Southern Company (The)

Good afternoon. My name is Myra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Southern Company third quarter 2021 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. I would now like to turn the call over to Mr. Scott Gannell, Investor Relations Director. Please go ahead, sir.

Thank you, Myra. Good afternoon and welcome to Southern Company's third quarter 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 that we'll be making forward-looking statements today in addition to providing historical information. Various important factors could cause action 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 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.southerncompany.com. At this time, I'll turn the call over to Tom Feeney.

Thank you, Scott. Good afternoon, and thank you for joining us today. As you can see from the materials released this morning, we reported strong adjusted results for the third quarter. The economies in our service territories continue to recover from the COVID-19 pandemic, And in particular, customer growth continues to exceed our expectations. Given results through September, we expect full-year adjusted earnings per share to be above the top end of our guidance range. Dan will share more on this in a moment. So let's begin with an update on Vogel Units 3 and 4. Two weeks ago, we updated our expected completion timeline for both units extending the in-service dates by three months for unit three following the completion of hot functional testing we completed walk downs of the 158 safety related rooms within the nuclear island to assess the extent of remediation work required consistent with the electrical installation quality issues we highlighted earlier this year The number of instances of items needing remediation found during our full assessment process, however, exceeded our estimate from July. The change in the Unit 3 schedule into the third quarter of 2022 is primarily a function of the time needed to address the full scope of the remaining remediation work and to account for the impact on productivity resulting from higher than expected attrition and slower than expected onboarding of new electricians, field engineers, and supervisors. For Unit 4, recent progress has slowed as craft labor and support resources have been temporarily shifted to support Unit 3's completion effort. Considering this decrease in available resources over the next several months, plus recent productivity trends, we now expect Unit 4 in service during the second quarter of 2023. Importantly, with the corrective actions the site has implemented after discovery of the Unit 3 quality issues, including reinforcement of the importance of first-time quality with craft personnel, and improvements to the application of Bechtel's quality program, we believe that as we turn systems over on Unit 4, the amount of remediation work required will be less than what we experienced on Unit 3. During the third quarter, consistent with the surrounding areas, the site experienced a spike in COVID-19 cases that approached the peak of cases we experienced early in 2021. While the availability of vaccines and well-established protocols helped preclude the same degree of disruption experienced during the first waves of COVID-19, the pandemic was certainly a contributing factor to overall productivity and resource availability. For Unit 3, repairs to the spent fuel pool, system turnovers, and ITAC submittals continued throughout the third quarter. Repairs to the spent fuel pool are now complete, and the next major milestone for Unit 3 will be the receipt of the 103G letter from the NRC. To date, 242 ITAC have been submitted to the NRC with 156 remaining. On slide seven of today's earnings call deck, we have included a forecast of the remaining ITAC submittals required to support a projected May 2022 fuel load and third quarter 2022 projected in service date. Now, considering our recent volume of ITAC submittals in October, and the expected completion and turnover of significant systems in the months ahead, the site is targeting ITAC completion earlier than what is indicated in this forecast, which would provide margin to Unit 3's remaining schedule. We expect to use the time between ITAC completion and fuel load to finalize the non-safety-related elements of the plant and to complete any remaining pre-fuel load testing. Turning now to Unit 4, direct construction is now approximately 89 percent complete. A revised projected in-service date of the second quarter of 2023 reflects the temporary shift of services to Unit 3, recent productivity trends on bulk electrical work, and ongoing efforts to add craft labor and non-manual field support resources in support of first-time quality and productivity. Construction completion for Unit 4 has averaged 1.4% per month since the start of the year. To achieve a second quarter 2023 in-service date, we estimate that Unit 4 would need to average approximately 1% construction completion per month through the end of 2022. From a cost perspective, Georgia Power's share of the total project capital cost forecast increased by $264 million, largely driven by our updated schedule, productivity consistent with recent trends, the cost of additional resources to complete the full score for remaining work with necessary focus on quality, and the replenishment of contingency. As a result, Georgia Power recorded an after-tax charge of $197 million during the third quarter. We remain committed to the credit