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SO’s Regulated Operations Expansion Signals Its Stable Growth

Will Southern Company Fulfill Flat Growth Estimates in 1Q16?

(Continued from Prior Part)

Segment-by-segment earnings

Southern Company’s (SO) traditional operating companies continued their growth momentum last year. Georgia Power and Alabama Power are the main contributing subsidiaries to Southern Company’s consolidated earnings.

Southern Power is a subsidiary that looks after SO’s wholesale operations. The chart above shows the contributions from Southern Company’s subsidiaries to its total operating income.

Traditional operating companies

Georgia Power and Alabama Power collectively form nearly 90% of SO’s total operating income. Southern Power struggled last year due to the steep natural gas price fall. Power prices in the wholesale markets fell due to gas prices, which ultimately burned utilities (VPU) in the wholesale markets.

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Natural gas’s price fall could continue, but Southern Power will strive to offset the negative impact with renewable capacity additions.

Expansion of regulated operations signals stable growth

As the largest operating subsidiaries of Southern Company, Georgia Power and Alabama Power are expected to be the focal points of SO’s capital spending plan for the next three years. Of the $13 billion in capital SO has allotted to its traditional operating companies for the next three years, nearly $11 billion is expected to be spent on these two.

The strategy of strengthening its regulated operations may improve SO’s earnings in the next few years. After the AGL Resources (GAS) acquisition, SO’s regulated operations are estimated to grow even further, as AGL is already an 80% regulated gas distribution company.

Southern Company forms 8% of the Utilities Sector SPDR ETF (XLU). NextEra Energy (NEE), Duke Energy (DUK), and Dominion Resources are a few of XLU’s top holdings. Together, they form ~25% of the ETF.

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