Southern Company (NYSE:SO) has been delivering a satisfactory financial performance as of late and has remained a popular choice for investors seeking income, as the stock offers an impressive dividend yield of 5%. Lately, the company has been upgrading its electricity generation assets to strengthen its generation portfolio and has been involved in the construction of several power units. The company's major ongoing construction projects include Plant Ratcliffe and Vogtle Units 3 and 4. For the past several months, the company has increased its estimated construction costs for Plant Ratcliffe and has extended the completion date for the project. Also, the company is exposed to a couple of pending rate cases, on which decisions are expected in the near future. The construction of the ongoing projects and pending rate cases provide uncertainties for the stock and could have an adverse impact on the stock price. Therefore, I recommend investors stay on the sidelines on SO.
SO is among the leading U.S. regulated utilities. The company has a large customer base of 4.4 million and has four utility subsidiaries, including Alabama Power, Mississippi Power Co., Gulf Power (Florida) and Georgia Power. SO has delivered a satisfactory financial performance in recent times; however, lately, the stock has been surrounded by uncertainties regarding estimated costs and completion times of ongoing projects.
Last week, SO disclosed that the ongoing construction of Plant Ratcliffe would miss its completion deadline of May, 2014. The delay in the completion date was attributed to rainy weather in summers and low labor productivity. The plant has a generational capacity of 582MW and was earlier scheduled to be operational by May 2014. Already, the company has raised the project's estimated costs by $990 million to meet the scheduled operational date of May, 2014. Due to the increase in estimated costs of the project, the company registered an impairment charge of $333 million in 1Q2013, and another impairment charge of $278 million in 2Q2013. Other than the increase in estimated costs for the project, the company forfeits $133 million of investment tax credit because of a delay in the completion date. The increase in the expected cost and impairment charges took a toll on Mississippi Power's equity ratio, as its equity ratio dropped by approximately 10% to 40%, from its long-term target equity ratio of 50%. To maintain its long-term equity target ratio of 50%, Mississippi Power is likely to opt for issuing common equity, which will lead to earnings dilution.
The company has not yet provided the revised construction schedule for the Plant Ratcliffe and is likely to provide a revised schedule and updated cost estimates for the project in the first week of next month, November. If the company increases cost estimates of the project any further, it will have an adverse impact on the stock price. A delay in the project will add to its cost; it is projected that a delay in the in-service date will increase the cost of the project by $15-$20 million each month.
Other important ongoing construction projects include Plant Vogtle, Units 3 and 4. Units 3 and 4, the two nuclear units, have a total generational capacity of 2200MW and are projected to cost $14 billion. Vogtle Unit 3 is expected to be in service by 2017, and Vogtle Unit 4 is expected to be in service by 2018. As the generational capacity and estimated costs of the two units are significant, any delay in operational dates or an increase in estimated costs can have an adverse impact on the stock price.
The company is also awaiting the decision of a rate case filed by its subsidiary, Georgia Power, requesting a rate increase of $482 million or 6.1%, accompanied by an ROE of 11.5%. The decision in the case is expected on December 17, 2013. If the requested ROE of 11.5% is not granted by the commission, then a downside risk prevails.
Uncertainties regarding ongoing construction projects' estimated costs and expected completion dates remain a risk for the company. Also, the outcome of pending rate cases poses a threat to the company's future financial performance and the stock price. Due to these uncertainties, I recommend investors stay on the sidelines on SO. Once the company provides an update on its construction projects, providing more visibility into the future, and there's a constructive outcome of the pending Georgia Power rate case, it could help remove the prevailing overhangs from the stock price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.