Electric utility firm Southern Co. (SO) reported in-line fourth quarter 2010 results, as the positive effects of higher weather-related gains and improvement in industrial activity were offset by increased operations and maintenance expenses. Earnings per share came in at 18 cents, same as the Zacks Consensus Estimate but below the year-ago profit of 31 cents.
However, quarterly revenue, at $3.8 billion, was up 7.4% year over year and beat the Zacks Consensus Estimate by $102 million. The company benefited from favorable weather conditions and positive economic trends. This brought about an upward movement in overall electricity sales and usage. Total electricity sales during the fourth quarter were up 1.3% from the same period last year.
Total retail sales grew by 4.0%, reflecting strong demand. Industrial sales increased 3.8%, driving Southern’s fourth 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. Commercial sales rose by 2.8%, while residential sales managed to register a solid year-over-year growth of 5.6%.
Expenses Rise
The company’s operations and maintenance expense increased 15.8% year over year, the fourth successive quarterly rise. Southern’s total operating expense for the period was $3.3 billion, approximately 8.8% 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
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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