Q4 2021 Southern Co Earnings Call
Okay.
Good afternoon, My name is Chris and I'll be your conference operator today.
At this time I'd like to welcome everyone to the Southern company fourth quarter 2021 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.
If you would like to register for a question. Please press the one followed by the four on your telephone.
I would now like to turn the call over to Mr. Scott Gammill Investor Relations director.
Go ahead Sir.
Thank you Chris Good afternoon, and welcome to Southern company's year end 2021 earnings call. Joining me today are Tom Fanning, 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, Qs and subsequent filings in them.
Asian, we will present non-GAAP financial information on this call reckon.
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 <unk> Southern company Dot Com.
This time I'll turn the call over to Tom. Thank you Scott Good afternoon, and thank you for joining us today.
As you can see from the materials that we released this morning, we reported strong adjusted earnings per share for 2021.
Exceeding both our original 2021 guidance and the estimate that we provided on our third quarter call. This performance is due in no small part to our outstanding service territories.
And the unparalleled commitment of our employees to deliver clean safe reliable and affordable energy to our customers our outstanding customer service our commitment to the communities, we serve and our proactive engagement with our stakeholders are reflected in the numerous honor.
As we've highlighted in our slide deck <unk>.
Including recent recognition as number two in the nation.
On Forbes 2022 list of America's Best large employers.
Many of the initiatives that support this distinction are reflected in our inaugural transformation report, which we released earlier. This week. This report details our sustained commitment and actions to further advance equity both within our company and our communities. These commitments allow southern.
<unk> company to help lead change within our communities and provide an enduring reflection of our values. We are proud with the progress we have made and continue to recognize the opportunity to do more.
As an example of the work we're doing to drive our customer satisfaction results a meaningful portion of our capital plans in recent years.
Has been allocated to the continued modernization.
Of our electric grids.
Our grid automate automation strategies and investments are delivering real value to customers.
And in 2021.
Our customers experienced 15% fewer minutes of interruptions.
Similar initiatives will continue to be a major component of our capital plans going forward.
Across all of our stakeholder groups, including employees customers communities and investors, we're focused on sustainability in a long term view of value.
That objective remains sound the long term financial plan that we outlined for you last year remains intact.
And we are reaffirming our 5% to 7% long term growth rate expectation consistent with adjusted earnings per share in a range of $4 to $4.30 in 2024.
Let's now turn to an update regarding some of the recent developments related to our progress on plant Vogtle units three and four.
As you can see in the materials provided earlier today, we updated our expected completion timeline for both units extending the in service dates for each unit by three to six months.
And we discussed on previous calls the paper process is a critical aspect of turning plant components and systems over from construction to testing and operation.
We have discovered incomplete and missing inspection records concerning much of the materials and equipment that had been installed at unit three.
These inspection records are an important part of the documentation that is necessary to file I tax.
Our progress on unit three I tax has slowed as we address our backlog of tens of thousands of inspection records needing completion to support system turnovers through hard work over the last several weeks, we have reduced this backlog by more than 30%.
Acumen Taishan within these inspection records is a critical aspect of getting it right.
And the time and resources to complete the remaining inspection records and remediate construction issues identified in the process, including the impact of borrowing unit for resources are key drivers for the change in schedule.
We have 123 I tax remaining for unit three.
The revised Eyetech completion schedule. We've included in our slide deck is consistent with a three month change in the unit three schedule.
Over the past year, a number of challenges, including shortcomings and construction and documentation quality have continued to emerge adding to project timelines and cost.
In recognition of the possibility.
For new challenges to emerge we further risk adjusted our current forecast by establishing a range of three to six additional months for each unit and we've reserved for the maximum amount.
We continue to make meaningful progress on both units, notably for unit three all 157 fuel assemblies had been loaded into the spent fuel pool in preparation for fuel load.
For unit four direct construction is now approximately 92% complete.
Open vessel testing has started and we recently completed the structural integrity and integrated leak rate tests without issue.
The a for merchant churn for months mentioned challenges on unit three are serving as lessons learned for unit four and had benefited our performance on unit four to date relative to unit three.
First time quality on both construction and documentation are key areas of focus our priority is bringing vogtle units three and four safely on line and again to get it right to provide Georgia with a reliable carbon free energy resource for the next six.
To 80 years.
With this most recent change and project cost and schedule provisions in the Vogtle three and four co owner agreement came to the forefront requiring the owners to affirmatively vote to proceed with the project.
Three and four is incredibly important to the state of Georgia, and its robust growing economy.
Furthermore, The addition of 2000 megawatts of Baseload carbon free energy is vital to increasing the availability of net zero energy resources across the state.
Considering these facts.
And our proximity to commercial operation, Georgia power has already voted to proceed.
The other owners are required to vote by March eight which allows time for them to work through their own governance processes.
Consistent with the schedule extension of up to six months additional for each unit, Georgia Power's share of the total project capital cost forecast increased by $480 million.
Largely as a function of time additional resources to complete the remaining work with the necessary focus on quality construction and documentation.
And the replenishment of contingency.
We continue working constructively with our co owners to resolve different interpretations of the cost sharing agreement with an expected potential range of outcomes of 100 million to $900 million. We have included $440 million of the 900.
Dollars and our total project cost estimate.
In aggregate.
Georgia, Power's, resulting total capital cost forecast is $920 million and as a result, Georgia power recorded an after tax charge of $686 million during the fourth quarter.
We value our partners on Vogtle, three and four and the relationship we've had with them across multiple assets for decades, we look forward to our continued partnership on each new unit as they transition to commercial operation, providing millions of Georgians with clean.
<unk> safe reliable and affordable electricity for decades to come.
Before turning the call over to Dan for an update on our 2021 financial performance and our long term outlook I'd like to briefly touch on Georgia, Power's Triennial integrated resource plan or I R. P, which was filed with the Georgia Public Service Commission late last month.
