Atlanta-based Southern (SO) beat Wall Street forecasts in the Wednesday rollout of its first-quarter earnings, but investors were also given a look at mounting costs tied to Southern's ambitious Kemper gasification project.
The electricity provider booked earnings per share of $0.58 on the quarter, topping analyst expectations by more than 9%, while sales of $3.97 billion fell short by about 7%, based on Bloomberg consensus data.
The better-than-expected income on the quarter was largely the result of average electricity use exceeding the expectations for a warm winter, rate increases, as well as strong numbers posted by fully owned subsidiary Southern Power, Barclays analyst Daniel Ford said in a Wednesday investment note.
But Southern also booked $33 million in additional charges tied to its Kemper integrated combined-cycle gasification project, which will now cost roughly $6.7 billion. The project is being carried out by Southern subsidiary Mississippi Power and is expected to become operational in the third quarter.
The project has already been the cause of a Moody's ratings downgrade last summer on $2.2 billion of Mississippi Power's senior unsecured debt. The ratings agency cited the lack of cost-recovery plans associated with the project, especially since the Mississippi Supreme Court invalidated the company's rate plan earlier in the year.
"The negative outlook also reflects Mississippi Power's constrained liquidity position and high reliance on parent company Southern for liquidity support," Moody's said in its downgrade, noting that the Kemper project "continues to be affected by schedule delays and cost increases."
Analysts generally appear to be somewhat apprehensive about Southern's growth prospects, with just 5% of the company's listed analysts maintaining Buy ratings, 70% with Holds, and 20% with Sells, according to Bloomberg consensus data. Meanwhile, the average 12-month price target on the company is $49.53.