also markets these services to the public and provides fiber cable services within the Southeast. Southern Holdings is an intermediate holding company subsidiary, primarily for Southern Co.'s investments in leveraged leases and for other electric services. Southern Nuclear operates and provides services to the Southern Co. system's nuclear power plants and is currently developing Plant Vogtle Units 3 and 4, which are co-owned by Georgia Power. PowerSecure is a provider of products and services in the areas of distributed generation, energy efficiency and utility infrastructure.
2. Company filings
Alabama Power and Georgia Power each own 50% of the outstanding common stock of SEGCO. SEGCO is an operating public utility company that owns electric generating units with an aggregate capacity of 1,020 MWs at Plant Gaston on the Coosa River near Wilsonville, Alabama. Alabama Power and Georgia Power are each entitled to one-half of SEGCO's capacity and energy. Alabama Power acts as SEGCO's agent in the operation of SEGCO's units and furnishes fuel to SEGCO for its units. SEGCO also owns one 230,000 volt transmission line extending from Plant Gaston to the Georgia state line at which point connection is made with the Georgia Power transmission line system. SEGCO added natural gas as a fuel source for 1,000 MWs of its generating capacity in 2015. In April 2016, natural gas became the primary fuel source. Alabama Power, which owns and operates a generating unit adjacent to the SEGCO generating units, has entered into a joint ownership agreement with SEGCO for the ownership of an associated gas pipeline. Alabama Power owns 14% of the pipeline with the remaining 86% owned by SEGCO.
Disclosure: I do not have shares in any of the companies mentioned.
