Electric utility firm Southern Co. (SO) reported first quarter 2012 earnings per share (EPS) of 42 cents, lagging the Zacks Consensus Estimate of 46 cents and the year-ago period profit of 50 cents. The underperformance reflects the adverse effects of an unusually warm winter.

Quarterly revenue, at $3,604 million, was down 10.2% year over year and also came below the Zacks Consensus Estimate of $4,155 million.

Near-record mild weather across most of the country curbed electricity demand for heating all winter. This brought about a downward movement in overall electricity sales and usage. Total electricity sales during the first quarter were down 7.3% from the same period last year.

Total retail sales fell by 5.1%, reflecting lower demand from residential customers, which deteriorated by 13.7%. Commercial sales registered a year-over-year decline of 3.1%.

On a positive note, industrial sales increased 1.9%, providing some respectability to Southern’s first quarter results. With approximately a third 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 2.4% year over year, the first quarterly rise following three consecutive quarterly declines. Additionally, Southern’s total operating expense for the period, at $2,838.0 million, is approximately 10.1% lower than the prior-year level.

Outlook

Management indicated that it continues to see ‘positive indications of economic growth,’ especially in Southern’s core Southeast market. In the meantime, the company continues to build on its emphasis on exceptional service, industry-leading reliability and prices below the national average.

Recommendation & Rating

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.

One of the largest and best-managed electric utility holding entities in the U.S., Southern Company dominates the power business across the Southeastern region. With good rate-base growth and constructive regulation, we expect the firm 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 in the next few quarters. We are also concerned by the company’s high level of Vogtle-related spending, which may result in reduced returns going forward.

Consequently, we do not anticipate a significant upside in the near future and expect the stock to perform in line with the broader market, as reflected by our continued long-term Neutral recommendation.

For the short-term though (1-3 months), Southern Company currently retains a Zacks #4 Rank (Sell rating).

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