Electric utility firm Southern Co. (SO) reported modestly better-than-expected third quarter results, driven by lower expenses and increased monthly service charges. Earnings per share came in at 99 cents, edging past the Zacks Consensus Estimate by a penny.
In the year-ago period, Southern earned $1.01 per share. The year-over-year negative comparison can be attributed to decrease in electricity usage and sales and flat customer growth. Revenues for the quarter were $4.7 billion, a decrease of nearly 14% from the corresponding period last year.
Another Challenging Quarter
It was another difficult quarter for Southern, as it continued to be adversely affected by significantly cooler than average weather and a weak economy. This resulted in a decrease in electricity sales across all categories. Total electricity sales during the third quarter were down 6.1% from the same period last year.
Total retail sales declined by 5.1%, reflecting soft demand. Industrial sales suffered the most, reflected in a 9.6% year-over-year fall. With almost 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. Residential and commercial sales performed relatively better, declining 2.6% and 3.6%, respectively.
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 nearly 10% year-over-year, the third successive quarterly fall. Southern’s total operating expense for the period was $3.3 billion, approximately 19% lower than the prior-year level.
Smart Grid Award
In a separate development, Southern announced the receipt of a $165 million award in stimulus funds as part of Obama administration’s plan to invest $3.4 billion to encourage transition to a smarter energy grid. The so-called smart grids are designed to improve communications and handling of the electrical infrastructure at the same time providing meters to allow conservation of power.
Outlook
Management indicated that there were signs of stabilization and the beginning of recovery in some of its regions. The company cited an 11% sequential increase in industrial sales to support this.
We subscribe to management’s view regarding an improving outlook, however, 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 still remain weak.
As such, we do not anticipate a significant turnaround in the near future and maintain our Neutral rating on the company.
Read the full analyst report on “SO”
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