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Will High Leverage and Coal Dependence Affect Southern Company?

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Dec. 4 2020, Updated 10:53 a.m. ET

A company in transition

Southern Company (SO) is one of the leading utility companies (XLU) in the US. The company has a history of stable performance. This is evident through its track record of rising dividends for the past 270 consecutive quarters or 14 years.

Recently, Southern Company has undergone a lot of transformations to regain its position in the industry. It’s investing heavily in building up its generation capacity, either by developing or acquiring, especially in the solar (TAN) and natural gas space. The majority of its acquisitions are from First Solar (FSLR). Apart from this, Southern Company is building up an Energy Innovation Center to promote the research and development of clean and efficient energy sources.

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Debt overburden

The recent announcement regarding the acquisition of AGL Resources (GAS) is a big positive for Southern Company. It’s expected to make it the second largest utility company in the US. In contrast, this transaction will increase the leverage at the holding company level by about $8 billion. Although Southern Company plans to eventually raise fresh equity, the leverage will remain high for several years. This will drive the outlook for Southern Company and its subsidiary Mississippi Power to negative.

Currently, Southern Company is building nuclear reactors in Georgia. It’s building an integrated coal gasification combined cycle facility at Kemper. Both of these have exceeded their time and cost. This could continue to impact Southern Company’s profitability.

EPS forecast

Southern Company’s earnings are expected to grow. According to analyst forecasts, the company’s EPS (earnings per share) is expected to be $2.84 in 2015. It’s expected to grow to $3.20 in 2018.

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