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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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