Cold Weather Boosts Southern Co. Profit

Zacks Investment Research
updated | Zacks.com
Electric utility firm Southern Co. (NYSE:SO) reported better-than-expected first quarter 2010 results, driven by improvement in industrial activity and higher usage on the back of colder-than-normal temperatures. These were partially offset by rise in expenses.
 
Earnings per share came in at 60 cents, higher than the Zacks Consensus Estimate of 44 cents and the year-ago profit of 42 cents. Quarterly revenue, at $4.2 billion, was up 13.4% year-over-year and beat the Zacks Consensus Estimate by 12.3%.
 
A Strong Quarter
 
It was a good quarter for Southern, as the company benefited from favorable weather conditions and signs of economic stabilization. This brought about a significant upward movement in overall electricity sales and usage. Total electricity sales during the first quarter were up 10.3% from the same period last year.
 
Total retail sales grew by 10.3%, reflecting strong demand. Industrial sales increased 6.7%, driving Southern’s first quarter results. With close to 30% 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 3.4%. However, residential sales managed to register a solid year-over-year growth of 20.6%
 
Expenses Rise
 
The company’s operations and maintenance expense increased 4.4% year-over-year, following four successive quarterly falls. Southern’s total operating expense for the period was $3.2 billion, approximately 1.9% higher than the prior-year level.
 
Outlook
 
Management indicated that the improvement in industrial activity points out continued stabilization of the economy. This could signal the beginning of an expected slow economic recovery, the company said.
 
We subscribe to management’s view regarding an improving outlook, but at the same time believe that the company will have to go ahead with its cost-cutting initiatives to offset the uncertain macroeconomic trends. We think that the challenging economic environment will continue to hamper Southern’s results during the next few quarters, as industrial sales remain sluggish.
 
As such, we do not anticipate a significant turnaround in the near future and maintain our Neutral rating on the company.
 
 

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