quality of Georgia Power and Southern Company, and we will continue to seek to maintain strong credit metrics for both entities. Our priority is bringing Vogel Units 3 and 4 safely online to provide Georgia with a reliable, carbon-free energy resource for the next 60 to 80 years. We are committed to taking the time to get it right and will not sacrifice safety or quality to meet schedules. At Unit 3, we are working to submit remaining ITACs to support receipt of the 103G letter prior to fuel load and commercial operations in 2022. For Unit 4, we remain focused on attracting and retaining necessary craft labor and support resources as well as first-time quality as we work to increase productivity and progress toward the start of open vessel testing which is now projected by the second quarter of 2022. Dan, I'll turn the call over now to you for an update on the financials. Thanks, Tom, and good afternoon, everyone. As you can see from the materials we released this morning, all of our major subsidiaries had a solid quarter, and our adjusted consolidated earnings are trending extremely well through the third quarter. For the third quarter of 2021, we reported earnings per share of $1.23 on an adjusted basis, one cent higher than both our estimate for the quarter and our adjusted third quarter 2020 earnings per share. For the nine months ended September 30th, 2021, we reported adjusted earnings per share of $3.05 compared with adjusted earnings per share of $2.78 for the same period in 2020. A detailed reconciliation of our reported and adjusted results is included in this morning's release and earnings package. Major drivers for our adjusted earnings results for the third quarter of 2021 included higher retail kilowatt-hour sales at our state-regulated utilities as we continue to see recovery from the pandemic, strong customer growth, and impacts of several constructive regulatory outcomes. Partially offsetting these impacts, Non-fuel O&M reflects a trend towards more normal operating conditions relative to 2020. Milder-than-normal summer temperatures in the southeast also negatively impacted earnings per share by two cents compared to our estimate and by seven cents compared to the third quarter of 2020. Turning now to customer growth, Through September, we have added over 40,000 new residential electric customers and over 20,000 residential natural gas customers across our regulated utilities. This level of customer growth has exceeded our forecast year-to-date and puts us on track to surpass last year's customer growth levels, which were also above historical norms. Customer growth continues to be driven by a strong labor market recovery, which is on track to reach pre-pandemic levels of employment in our Southeast service territory next year. For the third quarter, weather-adjusted retail electric sales were up 3% compared to last year and were in line with our expectations. Residential sales remained higher than expected due to extended remote work practices and commercial sales showed continued improvement coming in slightly better than our forecast. Industrial electricity usage lagged other customer groups primarily driven by production cuts from a single large customer in the chemical segment. Absent this customer-specific event, industrial sales have been in line with our forecast for the quarter. We continue to analyze retail sales and, in aggregate, through the third quarter, our retail sales have essentially recovered to 2019 pre-pandemic levels. We are encouraged by these positive signals while we also continue to monitor the potential impacts of COVID-19 variants, supply chain constraints, and labor force participation. The economic development pipeline in Southeast remains robust. Job announcements and business investment in Georgia in the third quarter of 2021 were higher than pre-pandemic levels for 2019 and the average of five years ending 2020. In Georgia alone, there are currently over 200 active projects with the potential to bring in nearly 40,000 jobs and $13 billion in capital investment in the coming years. Next, I'd like to provide you with an update on our outlook for the remainder of 2021. With adjusted earnings per share through September of $3.05, we expect to achieve adjusted full-year earnings above the top end of our guidance range of $3.35 per share. Our estimate for the fourth quarter is $0.35 per share, which implies an estimated full-year result of $3.40 on an adjusted basis. Before turning the call back over to Tom, I'd like to follow up briefly on Tom's update on BOGO 3 and 4. First, I want to reiterate our commitment to credit quality, which has been constant. In our last call, we reinforced that commitment by announcing we would turn on our dividend reinvestment plans in the near future. As we have done so well over the last several years, we also continue to evaluate opportunities for asset sales. Within a portfolio the size of Southern Company, we have several investments which warrant continuous review for whether or not a better owner exists. Whether such potential transactions serve to offset our near-term equity needs or ultimately fund our long-term capital investment plans, we will remain disciplined to the benefit of equity holders and bondholders alike as we execute our financing plans. And finally, let me briefly highlight the Vogel Unit 3 rate adjustment stipulation that was unanimously approved by the Georgia Public Service Commission on Tuesday. Consistent with the framework the PSC established with their