Q2 2023 The Southern Company Earnings Call
Okay.
Good afternoon.
My name is Tommy and I'll be your conference operator for today.
At this time I would like to welcome everyone to the southern company's second quarter 2023 earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
At that time, if you have a question. Please press star one by the four on your telephone.
The conference should you reach opportunity Mccosh I'll start but is here.
My name is constantly being recorded today August 3rd 2023.
I would now like now to turn.
To return the call over to Mr. Scott Campbell, Vice President of Investor Relations and Treasurer. Please go right ahead Sir.
Thank you Tommy good afternoon, and welcome to Southern company's second quarter 2023 earnings call.
Joining me today are Chris Womack, President and Chief Executive Officer of Southern Company, and Dan Tucker Chief Financial Officer.
Let me remind you we'll be making forward looking statements. Today. In addition to providing historical information various important factors could cause actual results to differ materially from those indicated in the forward looking statements, including those discussed in our Form 10-K Form 10-Q and subsequent filings.
In addition, we will 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 that Southern company Dot Com at this time I will turn the call over to.
Chris Womack.
Thank you Scott.
Good afternoon, and thank you for joining us for what is such a pivotal and exciting time for our company.
As many of you know on Monday, we announced that plant Vogtle unit three successfully achieved commercial operation.
While work remains to bring unit for online. This incredible milestone is something to be celebrated.
This decade, plus journey, which involve developing a global supply chain managing through a global pandemic.
Tens of thousands of American craft workers, and engineers and millions of labor hours combined with a group of committed co owners and regulators that had the courage to support new nuclear power as an option when others didn't.
<unk> that we can accomplish monumental things when we share a common vision.
Vulgar unit three is now serving Georgia customers with over 1100 megawatts 24 hour seven day, a week carbon free electricity.
Turning now to unit four.
Since our last call. The project team continues to make substantial progress as highlighted by completion of hot functional testing risk.
Receipt of all 157 fuel assemblies.
Middle of all tax.
And most recently receipt of the 103 G. Finding from the nuclear regulatory commission signifying that license acceptance criteria for unit four has been met.
The project team's current focus is on working through final testing and system turnover two operations that when complete will allow fuel load for unit four.
Recall as we contemplated in the Vcs 17 order, Georgia power can file is prudent request with the public service Commission following fuel load on unit four.
Following fuel load the project team will conduct final preparations and testing of systems, primarily associated with the electrical power production side of the plant and.
And achieving the pristine conditions in the nuclear island necessary for startup activities and initial criticality.
<unk> the project capital cost forecast is unchanged since last quarter.
And we continue to project unit four will be placed in service between late fourth quarter 2023 and ended the first quarter 2024.
Successful completion of this important project is critical for Georges and our nation's energy future.
We look forward to these units providing reliable carbon free energy to customers for decades to come Dan I'll now turn the call over to you for a financial update.
Thanks, Chris and good afternoon, everyone.
For the second quarter of 2023, our adjusted earnings were <unk> 79 per share.
<unk> higher than our estimate and 28 <unk> lower than last year.
The primary drivers of our performance compared to last year were milder than normal weather conditions, higher depreciation and amortization and interest expense and changes in rates and pricing somewhat offset by lower income taxes and O&M expenses.
A detailed reconciliation of our reported and adjusted results as compared to 2022 is included in today's release and earnings package.
Weather in our electric service territories. During the first half of 2023 has been the mildest on record with the fewest aggregate degree days in the 129 year history of climate data reported by the National Oceanic and atmospheric administration more commonly known as Noah.
The negative <unk> 16 per share EPS impact relative to our weather normal EPS guidance range is our largest ever negative weather driven variance for the first six months of a year, which is a significant headwind for the full year.
While 2022 was a year in which we were able to fix the roof, while the sun is shining and positioned the company well coming into 2023.
We have been and will remain keenly focused on cost management, along with our constant focus on safety reliability and customer satisfaction in the second half of this year.
Our adjusted earnings estimate for the third quarter of 2023 is $1 30 per share.
Turning now to retail sales and the economy year to date 2023.
Weather normal retail sales were in line with sales levels for the first half of 2022.
