Electric utility firm Southern Co. (SO) reported modestly better-than-expected fourth quarter results, driven by lower expenses and increased monthly service charges. Earnings per share (excluding one-time items) came in at 31 cents, 5 cents above the prior-year period and a penny above the Zacks Consensus Estimate. However, revenue was down 7.7% year-over-year to $3.5 billion, as electricity sales continued to be hurt by the weak economy.
Another Challenging Quarter
It was another difficult quarter for Southern, as it continued to be adversely affected by the recession that had a significant impact on overall electricity sales and usage. This resulted in a decrease in electricity sales across most of the categories. Total electricity sales during the fourth quarter were down 4.1% from the same period last year.
Total retail sales declined by 0.6%, reflecting soft demand. Industrial sales suffered the most, reflected in a 2.1% year-over-year fall. With more than 30% of the company’s total retail sales coming from industrial customers, a sluggish economy severely affects the fortunes of Southern, as compared to other utilities that are less dependent on the industrial component. Commercial sales performed relatively better, declining by a meager 0.7%. However, residential sales managed to bounce back with a year-over-year increase of 1.1%.
Effective Expense Management
Given the weak electricity sales environment, Southern has taken certain strategic actions to improve the company’s performance and competitiveness in a cost-effective manner. As part of this initiative, the company managed to reduce operations and maintenance expenses by 3.3% year-over-year, the fourth successive quarterly fall. Southern’s total operating expense for the period was $3.0 billion, approximately 9.1% lower than the prior-year level.
Outlook
Management indicated that there were signs of stabilization and the beginning of recovery in its core southeast region. We subscribe to management’s view regarding an improving outlook, but at the same time believe that the company will have to persist with its cost-cutting initiatives to offset the weak revenue trends. We think that the challenging economic environment will continue to hamper Southern’s results during the next few quarters, as industrial sales remain weak.
As such, we do not anticipate a significant turnaround in the near future and maintain our Neutral rating on the company.
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