order for the 17th VCM process, this most recent order allows $2.1 billion of investment in Vogel Unit 3 and the Vogel Units 3 and 4 common facilities to be moved from the Nuclear Construction Cost Recovery Tariff, or NCCR, into retail rate base the month after Unit 3 goes into service, where it will earn Georgia Power's full allowed rate of return. Additionally, Georgia Power will be allowed to recover the related operating expenses and depreciation on this portion of Unit 3, which is an important credit supportive aspect of the stipulation. The entire process, which struck an appropriate balance for all stakeholders, was a great affirmation of the constructive Georgia regulatory environment. Tom, I'll now turn the call back over to you. Thanks, Dan. Let me wrap up with an update on the Southeastern Energy Exchange Market, or SEEM, and our fleet transition. Subject to resolution of any rehearing requests, SEEM is moving forward after clearing the approval process. SEEM is a region-wide automated intra-hour platform consisting of nearly 20 entities across 11 states with the goal of more efficient bilateral trading in the southeast. It is not an energy imbalance market or an RTO. Benefiting from robust integrated planning by the individual states, municipalities, and utilities, the region represented by SIEM members scores very favorably on all important metrics compared to the RTOs across the country. SIEM will improve electric service to customers in the southeast, a reason that is already an industry leader for customer satisfaction and reliability. The members of SIEM Electricity Market also provide low retail prices for residential and business customers using a mix of carbon-free energy resources similar to the rest of the country. We believe SIEM is good for our customers, and we're excited to be a part of this new platform, which is expected to launch in mid-2022. Turning now to our fleet transition, in our most recent climate report named implementation and action toward net zero we reaffirmed our long-term goal of achieving net zero greenhouse gas emissions by 2050. as an important step in the transition of our fleet earlier this month alabama power and georgia power filed plans with their respective state environmental authorities detailing how each would comply with the United States Environmental Protection Agency's effluent limitation guidelines. With these expected changes and the recent retirement announcement of two coal units at Mississippi Power's Plant Daniel, since 2007, Southern Company will have announced total decreases in its coal generating capacity from more than 20,000 megawatts across nearly 70 generating units to less than 4,500 megawatts of coal capacity remaining at eight generating units. This equates to a reduction of nearly 80%. The final resolution for many of the actions outlined in the ELG compliance filing, including the exact timing of retirement and any other actions we may recommend, remain subject to the approval of our state public service commissions through the Integrated Resource Planning Processes, or IRPs. These proceedings are intended to comprehensively address transmission and generation resource needs over the long term, which could include additional decisions regarding the future of the remaining coal units. As always, part of our planning process for transitioning these units will include placing a high priority on protecting the interests of our employees and the communities we are privileged to serve. The transition of our generating fleet and the important regulatory proceedings that will play out over the next nine months will significantly inform our capital investment opportunities. As we always do, we will update our capital investment plans during our fourth quarter earnings call early next year, which will include known fleet transition opportunities. It is likely that further transparency on our long-term capital plan will unfold throughout 2022, and we will update our forecast as appropriately. Importantly, Our current 2024 earnings per share base of $4 to $4.30 is based upon our current five-year capital plan with potential incremental investments providing the opportunity to strengthen our position both within that 2024 range and within our 5% to 7% long-term growth range. Before we move to the Q&A portion, which we always love here, this just came across the wires. Next week is Veterans Day, and a publication that I'm sure you all know well, Military Times, came out with their Best for Vets ranking of employers. And we've typically been on the list. It shows the top 15 companies across America, and it includes well-known companies like Bank of America, Booz Allen Hamilton, Hilton Group, Johnson & Johnson, and others. They just have named Southern Company the number one company in America that's best for vets. That included evaluations of recruiting practices, retention and support programs, and a higher emphasis on employers who provide assistance and flexibility for individuals in the Guard and the Reserves. We certainly respect the contribution that these folks make. They are a significant part of our employment base, I think amounting to over 11% of employees today. We respect their service, and we want to make sure that they have the best work environment that they could have. We are honored beyond belief to be named the number one company in America, Best for Vets, as named by the Military Times. Thank you for joining us this afternoon. Operator, we are now ready to take questions.