<unk> seen positive residential and commercial growth and strong commercial usage offset by lower industrial sales year to date, we've added nearly 24000 electric customers and 13000 natural gas customers trends, which continue to outpace pre pandemic levels Chris.
Chris I'll now turn the call back over to you. Thank.
Thank you Dan.
In closing I'd like to take a moment to acknowledge that southern company was recently awarded the number number nine overall spot on Forbes ranking of America's best employers for women.
The highest ranking within our industry.
We are honored to be selected to this list once again.
Workforce and leadership diversity is a tenant of ours and ensures we have the variety of experiences and perspectives to better serve our customers. We will continue to emphasize a culture, where all employees feel valued respected unable to accomplish their professional goals.
Thank you for joining us this afternoon and for your interest in Southern company, Operator, we're now ready to take questions.
Thank you very much and we'll proceed with our first question on the line as farmer <unk> Perretta from Guggenheim Partners. Please go right ahead.
Sure.
Good morning, Chris that was the world record for the fastest prepared remarks, so congrats there on that one.
Thanks.
Okay.
I always appreciate your comments in your analysis.
Yeah.
And in your perspective.
Yeah.
Just starting on George's economic backdrop, and obviously you guys have seen a step change in the pace that major industrial customers have been announcing new capacity needs. How many I guess, new Gigawatts are you seeing now in GA versus the prior update with the state what is the prior our ERP.
But how should we start thinking about any updates the capacity needs, including the viability of the remaining coal assets as youre thinking about the incremental demand. So could we see a drastically different IR PV final. Thanks.
And sure we're working through that analysis now I think we have said to you before and we've commented about.
All the wonderful economic development activity that we've seen across the state of Georgia over the past couple of years.
250 plus projects.
20, plus billion dollars of investment some 60000 jobs that I know the Governor has reported so I think we've talked about the impressive activity that we've seen.
We have not turned that into a.
The capacity needs at this time that some work that we're doing that we're doing and I am sure are forthcoming.
Work with the commission on what all that means and then.
Bigger out what it means for us in terms of capacity need going forward.
A little bit premature.
Got it again, we're kind of going through the analysis, but it's fair to say, what we've seen from our economic development announcement perspective in the past is hundreds of megawatts at a maximum in a given year and now we're having instances where it's thousands potentially in terms of the announcements and so just the pace has accelerated and you mention.
Industrial there are certainly a lot of large industrials involved with that particularly on the around the electric transportation sector, but its also data centers you know it's a story that's playing out in a lot of places just as an example for hours I mean, as we sit here today datacenters or roughly two 5% of our overall electric load.
Five years from now that will be well into the double digits in terms of percentage of our load that's the pace of growth we're seeing.
So Jonathan bottom line is yes.
No I think something.
We're very excited about it I think is a real positive contribution positive factor that we're excited about here in the state.
Do you have a sense, Chris on when you in Camden, Dan and the team update us around that potential opportunity.
I know, it's really early in the process, but we're obviously seeing the amount of customers that are moving to Texas and it's very material. So I didn't catch a georgia, which is really materials I'm just kind of curious.
Yeah sure I think it's a little bit premature.
But as soon as we get to that point.
We figure out and have conversations with the commission and I'm sure, we'll share that with share that with you share that with the industry.
Okay, Perfect and then lastly, Chris we're obviously approaching the prudency case once we've seen unit for fuel load anything we can provide and how we should be thinking about a potential settlement or should we be thinking about this as like a rate case and whether the potential for like a special election could impair.
That process, if at all especially a few low it takes longer than planned.
Yes, Charles I think there are a couple of questions you embedded there together first around prudent we have to get the fuel load once we get the FILO will figure out.
What happens.
Having having transparency and the process is very important but right now once we get to fuel load and we'll figure that out we'll work with the commission and the staff on that process.
I think you made reference to the makeup of the commission.
Okay.
Is that.
We'll get through prudent with the current commission, we have no idea what will happen in the Roes case.
So we're still waiting for that order in for that for that decision by the courts.
But theres nothing more I can say about that decision that at this point in time.
Okay perfect. Thank you, Chris Mccann very helpful. I appreciate it and congrats.
Sure.
