Electric utility firm Southern Co. (SO) reported third quarter 2011 earnings per share (EPS) of $1.07, ahead of the Zacks Consensus Estimate of $1.04 and the year-ago period profit of 98 cents. The outperformance reflects industrial sector growth and the positive effects of regulatory actions in Georgia.
Quarterly revenue, at $5,428 million, was up 2.0% year over year but came below the Zacks Consensus Estimate of $5,813 million.
Despite the EPS beat, the company’s results were adversely impacted by an unseasonably cool weather in September, which decreased electricity demand for air conditioning. This brought about a downward movement in overall electricity sales and usage. Total electricity sales during the third quarter were down 2.7% from the same period last year.
Total retail sales fell by 3.3%, reflecting lower demand from residential customers, which deteriorated by 6.9%. Commercial sales registered a year-over-year decline of 3.4%.
On a positive note, industrial sales increased 1.6%, driving Southern’s third quarter results. With nearly 30% 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 3.5% year over year, the second consecutive quarterly decline. Additionally, Southern’s total operating expense for the period, at $3,776.0 million, is approximately 2.2% lower 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 but at a slower pace than expected. In the meantime, the company continues 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 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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