Electric utility firm Southern Co. (SO) reported first quarter 2011 earnings per share of 50 cents, same as the Zacks Consensus Estimate. The in-line results reflect the positive effects of robust industrial sector growth and regulatory actions in Georgia, which were offset by warmer weather conditions, the scheduled expiration of a long-term contract, and increased operations and maintenance expenses.
However, relative to the year-ago period, Southern’s earnings per share fell 16.7% (from 60 cents to 50 cents) following the return to more normal temperatures compared to abnormally cold weather during the same period in 2010.
Quarterly revenue, at $4,012 million, was down 3.5% year over year and also missed the Zacks Consensus Estimate by $24 million.
The company was adversely affected by unfavorable weather conditions, which restricted electricity demand for heating. This brought about a downward movement in overall electricity sales and usage. Total electricity sales during the first quarter were down 7.5% from the same period last year.
Total retail sales fell by 3.9%, reflecting lower demand from residential and commercial customers. Commercial sales dipped by 3.3%, while residential sales registered a dismal year-over-year decline of 12.6%.
However, Industrial sales increased 36.7%, driving Southern’s first 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 increased 4.0% year over year, the fifth successive quarterly rise. Southern’s total operating expense for the period was $3,158.0 million, approximately 2.4% lower than the prior-year level.
Outlook
Management indicated that the economic recovery has led to improvements in industrial activity that has nearly reached pre-recession levels. 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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