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Weather, Kemper Plant Turn a Thorn for Southern Company in 1Q16

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Southern Company: Earnings

Higher temperatures during 1Q16 marred Southern Company’s (SO) top line, which was partially offset by lower operating and maintenance expenses. Operating and maintenance expenses fell by 6% due to a steep fall in SO’s fuel expenses and purchased power costs.

Southern Company reported net income of $485 million in 1Q16 compared to $508 million in 1Q15.

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What drove Southern Company’s earnings?

The low-emission, coal-fired Kemper County power plant has been a point of concern for Southern Company due to its regular cost overruns and delays. In 1Q16, the impact of these cost overruns dented Southern Company’s earnings by 4 cents.

SO’s other large nuclear plant at Vogtle saw similar issues such as overbudgeting. The Vogtle plant is also running behind schedule. On a positive note, it hasn’t created any drag on SO’s earnings as of yet.

Warmer weather dented Southern’s earnings by 6 cents in 1Q16 compared to 1Q15. Earnings also fell by 1 cent due to SO’s acquisition of AGL Resources (GAS).

Southern’s growth pillars fumbled

Net incomes from Southern Company’s traditional regulated utilities also fell during the quarter. Among them, Mississippi Power reported a fall of ~68%, while Georgia Power reported net income of ~14%.

Southern Company’s wholesale energy segment Southern Power also posted a rise of more than 50% compared to the previous comparable quarter. Southern Power’s new renewable projects uplifted the segment’s earnings.

AGL Resources acquisition

Southern Company has already forecast that its per share earnings will stay flat in 2016 compared to last year. Incremental earnings from operations in 2016 are expected to be offset by SO’s purchasing additional shares to fund its AGL Resources transaction and bonus depreciation.

Electric utilities (FUTY) are increasingly expanding their natural gas operations due to dull prospects for electric business. Dominion Resources (D) bought Questar Corporation (STR) in 1Q16, while Duke Energy (DUK) bought Piedmont Natural Gas (PNY) last year.

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