The Southern Company (NYSE:SO) Q4 2023 Earnings Call Transcript

The Southern Company (NYSE:SO) Q4 2023 Earnings Call Transcript February 15, 2024

The Southern Company beats earnings expectations. Reported EPS is $0.64, expectations were $0.59. 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 Malika, and I will be your conference operator today. At this time, I would like to welcome everyone to the Southern Company Fourth 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, February 15, 2024. 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, Malika. Good afternoon, and welcome to Southern Company’s fourth quarter 2023 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 and subsequent securities 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.

Chris Womack : Thank you, Scott. Good afternoon, and thank you for joining us today. 2023 was an exceptional year for Southern Company, a year in which we proved once again that we can do extraordinary things, including delivering strong financial results in the face of unprecedented headwinds and the successful completion of Plant Vogtle Unit 3, the first newly constructed nuclear unit in the United States in over three decades. Since its July 30th in-service date, Unit 3’s performance has exceeded our expectations, delivering over 5 million megawatt hours of safe, reliable, carbon-free energy across Georgia. Other noteworthy items for 2023 included, constructive resolution of the Vogtle 3 and 4 prudence process, resolving all issues of reasonableness, prudence and cost recovery; successfully completed construction and commissioning for a brand new 720-megawatt combined cycle plant on schedule and on time at Alabama Power’s plant Barry; acquired two new solar projects at Southern Power, which once construction is complete, will add an additional 350-megawatts of carbon-free generation to its portfolio of fully contracted renewable generation; continued progress toward our greenhouse gas emission reduction goals, including our interim goal of a 50% reduction versus 2007 levels by 2030; achieving a 49% reduction in 2023; earned a National Accounts Award for outstanding customer engagement by the Edison Electric Institute and top honors from J.D. Power for residential and business customer satisfaction.

And just last week, Southern Company was ranked as the number one most admired electric and gas utility in Fortune magazine’s World’s Most Admired Companies list for 2024. These achievements reflect our team’s steadfast commitment to keep the customers and the communities we are privileged to serve at the center of everything we do. Throughout 2023, our electric and gas franchises continue to excel at the fundamentals and started this year strong as evidenced through our preparations and execution during January’s winter storm, Heather, when electricity demands reach all the time winter peaks and Southern Company gas system continue to reliably serving customers throughout severe weather conditions across its four-state territory. Our ability to navigate through such severe weather events further demonstrates how our customers benefit from the combination of outstanding operational performance by each of our utilities and the value of our vertically integrated state-regulated business model.

Our state’s long-term integrated planning processes, which include adoption of important planning assumptions like a 26% winter reserve margin for our electric utilities benefit our customers by providing a reliable and resilient mix of energy resources. Before turning the call over to Dan for a financial update, I’d like to provide an update on Vogtle Unit 4. We continue to make meaningful progress toward the completion of Unit 4 with initial criticality achieved yesterday. Initial criticality represents a key step during startup whereby operators for the first time safely begin the self-sustaining nuclear reaction to create heat for steam production. As we approach the initial sync with the grid, Unit 4 continues with the remaining start-up and preoperational testing activities that perceive the declaration of in service, which is projected in the second quarter of 2024.

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Q&A Session

Our 2024 adjusted earnings per share guidance range, which Dan will detail, shortly assumes Unit 4 achieves commercial operation in April. Dan, I’ll now turn the call over to you.

Dan Tucker: Thanks Chris and good afternoon everyone. As you can see from the materials we released this morning, we reported strong adjusted earnings per share of $3.65 for 2023, which was the very top of our 2023 guidance range. The primary drivers of our performance compared to 2022 are higher utility revenues and lower non-fuel O&M expenses and income taxes, somewhat offset by higher depreciation and interest expenses. Mild weather was also a significant headwind with 2023 marking the mildest year in our history for our electric service territories. Our ability to deliver 2023 adjusted results at the very top of guidance is a great testament to our team and to the resilience and strength of our portfolio of companies. A detailed reconciliation of our reported and adjusted results compared back to 2022 is included in today’s release and earnings package.

