The Southern Company (NYSE:SO) Q1 2024 Earnings Call Transcript

The Southern Company (NYSE:SO) Q1 2024 Earnings Call Transcript May 2, 2024

The Southern Company beats earnings expectations. Reported EPS is $1.03, expectations were $0.898. The Southern Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. My name is Robert, and I will be your conference operator today. At this time, I would like to welcome everyone to the Southern Company First Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Scott Gammill, Vice President, Investor Relations and Treasurer. Please go ahead, sir.

Scott Gammill: Thank you, Rob. Good afternoon, and welcome to Southern Company’s first quarter 2024 earnings call. Joining me today are Chris Womack, Chairman, President and Chief Executive Officer of Southern Company; and Dan Tucker, Chief Financial Officer. Let me remind you, we’ll be making forward-looking statements today in addition to providing historical information. Various important factors could cause actual results to differ materially from those indicated in the forward-looking statements, including those discussed in our Form 10-K, Form 10-Q and subsequent filings. In addition, we’ll present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measure are included in the financial information we released this morning, as well as the slides for this conference call, which are both available on our Investor Relations website at investor.southerncompany.com. At this time, I’ll turn it over to Chris Womack.

Chris Womack: Thank you, Scott. Good afternoon, and thank you for joining us for what is such an exciting time for our company. Monday, we announced that plant Vogtle 4 successfully achieved commercial operation. Units 3 and 4 now deliver more than 2,200 megawatts of reliable 24/7 carbon-free energy and are designed to do so for decades to come. With all four units operational, the Vogtle site is now the largest generator of clean energy in the country. I cannot be prouder of our team’s perseverance and commitment to getting Vogtle Units 3 and 4 completed with the standard of quality clearly demonstrated by Unit 3’s performance since it reached in service last July. Along with our own team, success on this historic project required the hard work and dedication of tens of thousands of American craft workers and engineers, a committed group of co-owners and regulators who had the courage to support new nuclear when others did not.

While it was not our mission when we embarked on this project and while it was at times an arduous journey, we have proven that new nuclear is achievable in the United States. With ever-increasing demands for carbon-free energy and the burgeoning demand for reliable 24/7 energy to support our digital economy and society, we believe our country will need more nuclear energy. So the importance of this project for Georgia and our nation cannot be understated. This is what making history looks like. These are the first new nuclear units built from the ground up here in the United States in over 30 years. And we are proud to be the company that saw it through. Dan, I’ll now turn the call over to you for a financial update.

Dan Tucker: Thanks, Chris, and good afternoon, everyone. For the first quarter of 2024, our adjusted EPS was $1.03 per share, $0.24 higher than the first quarter of 2023 and $0.13 above our estimate. The primary drivers of our performance for the quarter compared to last year were investments in our state-regulated utilities and weather that was less mild for our electric utilities than in the first quarter of 2023. This is somewhat offset by higher interest expense and depreciation. A complete reconciliation of our year-over-year earnings is included in the materials we released this morning. All our businesses experienced a strong start for 2024, driving our results meaningfully higher than our estimate of $0.90 per share.

While there were several factors for this performance versus our estimate, one worth highlighting is the higher than expected weather-adjusted electricity sales in our commercial customer class. This was driven by a combination of our strong local economies as well as increased usage by many of our existing data center customers. Sales to data centers were up over 12% for the quarter compared to last year. Overall, weather-normal retail electric sales to all classes were 1.7% higher than the first quarter of 2023. Industrial sales are beginning to show signs of recovery following a soft 2023, with year-to-date increases led by the lumber and paper industries. The Southeast regional labor supply remains above pre-pandemic levels. Employment growth is strong and unemployment is low, averaging approximately 3% across our regulated electric jurisdictions.

A favorable business climate and increased expansion of manufacturing is attracting new households to the Southeast, driving continued net in-migration and customer growth. Before turning the call back over to Chris, I’d like to highlight our most recent dividend increase. Last week, the Southern Company Board of Directors approved an $0.08 per share increase in our annual common dividend, raising the annualized rate to $2.88 per share. This action marks the 23rd consecutive increase, and this will now be 77 consecutive years dating all the way back to 1948, that Southern Company has paid a dividend that is equal to or greater than the previous year. This remarkable track record remains an important part of Southern Company’s value proposition.