The proposed plan sets forth, a proactive innovative and transformational roadmap for how Georgia power expects to support customers and its growing service territory for decades to come.
Consistent with southern Companys path to net zero carbon emissions. The plan describes a tangible path to transition, Georgia Power's generating fleet.
The cleaner more economical resources.
This plan includes retirement of all of the coal units, Georgia power controls by 2028 <unk>.
Except for plant Bowen units, three and four which are scheduled to be retired no later than 2035.
The plan also includes a request for the addition of 6000 megawatts of renewable generation by 2035 more than doubling Georgia Power's current renewable resources. Additionally, 1000 megawatts of storage is requested by 2032 M prove.
The capacity value of these intermittent resources.
In recognition of the changing energy landscape, Georgia power proposed innovative programs to promote reliability and resilience, including a distributed energy resource program. The comprehensive long term plan also with dresses continued investment in our transmission system.
And energy efficiency programs for customers.
The I R. P is subject to the review and approval of the Georgia Public Service Commission.
Hearings will take place during the first half of 2021 with a final decision due this summer.
Dan I will turn the call over now to you.
Please take it away.
Tom and good afternoon, everyone.
All of our major subsidiaries had a strong 2021 as a result, our full year adjusted earnings were $3 41 per share 16 cents higher than adjusted results in 'twenty 'twenty and six cents above the top end of our original 2021 guidance range.
Financial performance for the year was highlighted by strong customer growth improving retail sales trends and continued investment in our state regulated utilities.
These positive factors were partially offset by milder temperatures throughout 2021 , resulting in a negative five cent variance for weather as compared to 2020, and a negative 14 sent variance compared to normal weather.
Additionally, 2021 non fuel O&M reflected a trend towards more normal operating conditions relative to the significantly reduced levels in 2020 a.
A detailed reconciliation of our reported and adjusted results compared to 2020 is included in today's release and earnings package.
Weather adjusted retail electricity sales were up 2.4% compared to 2020, approximately 1% better than our forecast for 2021 .
Almost all of this positive variance can be accounted for in residential electricity sales as a result of continued robust customer growth and an extension of the increased usage trends, which began in 2020.
Residential sales outpaced our expectation for the year by 2.7%, reflecting what we think could represent a transition to sustained hybrid work practices across our service territories.
We continue to analyze retail electricity sales relative to pre pandemic levels and in aggregate in the fourth quarter, our weather normalized retail electric sales exceeded sales in the fourth quarter of 2019. We are encouraged by these trends and will continue to monitor the implications of supply chain constraints Labor force participation.
<unk> and inflation pressures on our outlook.
Our stronger than expected customer growth as a trend that differentiates our service territories over the last two years. We've added an average of nearly 55000, new residential electric customers and 30000 residential natural gas customers across our regulated utilities average residential electric customer.
Additions were 43% higher over the past two years than the average for the five years ended in 2019.
Customer growth continues to be driven by a strong labor market recovery and our southeast territories are on track to reach pre pandemic levels of employment later this year.
Further supporting these trends the economic development pipeline within our southeast service territories remains robust for example, the average number of job announcements was 22% higher and business investment in Georgia was 39% higher than the average for the years, leading up to the pandemic.
<unk> trends in E Commerce, and electric transportation combined with a diverse well trained work force and a low cost of living have combined to drive major locations and expansions of distribution centers data centers manufacturing facilities and headquarters into our service territories.
Turning now to our expectations for 2022 our adjusted earnings guidance for the year is $3.50 to $3.60 per share.
$3.55 midpoint represents a growth rate of approximately 7.5%.
From the midpoint of our original 2021 guidance range.
In the first quarter of 2022 we estimate that we'll earn 90 cents per share.
Included in our guidance as a more normalized assumption for retail electric sales growth of zero to 1%, although a continuation of recent trends to deliver upside to that assumption.
We continue to see long term adjusted EPS growth in the range of 5% to 7% consistent with adjusted earnings in a range of $4 to $4.30 per share in 'twenty 'twenty four with 90% of total projected earnings over the five year planning horizon coming from our <unk>.
State regulated utilities are expected EPS trajectory has a solid foundation.
Additionally, our history of constructive regulation strong credit ratings and disciplined O&M spending serve to strengthen our outlook.
Underlying our long term adjusted EPS growth rate of 5% to 7% is a robust capital investment plan that continues to be driven by significant investment in our state regulated businesses.
Our base capital investment plan of approximately $41 billion, which excludes the capital required to complete vogtle units three and four supports our 'twenty 'twenty four estimate for adjusted earnings per share of $4 to $4 30.
This forecast represents a $2 billion increase in state regulated utility investment for the common years 2022 through 2020 five from our forecast a year ago.
These increases in our forecast are the result of greater visibility into investments to upgrade our enterprise applications serve major known customer expansions auditions further improve our grid and protect our technology infrastructure as well as investments related to the transition of our fleet.
We have long maintained a disciplined approach to capital forecasting within our state regulated utility businesses.
We don't use placeholders and we don't include capital that isn't expected to earn our allowed returns.
The result of this approach is that our forecast tend to grow, especially in the latter years as our visit ability into customer growth increases as regulatory processes unfold as compliance obligations evolve and as our long term system planning is refined.
We fully expect this trend to continue including in relation to Georgia Power's IOP.
For example, neither the long term hydro investment plan, nor the proposed company owned energy storage systems are fully reflected in our forecast. Additionally.
Additionally, none of the renewable additions proposed in the RFP are included due to both their timeframes and the potential for selecting purchased resources.
Furthermore, we continue to believe southern power has significant opportunity to continue growing through investments to facilitate fleet transitions and the growth in clean energy infrastructure broadly across the United States.
Southern Power's model has been distinctive since its beginnings in the early two thousands focused on long term contracts with credit worthy counterparties and a risk adjusted return profile that marries well with our overall value proposition.
We expect near term opportunities to meet our criteria to be modest.
