1. Southern Company – NYSE: SO
10/24/19
Josh Baker, Jared Robinson, Jacob Seidenberg, Bob Wang

2. Table of Contents Security Overview Company Overview Industry Overview
Investment Merits and Risks
Financial Model and Projections
Comparable Analysis

3. Security Overview

4. Security Overview Basic Info CUSIP – 843646AM2
Coupon – 4.15% Fixed, Semi-Annual
Maturity – 12/01/25
Class & Rank - Senior Unsecured
Credit Rating (Fitch, S&P) – BBB+
Amount Issued/Outstanding – 500,000 M/500,000M
YTM – 2.463
OAS – 83.3
Modified Duration – 5.151
Bloomberg

5. Company Overview

6. Company Overview Company Overview
Southern Company is a leading energy company based out of Atlanta, Georgia. Southern Company is a holding company that serves about 9 million customers. Through its subsidiaries, the company generates, wholesales, and retails electricity in the southeastern United States. They provide clean, safe, reliable and affordable energy through electric operating companies in three states, natural gas distribution companies in four states, a competitive generation company serving wholesale customers across America, a leading distributed energy infrastructure company, a fiber optics network and telecommunications services.
Southern Company has three business segments: Traditional Electric Operating Companies (TEOCs), Southern Company Gas, and Southern Power. Southern Power is a leading U.S. wholesale energy provider meeting the electricity needs of municipalities, electric cooperatives, investor-owned utilities, and commercial and industrial customers. Southern Company Gas is an energy services holding company whose primary business is the distribution of natural gas to 4.5 million retail customers. The TEOCs generate about 70% of revenue, while Southern Company Gas contributes a little over 15% of revenue, and Southern Power accounts for the last 10% of revenue.
Further, Southern Company is the second-largest owner of solar capacity outside of China, with 2.6 gigawatts.

7. Traditional Electric Operating Companies
Company Overview
Traditional Electric Operating Companies
Companies supply electric services throughout their respective state
Vertically integrated utilities companies that own generation, transmission, and distribution facilities
Southern Company Gas
Distribution of natural gas to residential, commercial, and industrial customers (~4.2 million customers across four states)
75,200 miles of natural gas pipelines, 14 storage facilities, total capacity of 158 BcF
Other smaller businesses: wholesale gas services and gas marketing services
Southern Power
Manages, develops, acquires, and constructs power generation assets, including renewable energy facilities (primarily Southeast)
Sells electricity at market-based rates in the wholesale market
Southern Company 10-K

8. Southern Company Gas Structure
Company Overview
Southern Company Gas Structure
State: Georgia
# Customers: 1,643k
Miles of Pipe: 33,610
State: Tennessee
# Customers: 67k
Miles of Pipe: 1,655
State: Illinois
# Customers: 2,237k
Miles of Pipe: 34,285
State: Virginia
# Customers: 301k
Miles of Pipe: 5,650
# Customers: 4,248k
Miles of Pipe: 75,200
Southern Company 10-K

9. Company Overview Other Companies
Provider of utility and energy technologies to electric utilities, and their industrial, institutional, and commercial customers
Operates six nuclear energy units for Georgia Power and Alabama Power
HQ: Birmingham, AL
Provides wholesale dark fiber optic solutions throughout the Southeast (Atlanta and other smaller cities)
Provides cell phone services throughout the Southeast
Offers products and services for natural gas customers; trading, storage and transportation, supply/producer services, etc.
Southern Company Website

10. Industry Overview

11. Industry Overview Overview of the Electric Power Industry
The power industry is the backbone of the industrial world. In developed economies investment is driven by transition of fuel and energy sources, increased environmental legislation, and a transmission and distribution (T&D) infrastructure. The industry is divided by region, which is why it must be regulated. Developing economies continue to try and expand their power bases to meet growing demand in electricity-starved regions. These are just some of the reasons why the power industry continues to have the largest investments and number of projects in the industrial world. There is currently about $5.9 trillion being spent on active projects. Industrial energy producers have over 4,731 projects worldwide that total up to $162 billion. The main players from Southern Company in this industry are Alabama, Georgia, and Mississippi Power. Some competitors include Duke Energy, NextEra Energy, Dominion resources, and Exelon.
Overview of the Natural Gas Industry
The United States is the world’s largest producer of natural gas, producing about 33% of the world’s total output. The US natural gas industry is generated about $181 billion in revenue in Government regulation is subject to the state in which the gas is being produced. Government agencies have to approve the natural gas rates. Once rates are approved, the agencies change them to ensure the Demand for gas is determined by the energy usage in each region; this is influenced by overall economic activity. Southern Company Gas’s biggest competitors are Piedmont Natural Gas, OnCor, and Centerpoint Energy.
Overview of the Renewables Industry
In 2018, the renewable industry generated around $238 billion in revenue. Also, the industry produced 8% more energy than it did the previous year. The three areas which saw the most growth were: transportation, building efficiency, and advanced fuel production. Also, few state governments are thinking about raising renewable energy portfolio standards. Some competitors of Southern Power in the renewables space are NextEra and Siemens. Recently in the industry, there has been some mergers and acquisitions with NextEra Energy acquiring a few businesses from Southern Company, including Gulf Power and Florida City Gas.
Industrial Info Resources,