In one quick note, our adjusted EPS estimate for the second quarter is $0.90 per share. Chris, I’ll turn the call back over to you.

Chris Womack: Thank you, Dan. Our system performed extremely well, and that’s a testament to our team’s collective commitment to serving customers reliably across our business, especially as we meet the demands of the extraordinary growth that we’re seeing. Particularly within our Southeast footprint, we continue to see strong economic development activity with first quarter investment announcements, representing the second highest first quarter on record, as our teams continue to work closely with our states and local development authorities to attract new businesses. This growth continues to reflect a diverse mix of sectors with recent announcements, including automotive suppliers, flooring and glass manufacturers, data centers and mixed-use developments.

During our year-end earnings call in February, we updated our forecast to reflect projected retail electric sales growth that is accelerating to a projected growth rate of approximately 6% from 2025 to 2028. The underlying Georgia Power projected sales growth rate is approximately 9% over the same period. As we look ahead, we’re encouraged to see the signs of incremental growth also materializing in Alabama and Mississippi. A little more than weeks ago, the Georgia Public Service Commission approved a stipulated agreement among Georgia Power the Public Service Commission staff and multiple interveners in the 2023 IRP update docket. This approval affirms the need to quickly procure and deploy several thousand megawatts of resources to serve customers for rapidly growing project electricity demands by the winter of 2026 and 2027.

Georgia Power was also authorized to build and own a balanced collection of resources, including new natural gas combustion turbines and battery energy storage systems, while also providing for an accelerated RFP process for incremental battery energy storage systems. The constructiveness and timeliness of decisions like this are a testament to the quality of our Southeastern states regulatory environment and our ability to meet the projected rapid demand growth garnering headlines across the country. Coinciding with Georgia Power’s 2023, RFP update filing last fall, and the release of our sales forecast in February, external attention, including from the investment community has focused on several key questions. How do you know the load in your forecast is real?

How do you know you’re pricing this new load appropriately? And what protections are in place if the forecasted boat does not materialize? Those are all very important questions, and the answers are all fundamentals of how Southern Company has run our electric utilities for a very, very, very long time. We’ll address each one of those questions in just a moment. First, I want to share with you what we believe are the four key characteristics required to successfully navigate this tremendous growth opportunity. We believe Southern Company is positioned as well or better than any utility company in the country on these four fronts. First, it requires supportive states and constructive regulation. Our states continue to be great economic development partners, and they have advanced economic policies that support healthy growth.

When it comes to utility regulation, our states are among the best in the country at balancing the needs of customers while helping ensure utilities provide real value to customers in the form of clean, safe, reliable and affordable energy. Second, it requires institutional wherewithal. We have vast expertise and experience deploying energy infrastructure. We’ve been investing billions to improve the resilience of our electric and gas transmission and distribution networks. In recent years across our subsidiaries and across the country, we’ve built thousands of megawatts of energy supply in the form of new solar, wind and battery facilities, advanced micro grids, a state-of-the-art combined cycle natural gas plant and the only new nuclear units built in this country and more than a generation.

These new assets along with the existing electric and gas infrastructure we operate have served customers with a superior measure of reliability and resilience. We have the people, we have the experience and we have the scale to be successful. The third requirement is a flexible pricing framework. Our electric utilities working with existing customers approved by their respective public service commissions have a history of being able to price new large load projects appropriately even in periods of high demand and challenging market conditions. These frameworks are designed to benefit all customers. For example, Georgia Power’s real-time pricing rate, or RTP, which was pioneered decades ago allows for the flexibility to price individual customers based on their unique, low profile and risk characteristics.

And finally, success in this environment requires experience and discipline, experience understanding utility economics and the true marginal cost to serve new customers. Experience identifying and mitigating the risk inherent and new or expanding large load customers, and experience and competing for new load with an objective of capturing tangible economic benefit for customers and states. Our experience, combined with the robust models and tools we employ are partially a product of the competitive economic environment we’ve navigated in the Southeast for decades. For example, in Georgia, most new large load customers can choose their electricity supplier. Over the years, we’ve been the chosen provider more often than not, however, as to load we did not win or perhaps did not even choose to compete for that reflects our discipline and experience.

