Southern Company Earnings: A Good Quarter, But at What Cost?

By Markets Fool.com

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Source: Southern Company.

Southern Company reported earnings on Wednesday, surprising analysts with higher-than-expected earnings. But with shares up 23.2% over the past year compared to the S&P 500's 17.3%, can Southern keep its stock soaring and costs under control? Here's what you need to know.

The Numbers
On the top line, Southern Company's sales clocked in at $4.05 billion, beating analyst estimates by $250 million. This latest report also represents a $105 million boost over Q4 2013 sales.

On the bottom line, analyst estimates proved exactly on target. Southern reported $0.38 in adjusted earnings per share (EPS), a 24% drop from 2013's fourth quarter earnings. This is the fifth straight quarter that Southern has managed to pleasantly surprise analysts by exceeding earnings expectations.

Southern Company is the first of the major U.S. utilities to report earnings this quarter, but its promising numbers may be the norm, rather than the anomaly. While seasonally adjusted earnings took a significant dip, analysts have generally had lower expectations for the some of the biggest utilities. Duke Energy Corporation's and American Electric Power Co.,'s earnings are both expected to drop 12%, while analysts predict a 15% EPS decline for PPL Corporation . But the U.S. economy (and thus, economy-linked utilities) has steadily continued along its recovery track, from homeowner expansion to industrial growth, and the utilities sector's decidedly domestic focus has kept it relatively shielded from recent geopolitical and world currency concerns that have cast a shroud over some other sectors.

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Electrifying Earnings
While other utilities have aggressively expanded into renewable energy, decentralized generation, smart meter technology, or even electric vehicle charging stations, Southern Company is still the epitome of a utility. Around 90% of its profit is regulated, which means predictable earnings. As Chairman, President, and CEO Thomas Fanning puts it:

Southern Company had one of its best years ever serving customers in 2014. We continued to lead the industry in customer satisfaction and set several all-time records for system reliability. Our commitment to providing clean, safe, reliable and affordable electricity while making communities better off because we're there remains the cornerstone of our business.

The utility's 46,000 MW of generating capacity serve more than 4.4 million customers across Alabama, Georgia, and Florida, and those customers are using more electricity. Residential sales grew 5.5%, commercial sales 1.3%, and industrial sales 3.3%. For 2014 overall, total sales increased 6.0%.

Keeping Costs Under Control
While those predictable sales are every income investors' dream come true, Southern still has to keep costs under control. Its regulated business model means it relies primarily on major power projects, and Southern has recently struck out on increasing its infrastructure.

Source: Southern Company, Kemper Plant.

Its Kemper County integrated gasification combined cycle project isn't just a state-of-the-art 582 MW clean coal power plant -- it's as expensive as art. The facility has far exceeded its original budget, and this latest quarter seems to be no different. Southern added on another $43 million in after-tax charges to its latest quarterly earnings, shaving off $0.05 EPS to account for increased construction cost estimates.

Kemper has been a thorn in Southern's side for a while now, but it's not the only cost increase. Generally, the company noted a $0.21cut off EPS due to increases in non-fuel operating and maintenance costs from Q4 2013 to Q4 2014.

Looking ahead, Southern also recently disclosed an 18-month delay in their $10 billion (Southern's share is $4.8 billion) 2,234 MW Vogtle nuclear project. Shareholders will have to wait until Feb. 27 for the full update, but Fanning's mention that contractor agreements "should help mitigate the cost" of around $40 million per month in oversight, operational readiness, and financing costs should keep investors on edge.

Steady Southern Stock?
Southern Company stock has put the S&P 500 to shame over the past year, and its growing regulated sales continue to reflect a churning cash cow. But if it's burning too much of the cash it's churning, investors won't see their fair share of this company's earnings. In the quarters to come, investors will need to keep a close watch on how Southern Company confronts costs.

The article Southern Company Earnings: A Good Quarter, But at What Cost? originally appeared on Fool.com.

Justin Loiseau has no position in any stocks mentioned, but he has used electricity in Florida before. 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.