The Southern Company (NYSE:SO) Q3 2023 Earnings Call Transcript

The Southern Company (NYSE:SO) Q3 2023 Earnings Call Transcript November 2, 2023

The Southern Company beats earnings expectations. Reported EPS is $1.42, expectations were $1.32.

Operator: Good afternoon. My name is Dina, and I will be your conference operator today. At this time, I would like to welcome everyone to The Southern Company Third Quarter 2023 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 November 2, 2023. I would now like to turn the conference call over to Mr. Scott Gammill, Vice President, Investor Relations and Treasurer. Please go ahead, sir.

Scott Gammill: Thank you, Dina. Good afternoon, and welcome to The Southern Company’s Third Quarter 2023 Earnings Call. Joining me today are Chris Womack, President and Chief Executive Officer of The 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 the call over to Chris.

Chris Womack: Thank you, Scott. Good afternoon and thank you for joining us this afternoon. Our premier state-regulated electric and gas utilities and Southern Power continued to perform well during the third quarter. Plant Vogtle Unit 3 has continued to operate at 100% react to power since being declared in service July 31, and we expect to deliver on our adjusted financial targets for 2023. Before Dan provides an overview of our financial results, I’d like to provide an update on several announcements since our last call. First, we continue to see economic growth across our Southeast service territories. We are excited about the important role our utilities play and attracted new jobs and investment to our states and communities and are proud of the recent recognition for those efforts as Alabama Power and Georgia Power will each named a top utility for economic development by Site Selection magazine.

With Georgia Power’s recognition representing the 25th consecutive year for this honor. Last Friday, Georgia Power filed an update to its integrated resource plan. Economic development in Georgia has accelerated over the past couple of years and is contributing to extraordinary projected electricity usage growth, which is significantly larger than historic levels. Electric transportation, manufacturing and its supporting supplier base have been major contributors to the state’s success along with new data centers to support increased computing power needs and the growing digital economy. With this 2023 IRP update, Georgia Power is proposing additional investments into Georgia’s energy future to provide economical energy solutions that should benefit our customers and communities for generations to come.

Building upon the plan approved in Georgia Power’s 2022 IRP, the 2023 IRP update seeks to continue the utilization of a diversified approach to help ensure resilience, reliability and flexibility on behalf of customers, and Georgia Power has requested that the Georgia Public Service Commission evaluate this update by the end of April 2024. In late September, Southern Power announced the acquisition of the 150-megawatt South Cheyenne Solar facility in Wyoming and the 200-megawatt Millers Branch solar facility in Texas. Commercial operation of the facilities is expected in 2024 and 2025, respectively. These projects represent Southern Power’s 29th and 30th solar facilities, which are the newest additions to a portfolio of 5,500 megawatts of carbon-free generating capacity.

Consistent with the project in Southern Power’s existing portfolio, these new projects include long-term contracts and counterparties with strong credit support. Additionally, Alabama Power’s Barry Unit 8 was successfully placed in service yesterday on schedule and on budget. This 720-megawatt combined cycle unit is expected to be one of the most efficient natural gas plants in the country. Consistent with the proposed resource plan in Georgia Power’s 2023 IRP update, we believe we are well positioned to continue applying our expertise and experience in constructing new natural gas and renewable generating units to serve our region’s growing needs. Last week, we announced a memorandum of understanding between Southern Company and the U.S. General Services Administration to develop carbon-free electricity solutions for federal facilities across our Southeast service territory.

The agreement documents our intent to collaborate on development of a road map that when executed will lead to federal agencies buying more carbon-free electricity in the region. We view this exciting partnership as another important contribution towards Southern Company’s goal of reaching net zero by 2050. And finally, last Wednesday, we issued our annual sustainability summary highlighting the great progress that we made as we continue to advance clean energy, lead through innovation, invest in our people and serve and elevate the communities that we have the privilege to serve. We have worked with our states, customer groups, communities, regulators, policymakers and other stakeholders to develop strategic solutions to deliver clean, safe, reliable and affordable energy to serve our growing economies.

Dan, I’ll now turn the call over to you for a financial update.

