Electric utility firm Southern Co. (SO) reported mixed fourth quarter and fiscal 2011 results, attributable to industrial sector growth and lower operating costs, partially offset by weak residential and commercial sector performance.
Quarterly earnings per share (EPS) came in at 30 cents, beating the Zacks Consensus Estimate by a penny. Reported EPS also compared favorably with last year's 18 cents
For the full year, Southern Co. reported earnings of $2.57 per share, surpassing our projection by a penny and ahead of the prior-year level of $2.37 per share.
Quarterly revenue stood at $3,696 million, down 2.0% year over year and also below the Zacks Consensus Estimate of $4,041 million.
Southern Co. generated revenue of $17,657 million in fiscal 2011, against $17,456 million in 2010. The result, however, failed to meet the Zacks Consensus Estimate of $18,032 million.
Despite the EPS surprise, the company’s results were adversely impacted by seasonality from October to December, which decreased electricity demand for air conditioning. This brought about a downward movement in overall electricity sales and usage. Total electricity sales during the fourth quarter were down 5.3% from the same period last year.
During the quarter, total retail sales fell 5.5%, reflecting lower demand from residential customers, which deteriorated 13.2%. Commercial sales registered a year-over-year decline of 4.9%.
On a positive note, industrial sales inched up 1.4%, driving Southern’s quarterly results. With nearly 35% 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 5.4% year over year, representing the third consecutive quarterly decline. Additionally, Southern’s total operating expense in the fourth quarter stood at $3,107.0 million, approximately 5.9% 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-than-expected pace. In the meantime, the company continues to further emphasize 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 serving 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 changes in consumer demand may hamper Southern’s results over 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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