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Why Southern Company Has a Predictable Business Model

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Southern Company’s presence

Southern Company (SO), together with its subsidiaries, has a presence in both the regulated and unregulated segments of the power utility (XLU) business. The regulated entities sell power to the retail segment and the unregulated entities sell power wholesale.

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Regulated business

As we described earlier, Southern Company is the holding company of four regional power utilities—Alabama Power, Georgia Power, Gulf Power, and Mississippi Power. These entities provide electricity to most of Alabama and Georgia in addition to the northwestern part of Florida and southeastern Mississippi. The regions served by these companies cover an area of about 120,000 square miles. It covers a population of ~16 million.

Unregulated business

Southern Company sells power to the wholesale market primarily through its subsidiary Southern Power. Its customers are typically investor-owned utilities, IPPs, municipalities, and electric cooperatives. Southern Power is a subsidiary of Southern Company. It’s purely into unregulated business. It gets the majority—about 79% in 2014—of its revenue by selling electricity to its customers by entering into long-term PPAs of 20–25 years. Some of the companies that Southern Company signed a PPA with for its recent solar (TAN) acquisitions are Southern California Edison Company (EIX), Pacific Gas and Electric Company (PCG), and El Paso Electric Company.

Revenue Share

The regulated business contributes to the majority share of Southern Company’s revenue. The regulated business contributed 94%, or $477 million, and 92%, or 561, respectively, to Southern Company’s consolidated revenue in 1Q15 and 2Q15.

The revenue mix is in line with its competitors. For example, Duke Energy (DUK) generates 91% of its revenue from regulated business.

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