Dan Tucker: Thanks, Chris, and good afternoon, everyone. For the third quarter of 2023, our adjusted earnings were $1.42 per share, $0.12 higher than our estimate — $0.11 higher than last year. The primary drivers of our performance compared to last year were warmer than normal weather conditions, changes in rates and pricing and lower income taxes and O&M expenses, somewhat offset by higher depreciation and amortization. For the nine months ended September 30, 2023, our adjusted earnings per share were $3.01 compared to adjusted earnings per share of $3.35 for the same period in 2022. A detailed reconciliation of our reported and adjusted results as compared to 2022 is included in today’s release and earnings package. For the nine months ended September 30, 2023, adjusted earnings per share are $0.34 below the same period a year ago, with the extremely mild weather conditions we experienced in the Southeast during the first six months of 2023, representing a major factor in how this year has developed.

While weather conditions continue to present risk to our fourth quarter results, we project to achieve our full year adjusted earnings near the middle of our guidance range of $3.55 to $3.65 per share. Our adjusted estimate for the fourth quarter is $0.59 per share, which implies an estimated full year result of $3.60 on an adjusted basis. Turning now to electricity sales in the economy, year-to-date 2023 weather-normal retail electricity sales were approximately 0.5% lower than sales levels for the first nine months of 2022. Year-to-date, we have added approximately 35,000 electric customers and 19,000 gas customers, trends which continue to outpace pre-pandemic levels. Strong commercial usage was offset by a return to office dynamic and residential sales as the relationship between these two customer groups appears to have largely reached pre-pandemic status.

Lower industrial sales continued to be driven by weakness in the chemical, paper and housing-related sectors. More broadly, our service territories are in a period of industrial transition particularly as it pertains to manufacturing. Historically, significant industries such as paper and chemicals are making way for the manufacturing of solar panels, batteries, airplanes and electric automobiles. As Chris mentioned earlier, during 2023, we have continued to see an extraordinary level of economic development activity within our service territories. While we will provide formal updates to our outlook during our fourth quarter earnings call in February, we did want to highlight the magnitude of potential change we are seeing in electricity sales growth.

Recall, our previous forecast assumed annual electricity sales growth of 0% to 1%. Factoring in the power needs of these new, highly data-centric businesses and manufacturing facilities, electricity sales are likely to have an annual growth rate closer to a mid- to high single-digit range over the next five years. While there is likely to be significant incremental capital investment required to serve this level of economic development activity, we expect both existing and new customers to recognize economic benefits from this growth. Chris, I’ll now turn the call back over to you.

Chris Womack: Thank you, Dan. Before taking your questions, I’d first like to provide a brief update on our progress at Vogtle Units 3 and 4. Since successfully achieving commercial operations at the end of July, Unit 3 has performed well, delivering nearly 2.5 million megawatt hours of reliable carbon-free energy to the citizens of Georgia. On Unit 4, following fuel load and during start-up and preoperational testing, we discovered a motor fault in one of the four reactor coolant pumps, necessitating a full replacement of the pump with one from our spare parts inventory. We have successfully cleared the path in which the existing reactor coolant pump will be removed and expect to begin that activity in the coming days. Many preoperational activities continue along a parallel path with the pump replacement, including coatings, insight containment and preparation of the turbine for power ascension testing.

After successful installation of the spare pump, we will recommence with start-up in preoperational testing with a projected in-service date during the first quarter of 2024. Also, in late August as part of the Vogtle 3 and 4 prudence process, Georgia Power filed an application with the Georgia Public Service Commission to adjust rates to include reasonable and prudent Vogtle Unit 3 and 4 cost. Related to this application, the Georgia Public Service Commission public interest advocacy staff filed a stipulated agreement among Georgia Power and several other intervenors, which is intended to constructively resolve all issues regarding reasonableness, prudence and cost recovery for the remaining Vogtle 3 and 4 costs, not already in base rates.

The Georgia Public Service Commission is expected to vote on this matter on December 19. Again, thank you all for joining us this afternoon and for your interest in Southern Company. Operator, we are now ready to take questions.

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Q&A Session

Operator: [Operator Instructions] Our first question is coming from the line of Carly Davenport with Goldman Sachs. Please go ahead.

Carly Davenport: Maybe just to start to pick up on your comments on Vogtle. I guess, first, just any expectations at this point in terms of the actual process of replacing the reactor coolant pump when you’d expect to get that wrapped? And kind of talk a little bit about maybe what gives you confidence still in that 1Q 2024 time line. And any factors that you’re watching that could accelerate or decelerate that time line?

