Southern Company: Solar Project Acquisitions a Small but Important Growth Opportunity

We are reaffirming our $68 fair value estimate for Southern Company SO after it announced two large solar energy project acquisitions in Texas and Wyoming this month.

Although the transactions by themselves are too small to have a material valuation impact, we think they are notable because they demonstrate another area of potential growth investment for Southern in the coming years. We are reaffirming our narrow moat rating.

Southern’s stock trades in line with our fair value estimate as of late September. It has outperformed the Morningstar U.S. Utilities Index by 10 percentage points this year, most of that coming since April when investors became comfortable that Southern would complete the Vogtle new nuclear units without any further delays or cost increases. Unit 3 entered service in July and Unit 4 remains on track to enter service early next year.

The two solar projects that subsidiary Southern Power acquired this week total 350 megawatts, a 15% increase in its solar portfolio. We think it’s likely that Southern will add another 300 MW to the Texas project, Millers Branch, in the coming years.

Long-term, we continue to forecast 6% annual consolidated earnings growth based on $8.6 billion of annual capital investment in 2023-25, excluding Vogtle. Although Southern Power likely will remain only about 10% of consolidated earnings, we think it’s a good way for Southern to invest growth capital that has long-term contracts and earns returns similar to its utilities without regulatory risk. This gives us more confidence in our growth outlook.

We continue to forecast 2023 earnings in line with management’s $3.55-$3.65 per share guidance despite an exceptionally warm winter that hurt first-half earnings. We expect Southern to make up some of the $0.23 per share negative earnings variance during the second half of the year. Our 2024 weather-normalized EPS is in line with management’s $3.95-$4.10 guidance range.