We do believe opportunities will accelerate in future years, we've allocated up to $3 billion to southern power over the five year plan with approximately $250 million in 2022 $500 million in 2023 and $750 million annually for the remainder of the forecast again.
These allocations of capital are not included in our base capital forecast.
In aggregate our financial plan is anchored to our base capital forecast of $41 billion, and we believe upside potential exists in our state regulated utility forecasts.
And our southern power allocation.
Representing spending of over $44 billion as part of our strategy to sustainably drive long term growth in earnings and dividends.
We also believe many of the same drivers for additional potential investment over the next five years could translate to investment opportunities beyond 'twenty 'twenty six as we continue on our journey to net zero.
And finally, we've included an updated three year financing plan, India appendix to our slide deck today.
This plan, which is consistent with our updated capital investment plans and the potential capital investment opportunities. We've highlighted continues to assume no equity need over our five year plan horizon.
Credit quality and strong investment grade credit ratings remain a top priority the expected improvement in our consolidated F. F O to debt metrics equates to 200 to 300 basis, a 200 to 300 basis point increase from 2021 and 2022 levels by 'twenty 'twenty four.
We've included a slide in the appendix to highlight some of the drivers for this expected improvement combined with the expected reduction in construction risk over the next 12 to 18 months. We believe we are well positioned to support our credit quality objectives, Tom I'll turn the call back over to you. Thanks.
Thanks, Dan.
Southern company strives to deliver superior risk adjusted total shareholder returns.
And I believe the plan that we've laid out supports that objective.
Our customer and community focused business model, our growing investments into our premier state regulated utility franchises.
The priority, we place on credit quality, and our commitment and actions towards net zero all contribute towards making southern company a sustainable Premier investment a remarkable track record for dividends is another major contributor to that equation.
For nearly three quarters of a century, we have paid a quarterly dividend that is equal to or greater than the previous quarter, including dividend increases in each of the past 20 years as we look ahead, assuming adjusted earnings within our estimated range of <unk>.
$4 to $4 30 per share in 2020 for a payout ratio that is expected to be at or below 70% and a sustainable long term adjusted EPS growth rate of 5% to 7%.
We believe that once vogtle, three and four completed our board will have the opportunity.
To consider an increase in the rate of growth of dividends further solidifying our long term value proposition.
Thank you for joining us. This afternoon, operator, we are now ready to take questions.
Thank you.
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One moment please for the first question.
Our first question is from the line of Julien Dumoulin Smith with Bank of America. Please go ahead.
Hey, Julien.
Absolutely. Thank you.
Likewise, so absolutely cool, hey, listen I'm on I'm on the incremental cost I just want to break this down if you will I mean, it's a lot of numbers flying around here. If you can so of the $440 million you talked about an incremental cost.
How much of that is driven by the corner Cowens agreement can you break that down right. So you've got 180 from the sharing band.
And then above that sharing again, what percentage of the cost is warrants you. If you will so can you kind of break down the sort of the success of pause. If you will and then of that what was the base project cost that was agreed upon with corners, and what was the decision on COVID-19 related costs right emphasis on that last piece, if you don't mind.
So Julien this is Dan so the 440, you absolutely hit it right within there is $180 million that $180 million is consistent with the provisions in our agreements coders, where Georgia power bears a fixed percentage of anchor for metal cost.
Up to a certain point and so that $180 million is the maximum amount of exposure under those provisions above the thresholds for those provisions is where this option to tender cost responsibilities, Georgia power kicks in.
And that number embedded in the 440 is $260 million. So what that represents is.
Georgia, Power's assumption of bearing $260 million.
That a different way, 100% of all the dollars above the threshold. So that $2 60 represents their their shares already captured in the 480. This is capturing the co owners piece that is assumed in these numbers to be tendered.
What was the second part of your question Julien.
Covid related costs I've got a follow up more holistic as well.
Yeah. So.
As we've disclosed and we talked about last quarter. There is differing interpretations in the in this co owner agreement as to exactly how those provisions work and exactly what the starting point works so rather than air those specific differences here on the call, let's let those conversations take place and the proper form but suffice it to say.
The two differing points of view is the starting point for where the initial provisions kick in.
And how COVID-19 cost ultimately adjust any cost before sharing.
Hey, Dan one more point I think and please I know you'll correct me if I get this wrong.
But we've associated the cost with tender in this estimate we had not given any credit for the value of megawatts tendered at the high end of the estimate the amount of megawatts tendered if everybody tendered maybe around 75 to 80 megawatts at the level in which we've estimated we think.
It could be around 30.
That's correct, Tom and we've given no credit to any value associated with those megawatts that we've talked about this on prior calls the fact that.
You may have megawatts, that's gonna be carbon free resilient for decades to come we think it would have real value. We've reflected no value in any of these estimate and just to put a finer point on all of US Julien. We've included this $440 million and that represents an estimate of an outcome. We do not at this stage.
We have an agreement with our Kona as we still have that difference of opinion.
Right exactly and maybe can you speak a little bit to this process than right. You're talking about is March 8th date web with the co owners here any initial indications on where they stand.
And obviously this 90% high bar, but.
Erratically, they could vote to proceed and then related to that they could tender the incremental costs you right I just want to make sure I understand the kind of two separate parallel processes here.
Yeah, Julian the way, we would think about that make them completely separate okay.
Well the process is simple.
By the contract that we entered into way back when what was it 2018 I guess you know I guess, we signed it in early 19, but.
That kind of provision spoke to.
A potential outcome that was really onerous like there was some cataclysmic problem and we could all go our ways our.
Our calculus was pretty simple we are this close to loading fuel and ultimately getting.
Unit three on service and then ultimately unit four.
To us it was an easy decision to proceed.
Got it alright.
These are separate and from their perspective, they couldn't theory voted to proceed and then ultimately allocate.
The tender their megawatts to you as you just talked about a moment ago right that thank you.