And we'll get to our next question on the line is from Carly Davenport with Goldman Sachs prescribed ahead.
Hey, Carly Thank Ali how are you.
Doing well thanks, so much for taking the questions today I appreciate it.
Maybe just starting in terms of what we saw during the quarter four for weather normalized demand a little bit weaker on the industrial side that commercial fell looks quite strong can you just talk about how things are evolving relative to your forecast and kind of how you could see that.
As we continue to move through the year.
Yes, absolutely and we saw this earlier this year as well from an industrial perspective, we're seeing.
Two different dynamics play out that are negatively impacting growth in those one is the housing sector. So when it comes to things like lumber stone clay and glass to a degree textiles, particularly where it involves carpet.
Just given the broader trends in the housing industry, where we're seeing that impact some of our usage in the short term and then the other thing is chemicals from.
And industrial perspective, so we've had one particular facility.
<unk>.
Bama that has slowed pretty significantly again some of that was anticipated very early in the year and so it's just playing out as we anticipated just wasn't anticipated when we kind of put our forecast together right before the end of the year. What we're really encouraged by is what we're seeing on the commercial and residential side I spoke to.
The customer growth that we're seeing from a residential perspective again, we've seen sustained levels well above what we were seeing pre pandemic and from a commercial perspective, but just a lot of different stories playing out in that regard some of its economic development. Some of this some of its datacenter dynamic that I mentioned and certainly that.
It is just commercial naturally following the residential growth as it pertains to how it's impacting our results.
What's important to remember is kind of the.
The revenue contribution of these two classes on a relative basis, a 1% change in industrial sales is only about $20 million of impact or is a 1% change in residential and commercial is more like 40% to $50 million. So in terms of our net implication for us.
We're getting the benefit of the residential commercial more than offsetting what we're seeing on industrial.
Got it that's super helpful. Thank you and then maybe just on the financing front in the context of the current rate environment, you've got some some financing kind of standing for the rest of this year. Just how are you thinking about execution of the plan that you haven't been there 23.
Yes look we're always going to kind of keep our options open the flexibility you've seen us do the convertible debt instrument early this year, we typically lean.
On an ongoing basis toward just senior unsecured stuff at the parent a lot of different instruments, we've used across the utility franchises.
I wouldn't characterize anything in our plans is out of the ordinary we're going to be monitoring the market and making sure we're being thoughtful about as we always are maturities about.
The mix between fixed and variable and like everyone's doing monitoring the rates is as actively as we can to make sure. We're we're getting to the market when it makes sense.
I appreciate the color. Thank you.
You bet currently thank you.
And we'll get to our next question on the line is from Julien Dumoulin Smith of Bank of America go right ahead.
Julia Hey, good morning team thanks for the time.
Great. Thanks, so much really appreciate it.
Hey, look I, just coming back to the other subject here on procurement.
Renewables on the renewables front I know we've talked about this last quarter here curious to hear your latest thoughts both on the utility side and ownership I think that had always been kind of back half of this year. How is that looking on that front in Georgia, and then separately I think Dan last time, we connected here.
You were talking about southern power effort looking like it was a tad more competitive in this environment.
In terms of your ability to actually win.
<unk> projects on that side of the house, So let's talk about some of the progress and maybe the evolution just with the rate environment, where it is.
Yes, Julian let me start with a review on the renewables front as you know in the 'twenty two RFP.
Georgia had another 2100 megawatts of renewables approved.
Doing that proceeding the.
The first RFP will begin later this year.
Targeting some 1300 megawatts renewable resources with operation dates between 26 and 27. Thank.
Thank you May have also seen Alabama power.
Renewable generation.
Certification modified.
Some 2400 megawatts over six year period.
So I think that will also be later this year. So we're proceeding and we're looking forward to opportunities for us to own.
On renewables.
Clearly, we will take advantage of.
Normalized tax treatment between PTC and ITC.
From a best cost perspective, and we think we've got support from our commissions to for us to own more renewables. So we're looking forward to.
Those processes as they proceed later this year I think your other question Dan you were talking about pricing.
Well I think the other question was around southern power.
Yeah, Julian the same continues to hold true.
Radar screen of active viable opportunities for southern power is.
As strong as it's ever been and.
