Electric utility firm Southern Co. (SO) reported second quarter 2011 earnings per share of 71 cents, ahead of the Zacks Consensus Estimate of 64 cents and the year-ago period profit of 62 cents. The outperformance reflects the positive effects of weather-related gains, robust industrial sector growth, and regulatory actions in Georgia.
Quarterly revenue, at $4,521 million, was up 7.5% year over year and also exceeded the Zacks Consensus Estimate by $59 million.
The company’s results were positively impacted by an unseasonably hot summer, which increased electricity demand for air conditioning. This brought about an upward movement in overall electricity sales and usage. Total electricity sales during the second quarter were up 1.2% from the same period last year.
Total retail sales rose by 1.6%, reflecting higher demand from residential customers, which improved by 2.2%. However, commercial sales registered a year-over-year decline of 0.4%.
In particular, industrial sales increased 3.3%, driving Southern’s second quarter results. With nearly 33% of the company’s total retail sales coming from industrial customers, a rebounding economy significantly affects the fortunes of Southern, as compared to other utilities that are less dependent on the industrial component.
Expenses Summary
The company’s operations and maintenance expense decreased slightly (by 0.5%) year over year, the first decline in six quarters. However, Southern’s total operating expense for the period, at $3,386.0 million, is approximately 4.0% higher than the prior-year level.
Outlook
Management indicated that the economic recovery has led to improvements in industrial activity, especially in Southern’s core Southeast market. The company continues to see positive economic trends and intends to build on its emphasis on exceptional service, industry-leading reliability and prices below the national average.
Our Recommendation
Headquartered in Atlanta, Georgia, Southern Company is the second largest generator of electricity in the nation behind Exelon Corp. (EXC), serving 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 good rate base growth and constructive regulation, we believe Southern Company will be able to generate steady earnings and dividend growth in the coming years through its long-term power contracts. However, the challenging economic environment and a return to more normal spending levels may hamper Southern’s results during the next few quarters.
Taking these factors into account, we remain comfortable with Southern’s Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
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