Southern Co Squeezed by Mild Weather

Electric utility firm Southern Company (SO - Analyst Report) reported weaker-than-expected third quarter 2012 earnings on the back of tepid industrial activity and lower usage due to mild weather conditions. The company reported earnings per share of $1.11, lagging the Zacks Consensus Estimate by 3 cents.

However, the Atlanta, Georgia-based power supplier’s per share profits came higher than the third quarter 2011 level of $1.07 amid a drop in costs.

Quarterly revenue at $5,049.0 million was down 7.0% year over year and was significantly below the Zacks Consensus Estimate of $6,091.0 million.

Milder-than-normal weather across most of the country curbed electricity demand for air conditioning. This brought about a downward movement in overall electricity sales and usage. Total electricity sales during the third quarter were down 4.9% from the same period last year.

Total retail sales fell by 4.0%, reflecting lower demand from residential customers, which deteriorated by 7.2%. Commercial sales registered a year-over-year decline of 2.4%.

In particular, industrial sales fell 1.9%, pulling down Southern’s third quarter results. With approximately a third of the company’s total retail sales coming from industrial customers, direction of the 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 decreased 7.8% year over year, the first quarterly decline following two successive increases. Additionally, Southern’s total operating expense for the period, at $3,309.0 million, was approximately 12.4% lower than the prior-year level.

Outlook

Management admitted to near-term uncertainties in the form of a stuttering global economy, the looming presidential election and the impending ‘fiscal cliff.’ However, Southern believes that the long-term prospects for the business remain robust.

Rating & Recommendation

Southern Co. currently retains a Zacks #3 Rank (short-term Hold rating). We are also maintaining our long-term Neutral recommendation on the stock.

Southern Company – one of the largest generators of electricity in the nation along with the likes of Exelon Corporation (EXC - Analyst Report) and Duke Energy Corporation (DUK - Analyst Report) – serves 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 a 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 may hamper Southern Company’s results in the next few quarters. We are also concerned by its 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.