Electric utility firm Southern Co. (SO) reported slightly weaker-than-expected third quarter 2010 results, pulled down by increased operations and maintenance expenses. These were partially offset by improvement in industrial activity and higher usage on the back of warmer-than-normal temperatures.
Earnings per share came in at 98 cents, a penny below the Zacks Consensus Estimate as well as the year-ago profit.
However, quarterly revenue, at $5.3 billion, was up 13.6% year over year and beat the Zacks Consensus Estimate by $8 million. The company benefited from favorable weather conditions and positive economic trends. This brought about a significant upward movement in overall electricity sales and usage. Total electricity sales during the third quarter were up 6.5% from the same period last year.
Total retail sales grew by 9.4%, reflecting strong demand. Industrial sales increased 7.3%, driving Southern’s third quarter results.
With more than 28% 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. Commercial sales rose by 6.4%, while residential sales managed to register a solid year-over-year growth of 14.0%.
Expenses Rise
The company’s operations and maintenance expense increased 24.2% year over year, the third successive quarterly rise. Southern’s total operating expense for the period was $3.9 billion, approximately 18.2% higher than the prior-year level.
Outlook
Management indicated that the economic recovery has led to improvements in industrial activity in the 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
Southern Company is one of the largest electric utility holding companies in the U.S. with good rate base growth and constructive regulation. We believe the 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.
SOUTHN COMPANY (SO): Free Stock Analysis Report
Zacks Investment Research
