Southern Company (NYSE:SO) continues to struggle to deliver a satisfactory financial performance, as uncertainties regarding the timing and costs of ongoing projects remain. Also, the company's long term growth potential seems to be becoming unattractive as we move forward. Moreover, the company's recent quarter's earnings were negatively affected by lower electricity demand. Therefore, I recommend investors remain on the sidelines with regards to the stock, and remain cautious and wait for clarity regarding the timing and cost estimates of ongoing projects, and the electricity demand growth trend.
Last week, the company reported its financial performance for Q3 2013, which was below consensus estimates. The company reported an adjusted EPS of $1.08 for the recent third quarter, missing consensus estimates by 3%, down from $1.11 in comparison to the corresponding period last year. The company reported total revenues of $5.017 billion for Q3 2013, missing consensus estimates of $5.4 billion, down approximately 0.5% as compared to Q3 2013. The company's financial performance for the recent third quarter was adversely affected by unfavorable weather conditions and lower electricity demand.
In the recent third quarter, the company experienced a decrease of approximately 3% in total electricity sales. Total electricity sales for the quarter were adversely affected by a decrease of 1.5% in retail sales, representing a decrease of 5.3% in residential customer demand and a decrease of 1.3% year-on-year in commercial sales.
Lower electricity demand due to mild weather took a toll on the company's gross margin, as the gross margin dropped by 1.2% year-on-year to $3.29 billion. Also, the company experienced a
5.7% and a 3.2% year-over-year decrease in operating and net income, respectively. Operating and net income for the recent third quarter were negatively affected by increased depreciation expense, higher operating and maintenance expense, and cost overruns for the company's ongoing projects.
Consistent with what I said in my pervious article, SO could experience a further increase in estimated costs and timing delays for its ongoing projects; recently, the company announced a further increase in the estimated construction cost and timing delays for its ongoing project 'Plant Ratcliffe'. An increase in costs and timing delays remains an important overhang on the stock price. Investors and the market are used to receiving negative announcements regarding Plant Ratcliffe at the end of every month, when the company releases the project's monthly status report. In the recent monthly project status report, SO announced an additional increase of approximately $150 million pretax charge, due to losses on the project. The company has already reported a loss of $540 million and $450 million due to cost overruns related to Plant Ratcliffe, bringing the total write-offs recognized to $1.04 billion (approximately 3% of the company's total market capitalization). The company is now expecting the plant to be online in Q4 2014, as compared to the prior expectation of May 2014.
Project execution and a further increase in estimated costs and timing delays pose a threat to the company's future financial performance. Investors should look for more clarity on Plant Ratcliffe in the upcoming monthly status report, and look to the result of the Plant's first gasifier test expected in Q2 2014.
Another negative takeaway from the recent quarter's earnings release was that the company indicated that it could lower its long-term earnings growth range of 4%-6% due to fading investment opportunities in the latter half of the ongoing decade. The company is still to provide details in relation to its long term investment opportunities and guidance range. The company may hold an investor day in Q4 to provide more detail on a possible slowdown in earnings growth as we move forward.
The company is scheduled to present at the EEI conference next week. Important possible takeaways from the upcoming conference would be a lower growth trend for the ongoing quarter (Q4), details regarding long-term investment opportunities and updated details on construction costs and completion timing.
I reiterate my recommendation that investors should stay on the sidelines when it comes to SO. The company's financial performance is being adversely affected by unexpected increases in costs and delays for the ongoing Plant Ratcliffe. Investors should look for more clarity regarding costs and the project's completion time and details regarding long term investment opportunities. The company's long term earrings could slow down due to less attractive investment opportunities in the future, which could have a negative impact on the stock price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.