Look we fully expect to be able to continue to deploy capital in the right way there we'll keep the same discipline. We've always had in terms of the hurdles. We look for the risk profile long term contracts creditworthy counterparty, but I think my my short message there on southern power just be stay tuned there's good things happening so far.
I do not think we're very optimistic on the regulated side.
Future holds for renewables and we'll see how that plays out begin to play out here.
Later this year.
Got it excellent and then just as you think about the the generation needs at the prior questionnaires have been really kind of poking out here.
Aligned with as you alluded to a second ago, the added ability to own some renewable generation through.
Through utility tax credit optimization, if you will.
Can you talk about that opportunity come together and maybe specifically the timeline that you could see that starting to play itself out I know, you've just alluded to the prior RFP cycle, but getting that the capex proposals rfps and ultimately just seeing that loaded forecast update it.
Yes, Joe once again, I think as little premature in that regard <unk> as I spoke to earlier about the renewable process in the Rfps, we see that forthcoming later this year clear.
Clearly, we've got some more work to do.
As we pay it.
Analyze the implications of this economic development activity and what is meaningful for loads and so we simply right now need to let the RFP process play out.
Over the next few months next few years, but you, but we'll keep you updated as we move through the process as we've said before.
Chris just said.
This will come together from a plan and capital deployment perspective in the latter part of our forecast horizon. So it was not a 'twenty three thing in terms of capital deployment.
Right, but probably not meaningful 24, but beyond that is where the real opportunity exists and the other thing that's coming together to help drive this.
Thank you.
You mentioned that economic development aspect Julien.
As all of these customers are choosing to locate in our service territories. They are increasingly demanding to be served with renewable generation and thats just helping support everything we're trying to do.
Yes, I hear you wish you guys best of luck and I Hope you guys sooner I take care.
Alright Julian.
Thank you very much we'll go to our.
Next question on the line is from Jeremy Tonet with J P. Morgan go right ahead.
Hey, Jeremy Hi, good afternoon.
Good afternoon.
Just wanted to see I guess start off vocal here some of the issues that the at the finish line here just wondering what learnings you can take away from that and do you see.
The same type of issues materializing for unit four or are there learnings here that can kind of head to head off any issues like that.
And Jeremy one of the things we've commented for.
We set a price for a few years now that that there would be lessons learned that would be transferring over from unit <unk> unit four let me give us give you. Some examples of how that is playing out.
Unit three hot functional testing to 94 days on unit four it took 88 days.
It may from 94 to <unk> 42 days Hot functional testing to complete 100, <unk> was 371 days on unit 388 days on unit four and from coal Hydro in a hot functional test at was 191 days on unit three to 103 days on use.
That for us So I think youre seeing clear examples of how lessons being learned from unit three over the unit four and that that work. Those lessons learned will continue I think to to show itself as we move through unit four.
Yeah.
Got it thats helpful. Thanks.
Just kind of pivoting here I think I saw that the D C.
Sure overruled FERC approval of the southeast energy exchange market.
What do you make of this year and what's the path forward.
Yes, I mean, it remanded it back to FERC to clarify a couple of issues around the power pool and there were some questions about.
Who is who can participate and seen him and seen that it has to be interconnections. So I think there is simply remanded back for clarification of a couple of issues, but nothing big there I may seem continues to operate and perform very well everybody is very pleased with the results. The same so it will.
It's going to be remanded back to FERC like I said, a couple of issues that Dell clarify foreseen going forward.
Got it that's helpful. Thanks, and just last one if I could.
What are you expecting in hydrogen rigs from Treasury and what do you think southern power has potential to participate could be with the bogo and the potential for green hydrogen here.
Let me say something quickly about hydrogen now Dan to touch on any rules from Treasury, we're participating in a number of processes has with hydrogen hub.
Excited about that as you may recall, we did a 20% blend and our plan.
Mcdonough gas sites. So we're excited about all the technology activity in the considerations that are going on around hydrogen we look forward to seeing if we can develop this market and get the pricing right get the transportation of the product right and then we can fine off takers. So we're thrilled by the possibility.
And how Vogel can continue to serve customers in Georgia.
