Southern Company (SO:NYSE) is an electric utility with 4.4 million customers in one of the fastest-growing regions of the country - the Southeast. SO generates 42,000 megawatts of capacity.
Thirty-five thousand of these megawatts go to places like homes and small businesses that pay under government regulation plans - and 5,500 megawatts of wholesale generation are sold to large companies like steel mills through purchase power agreements.
The company is in a unique position because during the past two years, state government regulatory boards have raised electricity rates to retail customers. And yet over the past three months, the price of coal, uranium and natural gas has fallen by two-thirds.
Despite this fall in coal, uranium and natural gas prices, in October, the Alabama electric rate regulator approved rate increases of 9% for commercial customers, and 14% for industrial customers, with the intent to pay for higher energy costs.
Encouraging Earnings News
In its latest quarterly SEC filing for the third quarter of 2008, Southern Company earned $780.4 million ($1.01 per share) compared to $762.0 million ($1.00 per share) for the third quarter 2007.
The company reported that the earnings increase was "primarily the result of an increase in contributions from market-response rates to large commercial and industrial customers and retail base rate increases at Alabama Power and Georgia Power."
Year-to-date 2008, Southern Company earnings were $1.56 billion ($2.02 per share) compared to $1.53 billion ($2.03 per share) for year-to-date 2007. This penny shortfall was blamed on a poor second quarter in which there was funding of a new plant and a coolerthan-average summer.
In the third quarter 2008, retail revenues were $4.48 billion compared to $4.09 billion year over year. For the year, revenues were $10.93 billion compared to $9.93 billion for the third quarter 2007. Again, the company attributes this rise to rate increases by Alabama Power and Georgia Power.
Sales growth did slow in the third quarter of 2008 by 2.1% due to an increase in costs as well as a cooler summer that didn't require as much air conditioning. This was partially offset by a customer growth of 0.7%.
Wholesale revenues grew 37% in the third quarter of 2008 to $774.8 million compared to $563.2 million for the same period in 2007. For year-to-date 2008, wholesale revenues were $1.88 billion compared to $1.53 billion for the same period in 2007.
Fuel and Purchased Power Expenses
Here's where the savings enter the picture for the fourth quarter...
In the third quarter of 2008, fuel and purchased power expenses were $2.53 billion compared to $2.02 billion for the third quarter of 2007.
This was due to a $572.9 million net increase in the average cost of fuel and purchased power. This was further attributed to a 34.7% increase in the cost of coal per net KWH generated. Traditional power companies that buy SO's energy have agreements whereas the price of fuel is taken out of the net income picture for SO. But the falling price of fuel does matter on the wholesale level.
Why This Company Can Overcome Market Hurdles
Southern Company has reported that it is in stable condition and has made it through the larger financial crisis with little worry. The company is able to draw on its bank loans and commercial paper. That said, since September 15th, it hasn't needed to. It hasn't changed any of its banking nor has it had to pay a higher rate for short-term debt.
Six Reasons to Buy Southern Company
Rates are up (set by government last year) but costs (coal and natural gas) are down. Economic impact on the Southeast is less than anywhere else in the country. End of Detroit will benefit the Southeast. Dividend paid for 60 years (243 consecutive quarters) without interruption. Currently $1.68 per share annually. 4.3% increase in April 2008, marking seventh consecutive year of dividend increases. One of the few companies that is up this year... At the end of 2007, total shareholder return was:
One-Year 9.8%
Ten-Year 14.8%
Thirty-Year 14.8%
Net cash was up to $2.59 billion for the first nine months of 2008 compared to $2.47 billion for the first nine months of 2007. The $119 million increase was due again to the higher rates the company has been able to charge.
It is on the balance sheet where you see most of the positive changes for utility companies. SO saw a $1.79 billion jump in total property, plant and equipment. They increased long-term debt by $1.64 billion, in order to build a new plant, and their cash pile grew by $605 million.
The basic backdrop of a utility company is simple. They make money when their business expands, prices go up and costs drop. The lack of an expanding housing market is the hurdle that must be overcome with this stock.
Over the past decade, megawatt hour usage per household has climbed from 9,700 to 14,200 per year. Houses are bigger and contain more TVs, computers, refrigerators and other gizmos. On top of this, the Southeast is growing at such a rate that North Carolina will surpass Michigan and Ohio as the seventh-largest state by 2030.
In the short run, investors have some fear that the Southeastern U.S. will be like Florida and Nevada, where huge swaths of homes sit empty. This is not the case in SO's region, where the boom in housing didn't boom quite as much, and therefore has less far to fall.
As an aside, what is bad for Detroit has been good for the Southeastern U.S. as more car companies relocate to nicer climates and seek non-union laborers. It's no wonder that SO's stock has gone up while every other stock on the planet has fallen off the table.
Sometimes It's Worth Paying Up for Quality...
Southern Company stock is currently trading around $36. It has a book value of $17.30 per share and pays a dividend of $0.42 per share. In the third quarter they paid a dividend of $0.4025%. This is a yield of 4.6%.
Southern Company is a best of breed. I am recommending this stock based on the fact that costs are dropping while the prices it charges are remaining constant. Furthermore, they have a fantastic track record going back more than 60 years.
The company is valued more than its competitors such as FPL Group Inc. ( FPL:NYSE ) , which sells power in the now-declining market of south Florida, and Entergy Corp. ( ETR:NYSE ) , which has the bad luck of being located in the greater New Orleans area. Both of these stocks have been beaten down for good reason.
And still, SO has a higher operating margin at 20.68% than FPL at 15.52% and ETR at 17.64%. SO has a P/E of 15.88, compared to 12.84 for ETR and 12.75 for FPL.
Quite frankly, it deserves the higher valuation.
In the long run, it is worth paying up for quality. SO has beaten its competition. In 2001 and 2002, when the rest of the market was falling apart in the aftermath of 9/11, this stock soared. It's a stock that loves a crisis...
Buy Southern Company ( SO:NYSE ) at the market.
The company has a direct payment plan so you don't need a broker if you so choose. It requires a $250 minimum initial investment with a one-time enrollment fee of $10 for new investors. Annual investment maximum of $300,000.
There are no costs to purchase shares and you can invest as little as $25 for additional shares.
Southern Company
30 Ivan Allen Jr. Blvd. NW
Atlanta, GA 30308
Phone: 404-506-5000
www.southerncompany.com
$30.41 (04/13/09)