They're completely.
Completely separate processes, yes, so they could decide to proceed and separately, yes. They can tender that's right there and Theres a 100 to 120 day 180 day clock that that we've disclosed in our 10-K as well.
Is really the time period to clarify tender or not.
And the ultimate calculation that we alluded to megawatts, we alluded to dollars all of that would not get buttoned up until unit four was in service and all of the costs were not.
Alright excellent. Thank you guys for the clarity Kanwal stated you bet Julien Thanks Budd.
Our next question is from the line of sharp <unk> with Guggenheim. Please go ahead.
Hey, Shar, thanks for joining us.
Hey, Tom it's actually James Ward on for Shar.
For taking my question.
Oh, Hey.
At a high level, when we think about the IR piece and what's the Georgia power, specifically as you've mentioned it before.
I understand that any storage or hydro improvement spend would be incremental but what about transmission.
Is there any ERP related spend baked into the 41 billion dollar based plan or is anything that comes out of the ERP going to be incremental.
Hey, James It's Dan So yes, there is transmission spend in there in this forecast period for the five years it is modest.
Keep in mind that the plan includes retiring coal units in the 27 28 timeframe and then further again in 'twenty 35, so the timeline to construct and frankly plan and permit. These transmission projects is going to take the bulk of this forecast period and spending really occurs beyond.
The other got deep.
Detailed James and the way you asked Chris I, just want to make sure. It's clear there is some storage reflected in the capital forecast, but not a it's a fraction of what has been assumed as a planning assumption and the IRB at the one project that Georgia power, specifically asking for approval of is in our capital plan and the.
The only other thing I'll add is that yeah.
Go ahead, sorry. Please go ahead.
The only other thing I'll add I think I've done this before and kind of private conversation with you all one on one but as you start thinking about retiring Vogel I mean, I'm, sorry, G with a bow in three and four.
There creates a need in north, Georgia, and we've talked about that for further study is required in order to evaluate how you replace that is that going to be more solar is it going to be combined cycle is it going to be importing megawatts from the south to the north and therefore incremental transmission.
We just havent done all that work yet.
Gotcha Gotcha, Okay. That's very helpful. Appreciate the color there.
Switching gears to asset optimization understanding that you do not need equity in our five year plan, you've been very clear about that.
But when you look at L. D CS trading hands at nearly two times rate base. How do you think about the opportunity to sell an asset at that level and then reinvest the proceeds into your decarbonization efforts at your electric utilities.
Well I think we've demonstrated over the years that we're both in the world of M&A, where both buyers and sellers, but we're always seeking to do is put assets in the hands of the best owner, that's just kind of our dogma and I think we followed through on it you know what's interesting about our gas properties is.
That they have been able to contribute like 10% earnings per share growth.
We are primarily focused on safety related pipeline replacement programs.
The acquisition of what is now southern company gas, we have well exceeded our expectations on the acquisition.
So in order to think about you know cap allocation as you do when we think about it all the time selling something like.
You know our asset in Illinois relative to reinvesting in the core we always have to consider.
You know, what's best for our long term growth rate, what's basket on a risk adjusted basis, we will continually do that.
And James you made the point in your question I mean, we don't have an identified equity need in the forecast and.
We think our L. D C is a great property yeah.
Got it would it would surely a value play as opposed to a need.
Great.
Got you and then one final one here.
Just to follow on from Julians question earlier.
To clarify here so given that the Vogel co owners are already protected by cost caps and this is just at a high level here.
Is there any incentive or other reason.
We should be aware of or that might be worth keeping in mind for why oglethorpe EMEA would not want to proceed at this point since they have those cost caps in place just to help us understanding out of where they might be thinking.
We're not aware of any reason that exist like that got it if they have to go through their processes in.
Thank you very much I had those are all my questions. Thank you for taking the Tibet James Thanks for joining us.
Our next question is from the line of Jeremy Tonet with J P. Morgan. Please go ahead.
Hey, Jeremy and good afternoon.
Thanks for having me here.
Yes that as well.
Maybe just coming back to vocal real quick here, just trying to get a little bit more clarity you have any other missing inspection reports resulted in a need to.
Rework completed sections of the plant and also just curious if the NRC has kind of weighed in here on the I tax issue in any thoughts you have as far as what can be done in the future for vocal for two <unk>.
Controls that can be implemented to avoid these issues.
Yeah.
Interestingly I was just in Augusta visiting with Glen Chick or I think he's just a superlative manager of the site along with Steve Kuczynski, and we actually went through different systems. At this point and we are trying we are effort ing to begin with.
A inspection report.
Fix with what we believe are the toughest hardest.
Issues to deal with cant guarantee that but so far with 30% complete we havent found the need for any of that comprehensive rework.
Certainly as we see things.
That arent according to specs or parent inspection requirement, then we will fix it but nothing comprehensive as you're suggesting.
Second question.
Well I was just curious I guess that's helpful. There. Thank you for that and the NRC, if they've kind of weighed in on the I tax issues.
Okay.
Yeah, Yeah, Thanks, Jamie Hey, you know the Nrc's posture again.
I think I say this pretty regularly there a very tough requiring regulator, but we think they do a great job and that's the reason why the United States' nuclear fleet is the envy of the world.
Getting it right as we so often say will allow us to have an asset that will provide energy carbon free resilient for 60 to 80 years. So we're all in on getting it right the NRC Likewise.
Is their primary focus in other words, they're not as concerned I'm guessing with schedule and cost they want to make sure that whatever we build is as appropriate to nuclear safety standards as exists in America today.
So they support our efforts to find these things and I think.
You know for the amount of Eyetech that we've already submitted something like 275 or so.
I think we've had very few problems with those eyetech that that process has gone well, which says.
That once we get the work package is turned over and all the paper done in nuclear standard as it is supposed to be we've had an enormous success rate and dealing with the NRC.
Part of the equation.
Got it that's really helpful. There and then just pivoting a bit.