There are a lot of aspects of hydrogen that we get really excited about clearly there's a lot of work that's got to be we got to work through to get to that point to make it viable commercial commercially viable.
Yes.
Jeremy in terms of the Treasury rig certainly like most in the industry.
Thank you for us it makes sense that those are as broad as possible going in to help kind of drive the deployment of the technology otherwise. It just may be cost prohibitive for a lot of people to get it out there and whether thats, a permanent broadness or its a temporary broadness that transitions to something more specific.
Pacific I think that's going to be in the hands of the Treasury group in terms of southern Power's opportunity to play there certainly southern Power's wheel wheelhouse is providing you.
Utility scale renewable generation, two counterparties and to the extent that we find opportunities in this space to serve.
Electrolyze or another entity with a long term contract and it's a creditworthy counterparty and it meets all of the same criteria. It certainly expands our universe of opportunities.
Got it that's helpful I'll leave it there thanks.
Thank you.
And we'll get to our next question on the line.
It's from David Arcaro with Morgan Stanley go right ahead.
Dave how are you David.
Hey, doing well thanks for taking my questions.
Wondering if you might be able to touch a little bit on form energy you had an agreement reached at Georgia power. This quarter I was wondering.
How are you thinking long duration energy storage might play a role in your system over time.
Once again, we're excited about the relationship that we've established with form.
We have utilized.
The kind of four to six hour batteries, but we think a 100 megawatt 100 hour long duration storage batteries, some 50 megawatts.
Got to be a part of that mix and it's got to be a part of the system and the grid going forward. So we're excited about what form is doing we were at their ground breaking ribbon cutting up in West, Virginia, a month or so ago. So we are excited about forum and looking forward to.
Their development as we go forward, but we think this has got to be.
Part of the technology mix as we go forward and we're hoping they're going to be successful.
As you know we pay a lot of attention to research and development and we think as we look at a lot of solutions, whether its emissions control or just making sure we maintain a reliable and resilient grid. We think technology advancement is very very critical and so we're excited about the work that form is doing and we'd like to partner with them.
Great that makes sense.
And then secondly.
Obviously, a big weather headwind that youre working through and could you touch on the cost control.
Just your confidence level in being able to manage and find flex in your O&M budget for this year and where are the key areas that youre looking at in terms of offsetting the headwinds so far yes.
Yes, I think Dan said it in the conversation early on that we will remain keenly focused on cost management and so we know.
Whether we have seen is unprecedented as the bill.
Lois warm as we've seen in history and so we've got a correspond with that with similar focus on cost management and so there are a number of efforts going on across the company to make sure that we are executing around cost management controls and right now we feel good about kind of where we are but we know we've got a lot more work to do as we go.
Forward through the rest of the year.
Okay understood congratulations on both unit three and thanks again I appreciate it.
Thank you very much.
Thank you.
Next question on the line is from <unk> Chopra with Evercore ISI go right ahead.
Hey, Good afternoon, then seven minutes and 58 seconds of prepared remarks.
You bet.
Real brief hopefully just following up on David's question. So this quarter, we had four cents of unfavorable weather versus normal.
But you actually delivered four cents higher than your estimates is that all just cost cuts are there other things that we should think about one time orders and other things.
Yes, it's primarily cost reductions gosh, I mean, there's always some little puts and takes here and there that are a little different than our forecast, but but overall, it's just the fruit of our labor in and kind of going back to David's original question in terms of where frankly, it would be doing a disservice to highlight any particular area of the business, where we're doing that because we're doing it.
Where this is a significant lift and we are.
Doing everything we need to do in pulling out all the stops to deliver.
Okay solid and then just maybe if you can otherwise I'll just follow up with Scott just any.
Sort of.
Initial takes on July weather.
It hasn't looked like the first half.
Okay. Thanks, so much I appreciate the time.
Thank you.
Thank you very much.
Next question on the line is from Nick Campanella from Barclays Go right ahead.
Hey, everyone. Thanks for taking my questions hope, you're doing well and congrats on the unit three news.
Thanks, Joe.
Yeah, absolutely. So just looking forward to unit four soon and then knowing that we are getting closer to that $700 million uplift that you've detailed on slides here on the CFO .
