Warm Weather Lifts Southern Co.

Electric utility firm Southern Co. (SO - Analyst Report) reported better-than-expected second quarter 2010 results, driven by improvement in industrial activity and higher usage on the back of warmer-than-normal temperatures. These were partially offset by a rise in expenses.

Earnings per share came in at 62 cents, slightly higher than the Zacks Consensus Estimate of 59 cents and the year-ago profit of 61 cents. Quarterly revenue, at $4.2 billion, was up 8.3% year-over-year and beat the Zacks Consensus Estimate by 1.3%.

A Strong Quarter

It was a good quarter for Southern, as the company benefited from favorable weather conditions and positive economic trends. This brought about a significant upward movement in overall electricity sales and usage. Total electricity sales during the second quarter were up 4.1% from the same period last year.

Total retail sales grew by 6.4%, reflecting strong demand. Industrial sales increased 13.0%, driving Southern’s second quarter results. With more than 32% 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 were relatively poor, rising by just 1.7%. However, residential sales managed to register a solid year-over-year growth of 5.8%.

Expenses Rise

The company’s operations and maintenance expense increased 10.3% year-over-year, the second successive quarterly rise. Southern’s total operating expense for the period was $3.3 billion, approximately 8.6% 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, particularly among its industrial and manufacturing customers.

Our Recommendation

Southern Company is one of the largest electric utility holding companies in the U.S. with good rate base growth and constructive regulation. We believe the 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 the slow pace of industrial recovery may continue to hamper Southern’s results during the next few quarters.

Taking these factors into account, we maintain our cautious outlook on the company. We rate Southern shares as Neutral with a Zacks #3 Rank, indicating a short-term Hold recommendation.

Read the full analyst report on SO