Turning now to electricity sales in the economy. Weather-adjusted retail electric sales were down 0.4% for 2023 compared to 2022. Strong usage drove commercial sales growth of 1.3% for the year, which was partially offset by lower residential usage with both commercial and residential sales impacted by the return to the office dynamic. We continue to see robust residential customer growth with the addition of over 46,000 residential electric customers and nearly 27,000 residential gas customers. Since 2020, we’ve added over 200,000 residential electric customers, which represents the highest four-year total in decades. Industrial sales finished down for the year nearly 2%, largely due to continued slowing in housing and construction-related sectors as well as lower sales to chemical companies due to outages and long planned plant closures.

Consistent with the drivers detailed in Georgia Power’s recently filed 2023 Integrated Resource Plan update, economic development in our Southeast service territory remains incredibly strong. Several years of extraordinary success in attracting new and expanding businesses to our states, underpins our long-term electricity sales forecast. While electricity sales growth is projected to remain around 1% to 2% for 2024 and 2025, growth from 2025 to 2028 is projected to accelerate to an average of approximately 6% annually, with Georgia Power’s total retail electric sales growth projected to be approximately 9% annually over this same period. The magnitude and velocity of this growth are significant drivers for the increased capital investments reflected in our current outlook.

This projected growth also represents a tremendous opportunity to de-risk our outlook and benefit customers as a substantial projected growth in kilowatt hour sales from new manufacturing facilities and data centers has the potential to put downward pressure on existing customers’ rates. Turning now to our earnings projections for 2024 and beyond. Our adjusted earnings per share guidance range for 2024 is $3.95 to $4.05, and our projected long-term adjusted EPS growth rate is 5% to 7% from that range. In early 2021, we provided the investment community with a stable post Vogtle 3 and 4 construction and EPS projection, with an initial and reasonably wide 2024 guidance range. It is perhaps the greatest of understatement to say that the world has changed a lot since early 2021.

On a macro basis, we’ve seen significant inflation and higher and then higher for longer interest rates, which alone has translated to interest expense for 2024 hundreds of millions of dollars higher than any of us assumed three years ago. Additionally, relative to our projection in early 2021, the projected in-service date for Vogtle 4 moved into 2024 from 2023. In the face of these challenges, we’ve continued to work extremely hard to grow our business and to create value for investors. Compared to our projections in early 2021, our state-regulated utility rate base for 2024 is projected to be approximately $6 billion higher, while lower O&M expenses and higher sales are projected to contribute hundreds of millions of dollars more than previously projected to help maintain affordability and help pay for those investments.

We estimated adjusted earnings of $0.90 per share for the first quarter of 2024. Our capital investment plan continues to be well over 95% attributable to our state-regulated utility businesses. The current five-year capital investment forecast, totaling $48 billion, reflects a $5 billion increase in state-regulated utility investments relative to our forecast a year ago. This 12% increase in capital spending reflects our ongoing efforts to further increase the resiliency of our electric and gas networks and our technology infrastructure. It also partially reflects new resources proposed in Georgia Power’s 2023 IRP update, about 60% of the brick-and-mortar megawatts proposed. We have maintained our disciplined measured approach to capital forecasting for our state-regulated utility businesses.

Given the magnitude of change in our projected sales growth and the timeframe in which new resources are needed to serve higher peak demands, we felt it was appropriate to go ahead and reflect certain new resources in our capital plan. Additionally, our capital investment forecast tend to grow, especially in the later years as the visibility into customer additions improves, regulatory processes unfold compliance obligations evolve and our long-term integrated system planning is refined. While the increases in this year’s five-year forecast represent an outsized upward adjustment due to the scale and velocity of the projected growth in the near-term, we do believe it’s reasonable to expect a historical trend of capital increases to continue going forward.