By offering prices designed to recover the marginal cost to serve new loads, we seek to protect all other customers and importantly maintain our credibility with our regulators and state policymakers. I’ll now turn back to Dan to address those three key stakeholder questions pertaining to this extraordinary growth opportunity.

Dan Tucker: Thanks Chris. So how do we know the load in our forecast is real? The short answer is that we’ve already incorporated risk adjustments to the forecast. One could argue it’s a conservative view. We would say our forecasts are informed by our experience and by our continuous engagement with prospective, new and existing customers. We’ve included a visual representation of our process in the slide deck. Typically, our forecast appropriately represents only a portion of the full potential load we might ultimately serve. If a customer has not formally communicated state specific project details with our company, they’re not included in the forecast. If they have a choice of utility provider within the state that they have chosen, which is the case in each of our states, they are either not included or only included at a reduced probability weighted level.

Importantly, even once a customer has committed to one of our utilities, we further risk adjust the forecast based on the likelihood of delays on the customer side, whether those are construction delays or delays in ramping up production. And lastly, we further risk adjust the forecast based on the history of announced loads being higher than actual customer loads. Lower actual customer loads often result from technology improvements, economic conditions or other factors. All of that to say, we believe our forecast is the best representation of expected future demand. And with the potential for additional new customers to choose our states and utilities, there is potential for our forecast to be higher down the road. Next, I’ll discuss pricing.

When it comes to knowing that we’re pricing this load appropriately with a view towards protecting existing customers, several of the factors Chris mentioned a moment ago are key. We use our experience and robust tools to ascertain the expected marginal cost to serve each new customer and incorporate that into our flexible pricing mechanisms. We priced the load in a manner that helps ensure the marginal cost will be borne by the new customer. Sometimes, as is the case with Georgia Power’s recent growth, we’re able to provide new large load customers with competitive market pricing that also provides meaningful benefits back to existing customers. These benefits are not only driven by carefully constructed market pricing. They’re also a function of a robust, long-term integrated resource planning process and Georgia Power’s ability to use existing resources to serve a large portion of the new demand, while only needing to incrementally invest to meet higher peak demands.

The stipulation the Georgia PSC recently approved includes a commitment by Georgia Power for these customer benefits to be incorporated into the 2025 rate case. Our approach to pricing has never been more important given the current macroeconomic backdrop. Affordability is a key tenet of our customer-centric business model, and we work hard to ensure new customer demands don’t place additional burdens on those less able to afford it. Lastly, the risk question, what protections are in place for our forecasted load does not materialize? I’ve already described how we’ve risk adjusted the forecast itself, the other major risk mitigations pertain to local infrastructure improvements and our portfolio of supply resources. These new large load customers often require significant local distribution system improvements, and these improvements often provide limited incremental benefit to other customers.

As a result, we require most new large load customers to pay for these improvements upfront, helping ensure other customers are protected. When it comes to supply resources, the risk mitigation comes in the form of the diversity of our resources. Purchased resources or PPAs, can expire without being renewed. Older owned resources which might require additional investments or higher maintenance O&M spend to remain available over the long term can be retired earlier. Decisions and risk strategies like these are a key aspect the multiyear integrated resource planning processes in each of our states. With robust long-term planning comes optionality in future decision-making. Said differently, planning for 20 years of resource needs every 3 years helps ensure that customers benefit from a flexible resource plan that is equally focused on reliability and affordability.

Chris, I’ll turn the call back over to you to wrap up our prepared remarks.

Chris Womack: Thanks, Dan. Before taking your questions this afternoon, I’d like to first take a moment to reinforce that as we serve these growing energy needs, we also remain focused on achieving our long-term greenhouse gas reduction goals, including net zero greenhouse gas emissions by 2050. Working closely with each of our states, and with an unrelenting focus on safely and reliably serving our customers’ needs, we continue to make responsible economic resource decisions over the long term. For example, over 80% of the resources additions plan across our system totaling nearly 10,000 megawatts from 2023 to 2030 are zero carbon emitting resources. We have accomplished some wonderful things in recent weeks, and we are even more excited about our future.