Dan maybe you can just remind us your preferred use of those cash flows as you roll forward. Your plan in the fourth quarter and I know, we talked about improving balance sheet in the past, but I'm also cognizant you are talking up a lot of different capex opportunities in your region.
Yes, and thanks for that question, it's it really is.
Kind of all of the above strategy. If you will in terms of the opportunity to to use this cash and it's the three the three things that we're primarily focused on you said, one which is to fund the capital plan right. So we will be positioned as we had been historically kind of pre penalty.
ROE in heavy construction on Bogo, three and four where our operating cash flow represents over three times the size of our common dividend and so that leaves an awful lot of cash flow to deploy against this.
Capital plan that we expect to continue to grow so that's thing one the number one priority of the things. We're focused on you also mentioned this is credit quality and what this does is provide an uplift to our credit metrics such that we're more in the $17 17 plus range for <unk>.
To that end.
The opportunity there is not a raise.
Raise at these levels well above our thresholds and then use that as some sort of currency to do things.
The opportunity to just once again get back to being a premium credit utility in maintaining that position for the foreseeable future. So that's thing too.
And then the third thing that we've talked a lot about is the opportunity that we'll have as our payout ratio gets kind of sustainably at or maybe a little below 70%. So call that maybe 2020 forward, but more likely 2025 and opportunity to go to our board in for Chris.
Now to make a recommendation to increase the rate of the dividend growth to be more aligned with our earnings growth. So it's a again all of the above but really important things that this enables us to do.
Alright, thanks for that that's it for me today appreciate it.
Thank you.
And we'll get to our next question on the line.
Angie <unk> with Seaport go right ahead.
Andrew how are you.
Very good thanks, So just just.
You guys have been in this comeback mode for the last decade, although it feels like.
And I know that there is still the prudent with you had a view but.
I'm, just I'm, just trying to picture southern and.
Back to basics mode.
So I mean, what does it even look like so that's one and number two is.
Clearly the stock has re rated somewhat.
What is it that you think you can do.
Well, besides just putting a unit for online to further re rate the stock from here.
Andrew Let me start with the first part of your question in terms of being in combat mode.
Doing this vogel period.
I'd say, we're kind of staying comeback mode in terms of execution.
Yes, hopefully we are going to be a little boring.
Boring is beautiful, but we're going to be incredibly aggressively focused on customers being at the center of everything that we do focus on the circle of life, making sure we're maintaining a constructive regulatory environment providing.
World Class service and using your language of and combat mode, but doing that in a very aggressive way that make sure we're giving customers what they need from a from a reliability, but also a resilient resilient perspective, but also making sure we're paying attention to issues around affordability. So we have a lot of work to do.
And so we're going to be very singularly focused on execution and I think that's going to be very important as we also make the case that we deserve that premium valuation and returning back to the days of old Southern classic.
It is no mistake no accident. The first page of our deck has a circle of life on them.
Okay, and then just maybe a smaller point, but.
You guys.
Has.
Just like everybody else more violent and impactful storms going through your service territory is there anything from one investment perspective to regulatory setup that could help you.
Heightening the grid and also assure timely recovery of any costs associated with those but the climate change basically.
And I would say I mean, if you look at our capital budget today, and getting past, but where there are no really large projects, but it's a lot of blocking and tackling with transmission distribution with grid improvement programs with under grounding with changing out circuits and improving <unk>.
<unk> scanning systems, so a lot of that work to enhance and improve reliability, but also improve resiliency, so that storms or more different paying attention to more extreme weather. So doing the basic work to prepare for these kind of conditions and helped us to maintain our focus on reliability and <unk>.
You can see of our system.
Great. Thank you.
Yeah.
Thank you very much thank you Andrew.
And that will conclude today's question and answer session. Sir are there any closing remark.
Once again, let me thank everybody for your call today, it's a <unk>.
Wonderful time for Southern company as we brought unit three commercial and with the progress that we're making on unit four and we will continue to improve.
<unk> ahead and move forward, but again, thank everybody for joining us today. Thank you very much and everybody be safe.
Thank you, Sir ladies and gentlemen, this concludes the southern company second quarter 2023 earnings call. You may now disconnect and have a great rest of the day.
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