According to research, weather forecasters are surprisingly realistic about their ability to predict the weather. As a group, they expect to be correct around half the time. That's a sign of just how hard it is to predict whether it will be hot or cold, dry or wet, on any given day.
If you are a utility, like the Southern Company(NYSE: SO), the weather can matter a lot. As an investor, you need to keep this in mind -- and the first half of the year was the perfect example of why.
Southern helps with heating and cooling
Southern's two main businesses involve providing its customers with reliable electricity and natural gas. These are vital sources of energy that help people live comfortable lives. The first thing you think about here will probably include powering your favorite portable device or cooking your dinner. But there's so much more.
Image source: Getty Images.
With natural gas, the connection is pretty direct. Although it is used for cooking, one of the biggest uses of the fuel is for heating homes. With electricity, one of the big draws is for air conditioning. However, electric heating systems are also increasingly important.
Step back a moment and think about these facts as they relate to Southern. A cold winter will mean more demand. A warm winter will mean less demand. On the other side of the year, a warm summer will mean more demand and a cold summer will lead to less demand. You might actually say what's bad for you is good for Southern's business (unless you like to freeze in the winter and be sweat-drenched in the summer). It is a bit counterintuitive in some ways.
The impact also depends somewhat on where a utility operates. For example, Southern, as its name implies, has material exposure to warmer regions of the United States. That means that summer cooling is likely to be a bigger issue than winter heating. For Consolidated Edison(NYSE: ED), which operates in and around New York City, heating is every bit as important, if not more so, than cooling.
So what impact can the weather have?
This is not a small issue, and Southern's financial results in the first half of 2023 prove this out. It was a fairly extreme situation, with management explaining on one of its second-quarter presentation slides that, "2023 represents the fewest aggregate degree days on record in 129 years." For customers that meant that the winter was fairly mild, and they didn't need to turn on the heat.
For Southern, meanwhile, it was the worst winter since 1895! That's a very long time, and it shows just how unusual the situation was. That, however, doesn't change the impact. Weather was a $0.16 per share headwind to earnings, which totaled $1.59 per share through the first six months of 2023. But that isn't the whole of it, since weather was a $0.06 per share tailwind in the first half of 2022. In other words, weather cut earnings per share by a full $0.23 per share year over year. Ouch.
To make matters worse, there's no way to predict what will happen with the weather. On the same earnings slide management laid out the financial impact of weather between January and June by year from 2007 and 2023. It organized the image by financial impact, not year. Although there are periods where a couple of years lump together, there's virtually no rhyme or reason. Based on this graphic, you'd likely come away believing that you really can't predict the weather at all. (And perhaps you'd consider no longer listening to weather reports.)
Southern is hoping for a better second half
Management at Southern can't predict the weather, so it isn't trying to. That said, when asked about the weather during the company's second-quarter earnings call, management joked that early on in the third quarter it hasn't looked like the first half. That sounds like good news given how bad the weather was for the utility in the first half. But don't go into the back half of the year with any expectations. Weather can play a huge role in Southern's earnings, as it can for any utility, but you probably won't be able to predict that impact in advance with any accuracy.
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Reuben Gregg Brewer has positions in Southern Company. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