We have seven quality state-regulated utilities with long track records of outstanding operational and financial performance that deliver over 90% of our earnings, along with a few quality complementary businesses, we believe we have the ideal portfolio to support our long-term objectives. Southern Company’s value proposition has never been more attractive. Our team has never been stronger, and we are positioned as well as we ever have been. As I said earlier, we have the people, the experience and the scale for sustained long-term success. Thank you, as always, for your interest in Southern Company. Robert, we’re now ready to take questions.

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Q&A Session

Operator: Thank you. At this time, we’ll begin the question-and-answer session. [Operator Instructions] Our first question comes from Carly Davenport with Goldman Sachs. Please proceed with your question.

Chris Womack: Hey, Carly

Carly Davenport: Hey, good afternoon. Thanks. Hey, how is it going? Thanks so much for taking the questions today.

Chris Womack: Thank you.

Carly Davenport: Good to see the strong sales growth coming in during the quarter. I guess just as we think about the impact to earnings from some of these volumes, are there any sensitivities that you can provide around the commercial load or the data center load specifically there?

Dan Tucker: Yes, absolutely. So just big as a bread box. So it’s roughly — if you think about our total sales, the average price, you’re talking about $40 million for a 1% change in our overall sales. Now for the vast majority of what’s showing up here, whether it’s data centers, some of these other large load industrial customers, it may skew slightly below that. So really it’s somewhere in the range of $20 million to $40 million for 1% change in sales.

Carly Davenport: Got it. That’s super helpful. Thank you. And then, just as a follow-up, as you think about the recent commission approvals on the 23 Georgia IRP filing, do you see any incremental capital needed relative to what you previously laid out on the fourth quarter call?

Dan Tucker: So there will be some additions based on the approval, Carly, and that largely pertains to the additional storage resources, the battery energy storage system. So if you recall what we included was two very specific projects in our outlook, but the commission actually approved 500 megawatts of owned storage, which is a little more than double what we had assumed. And so total dollars is going to — I’m going to give you a big range. And I’m going to throw in here if you didn’t see, we also announced an expansion of one of our solar projects in Southern Power. So that also was not included in our forecast back in February. So all told, you’re somewhere above $500 million, a little south of $1 billion, probably. And what we’ll do, we don’t want to get too far ahead of the regulatory processes. There’s specific certification processes to go through. So we’ll let all that play out and then update our forecast more formally later on.

Carly Davenport: Understood. Thanks so much for the color.

Dan Tucker: You bet, Carly.

Chris Womack: Thank you.

Operator: Our next question is from Steve Fleishman with Wolfe Research. Please proceed with your question.

Chris Womack: Hi, Steve.

Steve Fleishman: Hi, can you hear me?

Chris Womack: Yes, we can hear you.

Steve Fleishman: Yes. Great, okay. Well, first, congrats on getting Vogtle up and running. That’s great. And just — I know on the last call, you talked to the better sales growth, and you raised the CapEx and now there’s a little bit more potential to come, and then to reaffirmed squarely in the 5% to 7%. And I know you’re a big company, and obviously, it’s a lot to move the needle of 5% to 7%. But just is it fair to say that as you are adding this capital that at least within this range of 5% to 7% or some benefits of adding the capital even net of financing?

Dan Tucker: Yes. Look, I think it’s fair to characterize that everything that is occurring and particularly if the momentum continues and what we’re seeing, I would characterize that as adding an upward bias to where we are from an earnings perspective. And you kind of said it, Steve, and we certainly saw your commentary and your note yesterday. We are a big company. We are issuing equity. But even with all of that, these incremental investments should have an accretive effect. But I think it’s just too soon to say exactly what that means, but an upward bias, absolutely exists, particularly if this momentum continues. Now, does that mean change in growth rate? Probably not. Does it mean maybe that growth rate is off of some higher number later down the road? Probably so.

Chris Womack: And Steve, the only thing I’d add is we talked to you before about not just about raising growth rates, but it’s about the durability and the length, how we extend the runway is something that we are keenly focused on as we’ve talked to you many times about. And I think that’s clearly an opportunity that we are afforded by this added growth.

