Southern Earnings: 1 Dividend Stock Stuck With Higher Costs


Southern reported earnings this week, missing on top- and bottom-line expectations. With rate requests in the air and increased costs for capital projects, dividend stock investors are wondering whether Southern's still got it. Here's what you need to know.

Number crunching
Southern's sales clocked in at $4.25 billion, 1.6% higher than last year's Q2 but $50 million below analyst estimates.

Unfortunately for investors, the utility's top-line miss felt its way through to the bottom line, too. Adjusted EPS came in at $0.66, two cents below analyst predictions. This quarter's earnings also fell 4.3% below Q2 2012's $0.69 EPS.

For a peck of perspective, here's how Southern's trailing 12 months sales and adjusted EPS have fared over the past five years (essentially since the bottom of the Great Recession). While most utilities have seen falling top lines, Southern has managed to maintain steady sales. On the bottom line, however, the utility has seen adjusted EPS TTM fall 12.9%.

SO Revenue TTM Chart
SO Revenue TTM Chart

SO Revenue TTM data by YCharts

Focusing on fundamentals
Southern is one of the bigger utilities out there. With 46,000 MW of generating capacity spread across 4.4 million customers, Southern's unregulated and regulated divisions provide power across the southeastern United States.

For the moment, many of Southern's market moving regulatory agreements are still up the air. Its Alabama Power subsidiary hears back about a rate request later this summer, while its Georgia utility currently has three requests out to regulators. The utility is applying for funds to cover environmental and nuclear monitoring costs, as well as an overall $482 million three-year rate rise. Gulf Power is asking for its own $74 million rise, while Southern's Mississippi subsidiary has submitted a seven-year rate plan.

These requests will get the "yea" or "nay" over the next year, and the jury's out on whether regulators will play nice. Duke Energy hasn't been so lucky lately, with North and South Carolina regulators slashing rate requests in June and July.

As emissions standards increase and President Obama lines up on existing coal plants, utilities are especially interested in environmental rate requests. Integrys recently asked for an additional $17 million to cover coal dust collector costs on a 824 MW facility, while American Electric Power will grin and bear it with a $150 million to $170 million non-operating pre-tax hit as it chooses to retire coal facilities instead of coughing up disproportionate costs. Georgia Power's own environmental ask adds up to an additional $1.99 per month for average customers beginning in 2015.

On the generation side, Southern is playing the contrarian by becoming the first utility in three decades to build new nuclear plants. The $14 billion investment is no pocket change, but Southern thinks a 27% regional increase in electricity demand by 2030 will ensure these Georgia plants pay off. With total capacity clocking in at 2,230 MW, Southern was pleased to report that construction is on schedule.

Source: Southern.

But there's a darker side to Southern's nuclear notions. The utility's capital investment might take longer to pay off than previously expected, if nuclear-centric Exelon's latest earnings report is any evidence. Despite increasingly expensive natural gas, cheap power prices have put the utility in a tough spot, and lower forecasted earnings pushed share prices down this past week.

While nuclear construction nips along nicely, Southern's new IGCC plant construction isn't enjoying smooth sailing. While plans are on time for the first gasifier to come online by 2014, it'll be at a price tag $450 million higher than previously expected. The utility has already taken a total $611 million in after-tax charges in the past six months.

Can Southern soar?
Despite the tough quarter, Southern's not a bad stock. Shares are down 7.3% over the past three months, pushing the dividend stock's annual yield up to 4.5%. But despite the short-term losses, Southern's rapid recovery from the Great Recession puts current price valuations above many of its peers.

SO Chart
SO Chart

SO data by YCharts

Income investors willing to tag along for a less-than-stable stock ride can enjoy a fat dividend while hoping for the best with rate cases and new nuclear capacity. They might be rewarded mightily if prices play out, but risk-averse dividend stock investors should hold off to see where Southern stands in another few quarters.

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Fool contributor Justin Loiseau has no position in any stocks mentioned, but he does use electricity. You can follow him on Twitter, @TMFJLo, and on Motley Fool CAPS, @TMFJLo.The Motley Fool recommends Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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