Markets
SO

Southern Company Takes the Warm Winter in Stride

Image source: Southern Company.

Most investors see the utility industry as a conservative way to earn stable returns from a regulated business, and utility giant Southern Company has been a great example of the benefits of following such an investment strategy. Coming into Wednesday's fourth-quarter financial report, Southern Company shareholders had expected continued growth in revenue and earnings. Ordinarily, you'd therefore expect that a big revenue shortfall would cause problems for the utility, but Southern Company was able to sustain and grow its profits anyway. Let's take a closer look at Southern Company's latest results and what's ahead for the utility in 2016.

Southern Company passes on cheaper fuel costs to customers

Southern Company's fourth-quarter results reflect the nature of the utility business. Revenue plunged 10% to $3.61 billion, falling far short of an expected double-digit percentage gain on the top line. But after taking certain extraordinary items into account, adjusted net income rose 17% to $403 million, and that produced adjusted earnings of $0.44 per share. That exceeded the consensus forecast by a penny per share.

Looking more closely at Southern Company's numbers, you can see the countervailing influences on the utility's results. The company cited success with renewable energy projects at its Southern Power subsidiary as supporting earnings during the fourth quarter. Warmer weather partially offset those gains, but solid performance from the utility's traditional operating companies also helped push Southern Company's overall results forward.

Operationally, it was easy to see the impact of weather on Southern's metrics. Kilowatt-hour sales to retail customers in the company's service area fell 5.7%, led by a 13.5% drop in residential energy sales. Commercial and industrial energy sales also eased downward, and even after adjusting for weather, kilowatt-hour metrics fell slightly systemwide. For the most part, the huge revenue drop came from Southern Company passing on lower fuel costs to its customers.

The wholesale side of the utility business saw an even steeper decline in sales. Revenue from the unit plunged 22%, and kilowatt-hour sales for the wholesale arena dropped almost 10%.

Geographically, Southern Company's results were fairly evenly distributed. Operating revenues at its Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power units all fell, but all but the Alabama Power subsidiary saw a rise in pre-tax operating earnings. Except for Mississippi Power and Southern Power, all of Southern's divisions saw net income gains.

CEO Thomas Fanning was ecstatic about the results, calling 2015 "a tremendous year for Southern Company." In addition to good operating performance, Fanning said, "we also improved our overall risk profile by addressing several issues related to our large construction projects."

Can Southern keep expanding?

The big question for Southern Company going forward is whether the adverse kilowatt-hour demand trends will continue. The Southeastern portion of the U.S. that Southern serves has seen more than its fair share of growth compared to other parts of the country, and that should have a positive influence on the business overall. Regional peer Duke Energy has seen benefits from the growth in the region, and many investors have seen the prospects for Southern Company and Duke Energy continuing to expand and consolidate gains in the area. If business conditions get worse, however, it could eat into those opportunities for Duke Energy and Southern Company. That could lead to a reversal of fortune for the utilities, at least until regulated rates can catch up with changing conditions.

Southern Company investors reacted favorably to the news, sending the stock up nearly 1% after the announcement. Even utilities are vulnerable to economic factors, but most investors seem to think any adverse impacts are due more to temporary weather conditions than to more deeply entrenched trends.

The next billion-dollar iSecret

The world's biggest tech company forgot to show you something at its recent event, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early, in-the-know investors! To be one of them, just click here .

The article Southern Company Takes the Warm Winter in Stride originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Southern Company. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 - 2016 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

SO DUK

Other Topics

Stocks

Latest Markets Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More