Bit hot.
Towards that tomorrow. So just wondering if you could discuss southern's involvement with SMIC and we see the tech going over the coming years and do you think there'll be support to rate base of spend if the technology is proven up in the future. Just wondering if you've had conversations with commissioners or other stakeholders on if this could be a potential down the road.
Yeah, My conversations with kind of future nuclear technologies have really been more I haven't talked to the states at all of that really would be the realm of Mark Crosswhite, and Alabama, Chris Womack and.
In Georgia, or Anthony Wilson at Mississippi.
In my conversations with D. O. We are with folks in that ilk or in the administration that those conversations too.
In my opinion I know other people are more bullish on S. M ours than I am but you still have to deal with enormous security issues, you still have to deal with kind of the NIMBY issues associated with nuclear so I've always felt that nuclear lends itself to scale now.
S M ours do absolutely have an important place in our nuclear future.
My opinion, it would be in the niche areas like military bases. The military are a does S. M ours on submarines and aircraft carriers. So it's easy to conceive S. M are showing up on big nuclear installations. It also provides them a degree of resilience I get that.
We have been and we participate in S. M ours, you should know that so.
Our nuclear team and our R&D team are involved in the S. M. A process, we've actually been asked to get involved in a significant way in S. M ours, and given I don't want to be distracted with anything other than getting vogtle, three and four done we've really stayed away from that.
On the other hand, we view great progress potential with the so called Gen. Four reactors the molten chloride salts.
You know we've worked with Bill gates and his team on that we are you know when you think about the R&D S curve I think we've done a lot of work on the science, So I would call. It the bench science of it and the very small kind of.
Element of starting up that S curve. The next kind of big slugs of development on the Gen. Four reactors will require hundreds of millions of dollars I know I've talked to the Secretary Grand home Deputy Secretary Turk.
Uh huh.
Other folks that it would be great as the D. O is looking to put money to work, especially in the technology development area. This is a place where we could partner with the federal government and really move quickly up that S curve to make gen four reactors the Khmer.
Actual reality in our own planning processes, they start to show up as an option probably.
In the late 2030, so lets say 2035 to 2040 and as an economic matter. They tend to compete with a C. C. S controlled combined cycle technologies, so depending on how the technology and cost X.
Spectation a ball you will see us either or continue with a combined cycles and capturing the carbon sequestering it or pursuing new gen. Four reactors, but again, that's an issue that's going to show up into very late 2000 thirties.
Yeah.
Got it maybe just a real quick follow up here curious on advanced nuclear thanks for your thoughts there, but as far as what technologies can make the most sense just wondering like water.
What vogel is doing versus molten salt or other technologies. Just wondering what you think of give and takes between them.
Well I think the obvious difference between kind of what we're building at Vogel and the so called Gen four reactors.
This issue of the the.
On the fuel and the core effectively the gen. Four reactors have the characteristic that a meltdown is virtually impossible and therefore, you need less containment structures and therefore less capital cost in order to put those units into play and have them be as safe as we expect.
Them to be that is the real big difference its a capital cost difference associated with how the.
How the reactors are a meltdown characteristic could occur.
Very helpful I'll leave it there thanks so much.
Thank you.
Our next question is from the line of Angie Stearns and ski with Seaport Global. Please go ahead.
Hey, Angie and great to have you with us.
Thanks.
I have a question I don't think I've ever actually asked the question about southern power so and.
Looking at your past disclosure and it seems like you are.
Gas plans are on the hedged about 80%, meaning that contracted for about 80% of the output we've seen.
Quite an expansion of spark spreads.
And across the country.
With your regions.
It's what Joe to Alabama, and North Carolina, as I'm not sure if that translates into.
Higher dispatch our earnings of these assets again.
Again, if you could comment.
Yeah, Angie I I don't know we'd have to run the numbers stand with you our own math would say, they're 92% contracted for about 10 years and importantly energy. So in front of the Georgia Public Service Commission as part of the ERP. The vast majority of the gas ppas that are in front of them for.
Approval are subject are southern power gas plants, and so that that's going to extend those units coverage for another 10 years and recall that we follow the same kind of rubric and contracting our assets as opposed to merchant players.
In that we don't take fuel risks, we earn a return on and return of capital and pass through the fuel and energy price.
Okay.
In fact in fact, Angie stomach the show me something else yes.
Excuse me one more us getting them one more data point, 95% contracted through 2026.
92 through 2031.
And that's the nerdy data.
[laughter] good now.
Going back to Vogel.
So.
Yes, I I've read I actually just re read the agreement the ownership agreement.
And that's that additional background about COVID-19 related costs.
So.
We are still sitting in there in the Covid era, so I'm assuming that at least some of this incremental cost related to the asset is still related to COVID-19 and how does that.
Come into this hole.
The discussion about the sharing agreement with that with the co owners and then secondly, we haven't you haven't mentioned inflation and so I'm just wondering how is that impacting.
The cost profile of this.
This.
Construction costs that project.
Yeah, and thanks for that.
This is my opinion I'm, giving you as opposed to fact, I guess, but in my opinion.
It is unquestionable it is unreasonable to assume that Covid had no impact.
And so the real art of the deal is to figure out how much of that impact.
Manifested itself, if you dial back out to those dark days when the first Covid thing hit and we were deciding whether to shut the project down or not.
I think it's very clear that we had to operate under a completely different operating regime on the site remember we stood up a medical village. We did all sorts of things in order to continue this very important project.
We have estimates that we provided the Georgia Public Service Commission and I don't think we've updated those recently, but certainly.
I think any reasonable person would say that there have been COVID-19 impacts on the site.
Yeah, and I would just say in terms of this most recent cost to increase its certainly not the driver it's not a major driver, but Tom's point, it's logically an element of what's going on and I think we provided the chart in the appendix materials you can see even this most recent.