Dan Tucker: And then the only thing I’d add is also the thing that we are really gratified to see as part of this whole dynamic is a derisking of our outlook. Because of these customer benefits the affordability equation is greatly improved, and that’s a good thing for the long-term sustainability of our business.

Chris Womack: And Steve, the only thing I’d add, I mean, one of the things that we talked about in our prepared remarks, we’ve talked to you more about how do we use this opportunity to make sure we put downward pressure on rates across our customer classes and making sure that we price this new load in the right way. And I think we’ve demonstrated our ability to do that and having the resources and tools to do that going forward. So, it provides us additional excitement for us as we go forward.

Steve Fleishman: Okay. That’s all helpful. And then just a different topic. Just on — I think as you go back to the last call since then, we’ve had, I think, a bill on the Commissioner status. I don’t know if we’ve had an update on kind of the election court cases, and then there was that bill about bringing back a consumer council there. Just can you update us on all those developments?

Chris Womack: Yes, the consumer advocacy group inside of the commission, that bill was not passed by the legislature. The legislature did pass a bill that provided what I think is some certainty around the election cycle going forward for the commissioners. There was some confusion chaos and time and schedule got a little short because of the court cases. And so as a result, the legislature didn’t pass a bill that laid out the order and schedule of elections for commissioners between 2025 and 2028. And so the thing about that, that I think is very instructive is that the current commission in Georgia will be the commission that will sit to review Georgia Power’s 25 IRP as well as Georgia 25 rate case. So there is order and schedule for the commission for the next two to three years — out to 2028.

Steve Fleishman: And then just last question going back to the data center update, which was very helpful. Just we’re hearing from a lot of other utilities about data center growth that they’re seeing. And obviously, you’re kind of somewhat at the forefront of that. But just you mentioned in some cases, taking deposits or taking money to kind of lock that in, that the customers can pay upfront. But just how are you trying to assess the risk of some of the customers putting themselves in line in six different regions and then in the end, only picking two of them and just making sure that you’re not on the losing end of that? Or just trying to kind of put that into your assessment of risk?

Dan Tucker: Yes, Steve. I think that’s what we tried to capture a little bit in what we laid out in the, I guess, Slide 11 in our deck. It’s we’re not counting on those that could potentially still be trying to put multiple states or utilities on the hook. Really until we have pretty firm line of sight and that bilateral conversation and commitment between them and our utilities, it’s really not solidly in there. There may be some degree of risk adjusted or kind of a probability-weighted aspect just, because there’s so much activity out there. But we feel pretty good about — I got I hate to use the word, but it’s — I think our forecast is fairly conservative in that regard.

Steve Fleishman: Okay. Now that’s helpful. Thank you very much.

Dan Tucker: Thanks Steve.

Operator: Our next question is from Shar Pourreza with Guggenheim Partners. Please proceed with your question.

Chris Womack: Hey, Shar.

Shar Pourreza: Hey, guys. Hey, Chris. Can you — just a follow up from Steve’s question. Just can you elaborate a little bit on the timing of sort of any guidance update around that “upside bias” you just kind of referenced. I guess what’s the trigger event, whether you guide to the top end a rebased higher and grow 5% to 7% off of that? I guess I’m just trying to figure out what would move that needle. What’s the event?

Dan Tucker: Yes. So importantly, Shar, the way I characterize that is that if we continue to see this momentum, right? So it’s certainly not the cards we have today. The cards we have today have greatly improved our overall profile. It’s added that durability. It’s massively derisked kind of the outlook. But it’s going to take continued momentum on this front more investment, more sales growth over the long-term. And then just in the disciplined way we do we’re not going to make updates like that kind of intra year, right? I mean, to the extent there’s an update to be provided, it’s going to be in our fourth quarter call, and it’s going to have to be with a pretty — as big a company as we are, a pretty significant needle-moving event within the profile.

Shar Pourreza: Okay. That’s perfect. And then, Chris, maybe just quick one for you. There’s been obviously kind of a debate in the industry around sort of the behind the meter and in front of the meter, in language from some of the hyperscalers seem to show a little bit of a preference around self-generation and self-supply with some backup capacity, which can obviously impact some of the demand numbers as we’re thinking about things more prospectively, right? I guess, Chris what conversations are you having around this as you kind of engage with new customers? Thanks.