12. Renewables Industry (cont’d)
Industry Overview
Renewables Industry (cont’d)
The U.S. advanced energy industry generated $238 billion in revenues in The top three growth sectors are advanced transportation, building efficiency, and advanced fuel production accelerating by $7.9 billion, $7.8 billion and $5.4 billion, respectively. Advanced electricity generation also grew 8% in 2018, reaching $59.6 billion in revenues. Other than Southern Company some key companies in the industry are Siemens, Vestas, GE, and NextEra Energy.
In several state governments, leaders increased or are considering increasing renewable portfolio standards, while more than 200 municipal governments have adopted 100% renewable energy goals. In addition, federal and state policies are increasingly supporting battery storage and offshore wind development in the United States.
Further, solar represents the largest source of new electricity generating capacity globally. Large cost reductions have driven the emergence of solar. The subsidy intensity of solar has greatly diminished over time too. With subsidies waning, unsubsidized solar has emerged as among the lowest cost fossil or renewable generation sources globally.

13. Overview of the Renewables Industry
Industry Overview
Overview of the Renewables Industry

14. Overview of the Renewables Industry
Industry Overview
Overview of the Renewables Industry

15. Investment Merits and Risks

16. Investment Merits and Risks
Investment Risk and Merit Summary
Investment Merits Merit 1 – Long-term contracts and variations of power sources Merit 2 – Plant Vogtle Merit 3 – Cash generation through divestment deals Investment Risks Risk 1 – Cost of compliance Mitgant: Market-based contracts Risk 2 – Need to divest assets in order to reduce debt Mitgant: Plant Vogtle cash flow generation, low refinancing rates

17. Long term contracts and variation of power sources
Investment Merits
Long term contracts and variation of power sources
Southern has an average remaining contract duration of 14 years. Its long term contract will generate stable cash flows for Southern Power to finance projects and issue debt repayments.
Southern Power has a majority of Solar Energy facilities under operation, and a significant numbers of wind power facilities. It is largely applying clean energy in its wholesale business. Southern Power also moves at a quick pace acquiring new facilities of energy sources. It started acquiring wind facilities in 2016, and has acquired 11 projects in total in a span of 2 years. Its wind projects are now in full commercial service, providing more than 1920 megawatts of wind energy capacity.
Southern Power has also aggressively scaled its Solar Capacities. It currently owns and co-owns 28 solar facilities, generating more than 1230 megawatts of solar generating capacity. Together with wind power, these two types of clean energy facilities account for more than 60% of power generating capacity of Southern Power. This is a sign that Southern Power is quickly adapting to the field of clean energy and has the capability to put it into full commercial uses, which gives Southern Company a competitive edge in both acquiring market share through cost efficient and policy friendly aspects.
In California and Delaware, Southern Power is working on multiple alternative energy projects, including the Millikan project in Irvine California, which uses lithium ion batteries for more sustainable and efficient energy storage. The project is contracted for more than 8 years.
With a wide variety of clean energy sources already in place, Southern Power will benefit significantly in future competitions. Its versatilities also provides Southern Power the capability to quickly switch between different energy generating options, and its active involvement in emerging technologies will further help Southern Power to scale down cost and increase efficiencies.
Source: Westlake

18. Investment Merits and Risks
Projects by Energy Sources

19. Project Map

20. Investment Merits Plant Vogtle
Plant Vogtle is an $8.4 billion nuclear project, in which Southern Power has a 45.7% share.  Plant Vogtle units 3 and 4 will be the first new nuclear units built in the United States in the last three decades and are on schedule to be the largest nuclear power plants in the United States. As construction continues, Southern Power’s subsidiary, Georgia Power remains focused on completing Vogtle units 3 and 4 with safety and quality as top priorities. Unit 3 direct construction is about 71% complete right now and should be approaching 90% by year-end. In Q2 of 2019, Vogtle achieved a major milestone when Unit 3 initial energization was completed. The next step is to begin integrated flush within the plant. The project’s major milestones to date for 2019 have been achieved and others are expected to begin this year. Also, the site has averaged nearly 150,000 earned hours over the past four weeks; at the end of Q3, there was significantly improved night shift efficiency and productivity. According to Evercore’s Greg Gordon, Plant Vogtle is 79% complete and Plant units 3 and 4 are expected to enter commercial operation in 2021 and 2022, respectively. The power plants will produce enough energy to power 1 million homes and businesses. Plant Vogtle, when it is up and running, will bring in mass amounts of revenue for Southern Company and provide ample benefit for the company’s investors. The plants will be operating significantly before our bond expires so we will reap the benefits.
Southern Power Q3 Investor Presentation