Whatever the omicron it had an enormous spike in the December to January timeframe. So certainly it had an impact we saw in <unk>.
And especially over the holidays, you know, we always expect to see more absenteeism in a variety of other things. We certainly saw it there as well, but it's fair to say like everyone is with every wave with every impact we are getting better at working in this environment and it becomes increasingly less disruptive and thus less of a cost impact.
And let me hit one other kind of controversial point, but.
But we watch this like Hawks recall at one time, we had 9000 people on site.
And there was a lot of concern was this somehow a COVID-19 hotbed will in fact, the data shows that our Covid experience is just about similar to the surrounding communities. We don't have a different experience on the site then in the surrounding counties.
Yes. Thank you how about inflation now is it already.
And this additional cost estimate.
Yeah, but angie most of the inflation sensitive stuff is already procured our supply chains are already spoken for all of the major equipments there.
I suppose there would be some.
Labor, where we're paying top decile right now.
You know I suppose that could come up later, but it hasn't been a big effect now.
Okay and then the last question so.
You know looking how strong your earnings were.
Then actually have the last couple of years now.
Yeah.
Despite unfavorable weather still is the load growth are the main driver.
Or is it just cost efficiencies what is what is putting you above the high end of your guidance almost consistently despite unfavorable weather.
Well, Dan has done a great job managing the cost structures of the system actually Dan in anything to do with it all of the people in the operating companies did but I'll tell you the big surprise I said this on Squawk box. This morning.
And the data we've provided you chose it we beat.
Our residential estimates by 2.7% in other words, we were projecting that to be down and it was actually up.
And we think that that is due to a change in lifestyle I think we budgeted as if we thought there was this return to work.
And therefore, we would see a like a 2.2% reduction in residential sales.
Because people are showing up at work led fact, our own data and if you look at southern company's experience.
Our old model was about 80% of the people came to work every day.
I think Ned and there were 20% that were virtual probably call centers now we're seeing about only 25% are here every day with about 50% hybrid they were coming in and out you know a few days a week.
Some more some less and then about 25% virtual.
What's interesting about that is the sales in the residential sector were sustained at a much higher level than what we thought we thought they drop off they actually increased a bit.
That uplift really helped us this year.
And just as you look at our forecast look we certainly haven't.
Assumed that that continues into the future because one year doesn't make a trend, but we have reasonable reasonably believe it might so if you look at our forecast for residential sales for 2022 it actually reflects year over year negative and that's frankly mitigated by our assumption of strong customer growth though.
To your point, Andrew there's certainly upside even a 2022 if we see these trends continue that customer growth has been awfully attractive ortho over 50000 on the electric side over the 27000 and something like that on the on the gas side. So.
We continue to do that and we think that is kind of a function too of people being able to work remotely and so they tend to go to places that have low input costs.
Tractive place to live our economic development data shows that as well. So I think some of the stuff that you talked about in the script.
It just looks good as particularly for GA, but even Alabama is coming back and.
We're doing well we have reason to be bullish about the long term viability of our franchise.
Very good thank you.
Thank you Andrew Thank you.
Yeah.
Our next question is from the line of Steve Fleishman with Wolfe Research. Please go ahead.
Hello.
Hey, Yeah, you to Tom and Dan.
Thanks, So two.
Two questions first just on the Vogel our eyetech issues.
I know you knew all along that the paperwork.
And in the trail of all that was was super important.
You've been doing all the work so.
Could you give us a little flavor of.
<unk>.
Just what what has gone wrong here because it because obviously, it's something that you were very focused on from the beginning.
100% State and I think you know.
No.
I said this in media earlier, but it's true I I get up every morning thrive.
Throughout the day in the middle of the night thinking about Vogel and what we can do and all of that.
And I was and I I was the folks at the site have been particularly frustrated at this recent development. When we left you on the call and I guess it was late October early November everybody. The site too was very bullish on the fact that man here. We go we're getting ready to.
While for one O three G in la.
Low fuel and the whole bit and when we started getting into the final.
Systems.
Related to the final Eyetech, so right, we've done 100, and I mean, we've done $2 75, we had 123 left.
We had already done in order to complete these tests and a lot of this equipment has already the operated within the testing regimes.
We had done physical and visual inspections, but what we found when we got ready to turnover.
These systems.
For the paper and important part of the paper are these inspection reports and we found in many cases, they were just either incomplete or missing let me give you an example.
But this is an example is as relevant.
For every bolt in that plant theoretically we would have to ascertain certificate the provenance of that bolt.
In other words, we'd have to prove that we know that the metallurgy worked and where it came from and everything else to the extent an inspection report did not account for the provenance of a bolt.
We had to either take the bolt out put it in the bolt that was certified or take the bolt out and test it.
To make sure that it met our standards.
This is at the very end of the process for the very final equipment and systems that were related to the turnover before we filed for one O. Three G. This is at the tail end of the process and.
And we found this out we just had to go stop we've got to do a complete review of all of these inspection reports and that's what you see right now.
Got it.
I am frustrated about it but it is something we have to do you know we talk about this is the first plant. We've constructed in 40 years well. This is the first nuclear documentation we've had to do in 40 years I wish we had found it sooner we just did.
Okay, and then a totally separate topic.
You were I think Tom pretty accurate accurate.
With caution about the build back that are getting done last year.
And I'm just curious.
How you're feeling about maybe a climate only type package.
Getting done in Congress this year.
Strictly my opinion and I was in the meeting with the President and all that.
You know what's interesting in it and I visit I work with both sides of the aisle here.
I think long term.
Both parties agree that we should do some pumping.
Thank the methods of doing something.
Especially in light of the inflation signals we are seeing.
And potentially the national security issues, we are seeing right now.
Blend themselves to nothing happening for the rest of the year.
I wish it would I don't think it will.
Great. Okay I appreciate your thoughts thank you.
Yes, Sir.
Our next question is from the line of Paul Fremont with Mizuho. Please go ahead.
