People rely on utility companies to deliver the power, energy, and water they take for granted, and the highly regulated industry still offers plenty of profit potential to the companies that prosper in it. Southern Company (NYSE:SO) has worked hard to build up an impressive presence in the utility industry, and its proposed merger with gas utility AGL Resources (NYSE:GAS) would create the second-largest utility company in the country. Coming into Wednesday's third-quarter financial report, Southern Company shareholders were looking for significant growth in revenue and continued strength in earnings, but as we've seen in past quarters, sales growth lagged behind expectations even as Southern Company posted better earnings results. Let's look more closely at how Southern Company did this quarter and why it's looking to a brighter future.
Southern Company delivers on the bottom line
Southern Company's third-quarter results continued the trends we've seen previously from the utility giant. Revenue of $5.40 billion was up 1.2% from year-ago levels, but that was far short of the 7% growth rate that investors had expected to see. Southern continued its track record of solid bottom-line results, though, with adjusted net income rising almost 9% to $1.06 billion and working out to adjusted earnings of $1.17 per share, which was slightly stronger than the $1.15 per share consensus forecast among investors.
A closer look at Southern Company's numbers showed some of the factors behind its results. Rising earnings came both from its traditional operating companies and from its Southern Power unit. Kilowatt-hour sales to retail customers in the company's service area rose by 1.3%, which was slower than last quarter's pace, and rising sales in the residential and commercial arenas were partially offset by declining industrial energy sales. Weather-adjusted gains were more modest but showed the same trends between the company's three customer bases. Once again, though, the wholesale side of the utility business held back Southern Company, as segment sales fell 13% to $520 million on a 6% drop in kilowatt-hour sales in the wholesale arena.
Southern got a boost to earnings from lower fuel costs, which declined by $137 million from the third quarter of 2014. In addition, a $268 million decline in the amount of estimated losses from the Kemper County gasification project drove a big drop in operating expenses that in turn was the primary contributor to net income gains.
Southern Company CEO Thomas Fanning celebrated the news, noting that "we not only achieved great financial results for the third quarter but also delivered major accomplishments that position us well for the future." Fanning mentioned Southern's investments in solar power as well as favorable dispute settlements and successful gasifier testing at Kemper County.
How will Southern keep growing?
More specifically, Southern should benefit from a settlement concerning the expansion of its Vogtle nuclear plant, with various parties agreeing to terms with contractors to get additional protection against future claims. By keeping the project on schedule, Southern asserted that the current in-service dates of 2019 and 2020 for the two units at Vogtle should remain feasible. At the same time, Southern is excited about test results at Kemper, which the company now more confident that it will be able to produce syngas from lignite coal and support the dual-fuel design for the integrated gasification combined-cycle project.
Meanwhile, Southern is moving forward with its plans to acquire AGL Resources. The two companies requested regulatory approval of the merger in a joint filing earlier in October, and the combined company would provide service to 9 million customers with 200,000 miles of electric lines, 80,000 miles of gas pipelines, and 46,000 megawatts of generation capacity. Southern expects the AGL Resources merger to be complete in the second half of 2016, and given the size of AGL Resources' Virginia Natural Gas subsidiary, the move will further cement Southern's status as a regional powerhouse in the southeastern part of the country.
Southern Company investors seemed generally comfortable with the results, but in the long run, the utility will still have to face the macroeconomic factors that have made the sector so volatile recently. By making smart moves toward consolidation, though, Southern is leading the charge to make the most of the opportunities it has in the utility industry.
Dan Caplinger has no position in any stocks mentioned. 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.