Chris Womack: Carly, again, thanks for your questions. We look at the pumps at Unit 3, I mean, the four pumps are running as designed. And as we’ve seen this from Sanmen in China, so we’ve seen this experience in terms of replacement. So, we think we have a good path to replacing the pump. And so, we just feel good about the process that we’ve identified that is in place for removal and then replacing the spare pump. So, we feel very confident about the process and where we are with the pump replacement process at this time.

Carly Davenport: Great. And then maybe just shifting to sort of some of the capital opportunities that Daniel alluded to facilitate this load growth that you’re expecting to see across your territory, I guess, in the context of the interest rate environment, how are you thinking about managing financing the CapEx required to support that growth? And how you’d expect to balance between debt and equity going forward.

Dan Tucker: Yes, Carly, it’s a great question. And look, just order of magnitude, we’ll provide specific guidance in February. But I think as we sit here today on the very front end of this IRP update process, we do see pretty substantial potential increases. And potentially, we’re talking billions of dollars where our current five-year plan for capital is $43 billion. I think we easily see a plan that translates to something north of $45 billion, and it’s really a question of how much higher than $45 billion once we get to February and kind of lay that out. And I say all that continuing to be conservative about including any owned renewables. We absolutely across all of our electric service territories expect to own renewables over the forecast horizon.

But we’re going to wait until there’s better line of sight on those individual projects to include those. So getting to your question in terms of financing, we’ve been very clear about our credit objectives. And I think our profile is positioned to be differentiated, and it’s our objective over the long term to preserve that differentiated profile. And so that will mean the potential for maybe turning on our equity plans. We’re fortunate to have one of the largest, if not the largest drips in the industry. We can generate between $350 million and $400 million a year just through those. And then we always keep on the shelf and at the market program just to have flexibility. So, we will absolutely do what we need to do to preserve the credit profile in terms of the balance of how that’s financed.

I think it’s still a fraction of any incremental capital that translates to equity. Again, I mentioned billions of capital and hundreds of millions of potential equity through the drip. I think that will be sufficient to maintain where we want to be.

Carly Davenport: Great. If I could just sneak one follow-up on that point, Dan. Do you have any — are there any targets that you have on the level of parent debt that you’d like to hold going forward?

Dan Tucker: I think where we sit today, Carly, just kind of on an unadjusted basis, if you will, so not trying to factor in equity credit or content for any particular securities. We’re a little south just of 30% overall. I think as the business grows, we don’t really intend to grow that percentage. So, the absolute quantum of debt may increase over time, but the proportion of parent debt to the rest of our debt will remain about the same, I think.

Operator: Our next question is coming from the line of Shar Pourreza with Guggenheim Partners. Please go ahead.

Shar Pourreza: Just a quick follow-up from the prior question. I guess, the opportunity set is pretty material, Dan, you’re obviously highlighting it could be in the billions. I guess, how do we think about that opportunity set in relation to your 5% to 7%? So is this a scenario where it’s accretive to growth or could be accretive to growth? Or is this sort of an extended runway scenario?

Dan Tucker: Yes. Look, Shar, it’s a great question. It’s the right question. But Chris and I have been out speaking to the investment community for months well in advance of this filing with the Georgia Commission coming together and acknowledging that whether it’s owned renewables, whether it’s the kind of economic development growth that we — and activity we’ve been seeing, potential for more capital has been lingering out there. But what we’ve both been very clear about is it’s not our objective to raise the growth rate as a result of that. What this opportunity presents itself as is an opportunity to strengthen the profile of the growth rate to potentially sustain it longer term. And again, the important governor on all of this is really two factors: One, we’re focused on the long term here.

We’re not trying to have some temporarily higher growth rate in the short term. And more importantly, number two, is customer affordability, making sure that we maintain a profile from a customer perspective that preserves the constructive regulatory environments, we’re fortunate to have. The other great benefit of everything that we’re seeing and the fundamentals that Chris and I are so excited about is this level of sales growth. That, in and of itself, will provide an opportunity to mitigate the affordability equation.

Chris Womack: And Shar, one thing I’d add. I mean, you know us very well, you know our process. I mean we will kind of give you that ’24 guidance in February of next year. I mean, so now we are looking at the headwinds, the tailwinds kind of where we are in terms of — I mean, the cards that we have and what’s in front of us, and we’ll update and give you that guidance in ’24. But I’d tell you, I mean, on the iconic development front, there are just a lot of exciting opportunities. We’ve got headwinds of interest rates, but we look forward to giving you that update in our call in ’24 in February.