21. Plant Vogtle Construction Milestones
Investment Merits
Plant Vogtle Construction Milestones
Southern Company Q3 Investor Presentation

22. Cash Generation Through Divestment Deals
Investment Merits
Cash Generation Through Divestment Deals
Southern Company has entered a few divestment deals with NextEra Energy and Global Atlantic Financial Group worth a combine $7.7 billion dollars. This cash will be used to help fund Project Vogtle, repay debts, and to help create a more focused portfolio of assets. In it’s deal with NextEra Energy, Southern Company is selling its Gulf Power Company, Florida City Gas, and interests in Oleander and Stanton natural gas.
These events show Southern Company’s willingness to sell valuable assets to repay its debt balance, an extremely positive sign for its bond investors. Additionally, these divestments show Southern Company’s willingness to effectively modify and streamline its portfolio to focus on state-regulated electric and gas utilities assets (such as Plant Vogtle). Southern Company remains a leading and maturing domestic utilities provider serving a diverse set of U.S. regions. Utilities securities are often protected against economic downturns and volatility.
Source: NASDAQ, Yahoo

23. Investment Risks Costs of Compliance
To comply with existing environmental requirements, Southern Power’s plants are paying significant capital and operating costs including the settlement of AROs (asset retirement obligations). This cost is expected to be recovered through ratemaking and market-based contracts. However, there is no assurance that these costs will be recovered.
Additionally, environmental laws and regulations covering the handling and disposal of waste and release of hazardous substances could require the Southern Company system to incur substantial costs to clean up affected sites, including certain current and former operating sites, and locations affected by historical operations or subject to contractual obligations.
Mitigant: Southern Power engages in ratemaking process and enters into market-based contracts to recover its costs. The regulation and compliance risks also applies to other competitors in the energy wholesale market. So, this particular risk will not significantly effect Southern Power’s competitiveness in the market.
Source: 10K

24. Need to divest assets in order to reduce debt
Investment Risks
Need to divest assets in order to reduce debt
At the end of 2018, Southern’s net debt was at $45.5 billion and the company was, and still remains, highly levered.  During the first six months of 2019, Southern generated $2.5 billion in net operating cash flow while spending $3.5 billion on capital expenditures and $1.3 billion on common dividend payments.  Southern Power’s free cash flow is not sufficient to repay their debt and dividends declared so the company is resorting to selling some of their businesses. Southern Power agreed to sell “Gulf Power, Florida City Gas and its ownership interests in the Oleander and Stanton natural-gas generating plants located in Florida in transactions valued at approximately $6.475 billion, including the assumption of approximately $1.4 billion of Gulf Power debt” to NextEra Energy Inc (NEE), their biggest competitor.
Also, Southern Company needed to sell a few facilities. This includes the Nacogdoches biomass facility sale to Austin Energy that closed in June and also the Plant Mankato sale to Xcel. That sale is expected to close sometime in the fall of 2019.
Mitigant: Southern is selling these assets to strengthen its balance sheet and to better fund its growth of capital expenditures over the coming years.  In addition, Plant Vogtle, and the other capital expenditures, will soon create more revenue for Southern Power, increasing their cash flows and helping to reduce their debt. Southern Power is also a major beneficiary of the FED recently lowering interest rates. This interest rate cut will push down on Southern’s cost of debt and make refinancing activities much easier. Further, in Q3, Southern Company raised over $3.3 billion of total capital at attractive rates.
Southern Company Q3 Investor Presentation

25. Financial Model and Projections

26. Financial Model and Projections

27. Comparable Analysis

28. Comparable Analysis The bonds mature at a similar time
Southern Power
CenterPoint Energy
NextEra Energy
Exelon
Xcel Energy
Net Debt/EBITDA
5.56
5.31
4.32
3.6
4.83
EV/EBITDA
14.42
17.33
8.34
13.24
Maturity
12/01/25
12/01/26
04/01/26
06/15/25
06/01/25
YTW/YTM
2.463
2.370
2.397
2.337
2.243
M. Duration
5.151
6.104
5.664
4.817
4.645
OAS
83.3
71.0
75.6
74.2
63.1
Credit Rating
BBB+ A-
BBB
The bonds mature at a similar time
Southern Power has a credit rating similar to the others
Southern Power has a median modified duration and highest yield to worst
Southern Power has a high OAS