Chris Womack: So I’d say we’re having a lot of conversations that cover all of those options and all those considerations. I mean, I think as you talk to these hyperscale data centers, one, they want the power, they want resilience. They want the reliability. Some of them want clean, and they recognize the demand that they’re putting on load in, in certain locations. And so their considerations do they self generate, do they want support from behind the meter. So I think you go across the continuum of options reflects the conversations that we are having with them, one, to understand what their needs are, but also to help them understand our business and how we provide service and how we operate as a company. Yeah, I mean, we’re trying to — want to serve them as customers.

But I think we’re also in a period where there’s just a lot of instruction and education that’s occurring in the marketplace today. And so the thing about our company is with all the complementary subsidiaries that we have in this portfolio, we have the opportunity to support them and help them in multiple different ways. So I think that’s another aspect of our portfolio. That’s pretty exciting as we look at this demand and what’s happening in the marketplace today and that we have resources and capabilities to serve them and support them in a number of different ways.

Shar Pourreza: Got it. That’s perfect. That’s all the questions I have. Thanks guys. Appreciate it. See you soon.

Chris Womack: Thanks Shar.

Dan Tucker: Thanks Shar.

Operator: Our next question comes from Nick Campanella with Barclays. Please proceed with your question.

Nick Campanella: Hey, good afternoon, everyone, and congrats on Vogtle, really excited stuff.

Chris Womack: Thanks, Nick.

Nick Campanella: Yeah, absolutely. So on the sales growth, you talked about things bubbling up in other jurisdictions just outside of Georgia. And can you just remind us what you’re assuming there, what’s embedded in the plan versus where the upside of those tickers could go?

Chris Womack: I don’t think there’s anything embedded in the plan. I think we — it’s about announcements and that we see forthcoming. We know – I think there was an announcement today in Alabama of a 200-megawatt facility that Meta just announced. And then you saw also some legislation in Mississippi that was providing incentives for data centers and other hyperscalers to come into Mississippi. So we see it coming, but that activity — those projects have not assumed are not included in the forecast as we talk about it today.

Nick Campanella: That’s very clear. And then, Dan, I just wrapping in that $500 million to $1 billion figure that you were discussing on the CapEx side. I understand this is outside the plan now and probably not coming to your yearly update. But just — how do we think about the credit implications? And I know last quarter, I think you said you were 14% to 15% FFO to debt in 2024 with a 60 basis point improvement every year thereafter. Is that still the way to think about the uplift here over the next few years? Maybe you could comment on that?

Dan Tucker: Yeah, absolutely, Nick. That profile we described in the fourth quarter that ramps from that 14% last year up to 17% in the back half of the plan, it’s absolutely still the profile to watch as this incremental capital opportunity emerges, what we’ll do is issue sufficient equity probably through something like an ATM and through our plans to kind of restore the metrics to where they would have otherwise been without that incremental CapEx. And again, kind of going back to Steve’s question, yes, even doing that, this incremental CapEx will have an accretive effect.

Nick Campanella: All right. Thanks a lot.

Operator: Our next question comes from Durgesh Chopra with Evercore ISI. Please proceed with your question.

Durgesh Chopra: Hey, guys. Thank you for taking my question, and congrats on Unit 4.

Dan Tucker: Thanks, Durgesh.

Chris Womack: Always good to hear from you.

Durgesh Chopra: Thanks, Chris. Thanks, Dan. So Dan, I was just curious in your commentary, you mentioned 12% growth from data center sales growth. Just can you break that for us? How much of that is new data centers versus is that — or is it just existing data centers using newer technology?

Dan Tucker: So it’s about three quarters existing data centers and then a little bit the other quarter kind of coming from new data centers year-over-year. So we’re seeing both. We’re seeing a continued ramp-up of new facilities, existing facilities ramping up their usage.

Durgesh Chopra: That’s terrific. Cool. And then just one quick follow-up on the legislative front. I’m not sure if the House Bill 1192 was actually passed and signed into law, and that talks to kind of suspending the, I believe, the sales stack exemption on data centers. Maybe can you just address that? Where does that sit? And what implications, if any, do you see on the data center growth in Georgia?