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Mississippi Power Co. – a unit of Atlanta-based electric utility firm Southern Co. (SO - Analyst Report) – recently announced that it will sell 15% of its Kemper County power plant to South Mississippi Electric Power Association (SMEPA) for $500 million. The agreed upon sale of the $2.8 billion under-construction facility is expected to be over by this year-end.

Earlier this month, Hattiesburg-based SMEPA agreed to purchase the LSP Energy power plant in Batesville for $286 million. The energy power plant has a capacity of 837 megawatts, implying that SMEPA will be paying $342,000 per megawatt of the generating capacity. On the other hand, SMEPA – the generator and transmitter of power to 11 electric cooperatives spread over southern and western Mississippi – will pay $5.65 million per megawatt for the Kemper plant, representing a capacity of 88.5 megawatts.

These two investments will add more than 900 megawatts of capacity and will meet SMEPA’s long-term needs.

The 582 megawatt Kemper plant will be using lignite to ensure stable fuel supply. To reduce fuel cost, lignite will be mined onsite. The byproducts generated in the whole process will be sold to other industries for economic and environmental benefits.

Southern Company – one of the largest generators of electricity in the nation along with the likes of Exelon Corporation (EXC - Analyst Report) and Duke Energy Corporation (DUK - Analyst Report) – serves both regulated and competitive markets across the Southeastern U.S. It is a holding company for four regulated Southern electric utilities that serve about 4.4 million customers – Georgia Power, Alabama Power, Gulf Power and Mississippi Power.

With a good rate base growth and constructive regulation, we expect the firm to generate steady earnings and dividend growth in the coming years through its long-term power contracts.

However, Southern Company’s heavy reliance on coal-generated energy supply and a lack of meaningful contribution from renewable energy is a matter of concern. In the current age of growing emphasis on ‘environment friendly or green’ energy, the company may be forced to divert cash flows to ensure regulatory compliance, which can adversely impact profitability.

Consequently, we do not anticipate a significant upside in the near future and expect the stock to perform in line with the broader market. Southern Company has a Zacks #3 Rank (Hold rating) for the short term. We are Neutral on the shares for the longer term.

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