On its own, our capital investment forecast of $48 billion supports annualized state-regulated rate base growth of approximately 6%, providing a solid foundation for our long-term outlook. Any upside to the capital forecast will simply serve to add durability to an already strong outlook. Strong investment-grade credit ratings remain a priority. We continue to believe that in order to be a high-quality equity investment, a company must also have high-quality credit. As we near completion of Vogtle Unit 4, the reduction in major project construction risk and the improvement in our FFO should strengthen and meaningfully improve our credit profile to help ensure we preserve what we believe will be a positively differentiated profile. We are also turning on our internal equity plans to fund the incremental capital investment at our subsidiaries that I highlighted earlier.

These plans typically provide approximately $350 million of new equity annually. Additionally, we’ll preserve our financing flexibility and optionality with a continuous focus on preserving and improving shareholder value. For example, we will continue to maintain an at-the-market or ATM plan to partially finance potential additional increases in capital spending in our subsidiaries or potentially, to partially refinance callable hybrid securities, if we determine doing so preserves or improves our credit and long-term EPS objectives. Southern Company strives to deliver a superior risk-adjusted total shareholder return, and we believe the plan that we’ve laid out supports that objective. Our customer and community-focused business model the growing investments in our premier state-regulated utility franchises and the priority that we place on strong credit quality and our remarkable dividend history all contributes toward making Southern Company a premier investment.

Chris, I’ll now turn the call back over to you.

Chris Womack: Thank you, Dan. Again, let me say, Southern Company had an exceptional year in 2023. We didn’t just meet challenges head on. We rose above them while remaining committed to keeping customers and communities in the center of everything that we do. I am extraordinarily proud of the hard work, the collaboration, the perseverance and the leadership that our teams show throughout the year to enable us to achieve these outstanding results. Having a team prepared to rise to such new heights doesn’t just happen. For decades, Southern Company has prioritized investing in our people, with a focus on positioning our leaders and their teams to provide the exceptional service customers expect to deliver the innovative solutions needed in an evolving energy landscape and to support growing the communities we are privileged to serve.

As you all know, our company implemented a leadership transition in early 2023. Rather than simply fill a handful of vacant seats, we embraced it as a grand opportunity. During 2023, we facilitated 75 officer level changes throughout the company. The changes brought renewed energy and excitement, and more importantly, and intentionally, the movement served to further strengthen what we believe to be the deepest and best bench in the industry. I am excited about the future of this company, and I’m excited about our team and its ability to deliver the results, all our stakeholders, customers and investors alike expect from Southern Company. Thank you again for joining us this afternoon and for your continued interest in Southern Company. Operator, we are now ready to take questions.

Operator: Thank you. [Operator Instructions] Our first phone question is from the line of Shar Pourreza with Guggenheim Partners. Please go ahead. Your line is open.

Chris Womack : Hey, Shar, welcome. Thank you.

Shar Pourreza : Hey, Chris and Dan. Good afternoon. Just quickly on the new guidance that you rolled forward. Does the new 2024 estimate range still include a Vogtle charge? So should we be adding back $0.05 or so to grow off the 5% to 7% like you’ve talked about in the past? And sort of that new 6% rate base growth estimate now comes with equity, I guess, what’s the comfort level of hitting the midpoint of that EPS growth range, which you just reiterated? Thanks.

Dan Tucker : Yes. Thanks for the question, Shahriar. And I know there’s a lot of focus on this. I think we’re always fascinated with the precision with which everyone wants to inhale all this down. The — so let’s start with the guidance range. Yes, I think, it absolutely includes impacts from Vogtle 4, not only being in 2024 at all, but certainly going into, as we’ve assumed in the guidance range, April. I mean, if you add all that up, that’s $0.08 of incremental impact on 2024 relative to what it would have been if the project been lined in 2023. And — but we haven’t adjusted a range by that full amount, by any means. And what we’re doing is using the flexibility, not unlike what we did in 2023 with the mildest year ever to kind of mitigate that.