Hey, Paul always great to have you with us.
Thanks, a lot.
I guess my my first question is going to be on turnover and so I think initially you had talked about doing some of the turnovers.
Those that were necessary to load fuel and delaying other turnovers that you thought were less necessary in light of the documentation issues are you now looking to do all of the turnovers before you load fuel.
Ah now I think I think Theres a set you have to turnover in order to get to 103 G and there could be some others in between one O three G and and loading fuel, let me give you a little bit of kind.
Where we are so on unit three now I'm doing big Hunky things Theres, a little less than 100 systems 96 or so.
You would split those into a 162 subsystems. Okay. So there's 11 total to go and since our last call. We've got five of those turnovers complete if I think about what's remaining here.
I would say that.
We have three to go for one O three G.
And six to go.
On fuel load.
And two that we can complete after fuel out there not necessary to the nuclear safety.
Are things.
Was that helpful.
Absolutely.
The.
In the past I think you've you've you've.
Estimated or you've you've put out estimates of COVID-19 related costs.
That went as high as 400 in the upcoming V. C. M. 26 filing are you going to update you our estimate of COVID-19 related costs or <unk> or not.
Yeah. The 400 444 was at 100 per cent dollars our share of that was 160 <unk>.
I don't know the status of that it didn't come up recently, so I think it's still an open issue.
There was some degree of estimating future impacts in the original number and I think it's been consistent with that yeah.
So we've not provided that.
Is that for 40 the.
Sort of the most recent number that you've put out publicly.
Yeah, Yes, and so you typically see us disclose it as 160 to 200, that's our share right 40 is $100.
Okay.
And just to be clear no change like that in N V. C. M 26.
Sure.
You are saying no change.
Correct.
N V C. M 26, but we just haven't just habit created in addition, based on the latest omicron effects.
I mean, clearly there where we just have an update at the estimate.
And then the numbers you put out for the cost sharing potential write offs are after tax numbers.
Can we get pre tax numbers for those.
The four 8 million pretax.
Yeah, Yeah, those are pretax Paul those those are pre tax.
So that adds 926 86 is the after tax force Yeah. If you look at our deck on slide six that then there's 920 listed there that's pretax total after tax for that is 686, and we've broken down the components, but all of those all of that breakdown is pretax all of that is pretax okay.
And then the most.
The highest number of <unk> that you've done in a given month I think is 18, how confident are you in being able to sort of do mid thirties types numbers once you're.
You're able to sort of do the catch up work on the on the.
Mentation.
Yeah, Paul what you have to understand it back where we were in in October November .
Were basically finishing the work and what we found is the inspection reports were lacking. So this work is ready to go the table is set once we get the documentation done we'll be ready to send those things and we feel good about this schedule.
And it's not that we're finishing construction.
And in terms of the.
So are you completely done with all of the construction or the remediation work for unit three that you had identified sort of in the fall.
Yeah, No I meant I just mentioned like an example of some of the remediation that might have to be done in order to conform with an inspection report.
So there's other examples but that's it.
Okay.
And then maybe the last question on.
The contracting of the southern power plants under the Georgia I RP.
It sounds like the the the net income that you're earning is is based on a some book value calculation on the plan. So so would the Georgia I R. P. If it were adopted at least with respect to the to the southern power plants are likely.
That the earnings from those plants would would remain.
Roughly the same or would there be any type of sort of would there be any material change.
I think the short answer Paul is no material change. These are market contracts. So they are all of these contracts are being awarded to southern power under a competitive RFP process and so it's going to reflect the current market for those 10 year contracts over the life of the contract the Irr's.
It would be similar and when you think about it what we have said about the market broadly is that we've kind of pulled back from the market. This is kind of elsewhere in the United States. Because there was so much supply and the demand was waning and there was a lot of uncertainty we saw the margins really getting tight and so we didn't.
Play, but for the things we do that we ultimately will sign up for pretty consistent I R. R. M.
And pretty consistent Aro <unk>, we are always typically are a wee bit better than what we would find in our <unk>.
Regulated jurisdiction reflective of a little bit of the higher risk.
Great and then last question for me the 686 should we assume either equity or asset sales to fund to fund that.
Yeah. So again, we I think I said in my prepared remarks, Paul that we don't see a need for equity in this five year outlook. So let me just hit that a little more broadly because I think it's important but absolutely nothing has changed about our near term or long term objectives. When it comes to <unk>.
Credit quality.
We've said kind of over the last year.
Several months that as we move closer to completion of the project any change in the cost or schedule will evaluate to see if equity is needed essentially because we're getting so close to the end and because of all the proactive things that we did in response to other changes in <unk>.
We did a little bit more than what was needed so that has positioned us.
Really well and I want to also emphasize the the improvement in the metrics that comes later on I think we put a slide in the appendix that shows some of the component of the uplift in F. F O that will occur in the 'twenty three 'twenty four time frame that also.
Is near enough and time horizon to give us comfort with our overall financial profile.
Great I think that's it in terms of questions. Thank you.
Awesome.
Our next question is from the line of Michael Lapidus with Goldman Sachs. Please go ahead.
Hey, guys Tom.
Alright, guys. Thank you for taking my question I. Appreciate you taking the time commodity prices are up across the board obviously, that's that led to that.
Or is she then any anyone.
No team a person can add can manage how should we think about given what's happening to commodity prices and given the investment you're making some of which like Vogel will help reduce the.
City exposure, how should we just think about the bill across your biggest businesses something in Alabama, and Georgia power I'm thinking about the bill and for Southern company gas like whats happening in the total bill for the customer as we enter 2022 and think about 'twenty three as well.
Yeah.
Yeah.
It's interesting stuff man when you look at the data gas prices increased 21 versus 'twenty, 92%.
You like are we averaged I think $3 82 per million Btu versus a buck 99.
A year ago.
So that's kind of a big deal now each of our jurisdictions have managed I think well there are.
Unrecovered fuel balances, Georgia, just got an increase it doesn't wipe it out completely but it did really well, Alabama used some of its.
Earnings are otherwise in 2021 to completely wipe out its fuel balance. So one of the things we are very mindful of and I. Appreciate the way you phrased the question.
We are very mindful of burden to customers.
And we manage that like Hawks, I think we're in really good shape right now.
Okay.
No you've done a lot of work over the years with the Federal reserve in Atlanta, just curious how the how when you think about just the economic impact to the service territory in and you've got a high growth service territory relative to a lot of your peers. How does this kind of how do you think about it when you meet with folks outside of the company about what it means for <unk>.
Amit growth.
Yeah, you know very interesting stuff if you look at the data we're seeing.
Even our industrial numbers I said this on squawk today.
While it will show that it looks like things are slowing down a bit on the industrial sales side. The momentum numbers would tell you that that's essentially the first derivative.
In fact, two of the segments that underperformed or decreased year over year, where chemicals and paper, but the paper was newsprint had a big closure of plant there the chemicals with a chemical plant caustic sodas and chlorine.
That closed as well if you wipe away those two big plant closures, our industrial sales actually were better than what we expected again.
So a pretty good stuff now it is very clear.
That inflation will eventually eat into the growth in the economy.
I was you know kind of visiting with some of the fed work and and all of that here recently.
You're familiar with the old permanent income hypothesis, I think people have felt wealthier lately and people are still spending as if inflation has and visited them yet.
It is in.
Inconceivable, though that that won't catch up at some point you saw these hot retail sales.
My sense is as inflation effects continue that those sales will start to wane.
So there will be a slowdown in the economy now the real you know 50000 dollar question is when does inflation start to.
Uh huh.
Recede a bit.
A lot of stuff right now says that a 2023 issue that we could start to see inflation getting back to a more normal level I think the underlying presumption in that one is that the supply chain works itself out right now we've had such an imbalance in supply and demand that prices in <unk>.
<unk> are high.
And for the lead time to procure certain goods and services.
It is a it is really sticky right now so.
The big swings or supply chain, unwinding and getting back to normal.
People are adjusting to higher prices, and therefore reduce spending and therefore.
Reduced heat in the economy. Those are all the factors that I think we'll go into.
This point.
For now.
I mean, it looks really good in the south east, but it inconceivable to me that it won't slow down a bit over the next year or so.
Got it and then one last one just thinking about whether you do the gigawatt of storage at Georgia power, obviously that debt.
And that kind of depends on the end of the ERP process as well as if you were to wind up doing more incremental solar at either Georgia, or Alabama power were at southern power.
Are you thinking about the renewable supply chain and because theres been lots of discussion and commentary some one or two of your peers have talked about supply chain, becoming an issue for.
They are nonregulated contracted solar business.
I'm just curious what insights your teams getting in terms of the ability to procure things like panels or or lithium ion other and the ability to actually install at the pace you'd like to install.
Yeah. So Michael this is Dan so right now we're not in a big construction period, and so we're fortunate to not be experiencing as acutely as some of our peers right now some of those slides we've seen some we are in the middle of the storage project out in California, we've seen some modest delays, but nothing that's going to impact the project overall.
That's part of it is the supply chain and then really combined with I.
I think how everyone is seeing the near term markets is why we also have this ramp up and our expectations for southern power you heard me say, we've allocated just the $250 million. This year 500, the following year and Thats really a recognition that there are projects actively on our radar screen today, and we're a bit aspirational that those might be.
Come to fruition, but to the extent they don't I think what you'll see us logically do is push those dollars out a little further in time and have opportunities later.
Theres another conversation that I've been having in D C. Whether its secretary granholm who's been terrific or depths Sac, David Turkey is a terrific guy.
You know as a matter of national security as a matter of economic opportunity one of the things that we need to do as a nation is resource. These important supply chain domestically that will grow manufacturing grow jobs grow personal incomes, it's a real winner and.
And I think some of the money that's been put out in the incentives whether it's inside D O right now or in the infrastructure Bill elsewhere is to think about ways to to promote.
The domestic supply of these things and really get it going now when I say that youre talking five years from now that that isn't going to happen immediately but people are considering it and I betcha, you would get broad bipartisan support for that strategy.
Got it thank you Tom Thanks, Dan.
You bet Michael.
And that does conclude our question and answer session. Sir are there any closing remarks.
No.
Thank you all for <unk>.
Attending with US. This afternoon. This was an important call. This was a frustrating time for us all.
We were ready to go there we thought kind of early this year and now with this delay it looks as if you know will be end of the year for unit three and we've allowed for an additional quarter just given the uncertainty that we've seen in the past. We think these schedules aligned closer to what the staff and the commission has been kind of thinking about.
<unk>.
But I can assure you we're on the case.
We all spend our time at the site are those people are fixated on getting it right along our partners Bectal and when we build this thing when we get it in service. We are right at the end of that process. It will be of the quality that is necessary.
In the United States nuclear industry.
And we're gonna be proud of it for decades to come otherwise the company is performing as well as it possibly can whether it's our reliability our resilience our customer satisfaction the way our employees feel.
We were number one in military.
Employers.
Look all of these data they sound like kind of headlines and billboards and Pablum, but I think they really speak to our dogma here at southern that this is a company built to last that these indicators.
Are things that will prove that we are sustainable in our business model for years and years to come and we're very proud of that and I want to thank all of the thousands of employees at southern for making that.
They're part of their day every day, it's way beyond making moving and selling its all wound up and making sure that the communities we serve.
Are better off because we're there we do that every day and we will continue to do that we look forward to getting the projects behind us and getting into 2024.
Our financial position the integrity of this company will be better than it ever has been in my experience.
So thank you and we'll talk to you soon.
Thank you, Sir ladies and gentlemen, this concludes the southern company fourth quarter 2021 earnings call you may now disconnect.
Yeah.
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