Southern: Vogtle Nuclear Plant Nearing Finish Line

Strategist

Travis Miller

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Southern is undergoing one of the most dramatic transformations in the utilities sector with its plan to invest $43 billion during the next five years to reduce greenhouse gas emissions, build renewable energy projects, strengthen the gas system, and support the Southeast region's fast-growing energy demand.

In 2000, almost 80% of the electricity Southern sold was generated using coal. That share is down to 20% and falling. The company is aiming to retire all but eight coal plants by 2028 and reach net-zero carbon emissions from its power generation fleet by 2050. Nuclear, natural gas, and renewable energy are all increasing their share of generation.

However, the transformation has had hiccups, notably the construction delays and cost overruns at the new Vogtle nuclear units 3 and 4. The units are five years behind schedule and more than double the initial cost estimate, but the project is nearly complete. Unit 3 has begun the startup phase and unit 4 is on schedule to begin operations in early 2024.

Vogtle's total capital cost is now set to top $23 billion, with Georgia Power's 45.7% share approximately $10.6 billion net of a $1.7 billion settlement payment from Toshiba, which declared bankruptcy in 2017 in part due to the project's financial challenges.

Other setbacks with Southern's transformation were the delays and cost overruns at the Kemper (Mississippi) project, a planned first-of-its-kind lignite coal-to-gas combined-cycle plant with carbon capture. But the project fell three years behind schedule and the budget doubled before Southern decided to run it as a traditional gas plant. Abandoning the lignite-to-gas operation ultimately required a write-off of roughly $6 billion pretax.

Although these problems have resulted in shareholder losses and weighed on the stock, we think Southern can rebound and produce steady 6% earnings growth. The dividend has grown more slowly than earnings in recent years because of Southern's growth investments, including Vogtle, but dividend growth should accelerate to match earnings growth once Vogtle is finished.

Business Strategy & Outlook

We believe Southern has a narrow moat driven by its state-regulated businesses that represent approximately 90% of its earnings. Service territory monopolies and efficient scale advantages are the primary moat sources for Southern's regulated utilities.

State and federal regulators typically grant utilities like Southern exclusive rights to charge customers rates that allow the utilities to earn a fair return on and return of the capital they invest to build, operate, and maintain their infrastructure. In exchange for regulated utilities’ service territory monopolies, state and federal regulators set returns at levels that aim to minimize customer costs while offering fair returns for capital providers. We expect returns on invested capital to remain at a modest but consistent spread above Southern's cost of capital for the foreseeable future, supporting our narrow moat rating.

This implicit contract between regulators and capital providers should, on balance, allow Southern's utilities to achieve at least their costs of capital, though observable returns might vary in the short run based on demand trends, investment cycles, operating costs, and access to financing.

Southern derives approximately 80% of its earnings from three state-regulated utilities providing electric service. Rates for the generation of electricity are combined with regulated customer rates for transmission and distribution service. In exchange for its monopoly position, state and federal regulators set customer rates.

For natural gas distribution service, representing approximately 10% of Southern's consolidated earnings before parent expenses, state regulators set distribution rates and allow Southern to recover its natural gas costs with a pass-through charge to customers. Thus, Southern has no commodity price risk that could weaken its moat. Customers may elect to purchase natural gas from independent retail energy suppliers, but that has no impact on the distribution utilities' earnings or returns.

Southern benefits from favorable regulatory environments and fastest-growing local economies in its service territories. These factors contribute to the premium returns Southern has earned and its constructive relationships with regulators, the most critical component of a regulated utility's moat.

The investment opportunities and regulatory mechanisms that have allowed Southern to earn its best-in-class returns on equity are in large part because of the company's constructive relationships with state regulators in Alabama, Georgia, and Mississippi. Southern will have to prove it can build constructive regulatory relationships in more challenging states such as Illinois following its acquisition of AGL. In addition, the delays and cost overruns at the Kemper and Vogtle projects have weighed on earned returns.

Southern's competitive generation business benefits from long-term contracts that lock in favorable returns for capacity and energy. Its average contract length is over 10 years and it takes little direct commodity risk.

Narrow

Economic Moat

Southern Company

Gulf Power is a U.S. investor-owned electric utility with all of its common stock owned by Atlanta-based Southern Company. Gulf Power Company is headquartered in Pensacola, Florida, and has a service territory that spans 7,550 square miles (19,600 km2) in 10 counties and 71 towns in northwest Florida. Gulf Power has approximately 428,000 customers in Florida.

Gulf Power

The Southern Co is a holding company, which engages in the generation and sale of electricity. It operates through the following segments: Traditional Electric Operating Companies, Southern Power and Southern Company Gas. The Traditional Electric Operating Companies segment refers to vertically integrated utilities that own generation, transmission and distribution facilities, and supplies electric services in the states of Alabama, Georgia, Florida, and Mississippi. The Southern Power segment constructs, acquires, owns, and manages generation assets such as renewable energy projects and sells electricity in the wholesale market. The Southern Company Gas segment distributes natural gas through natural gas distribution facilities in the states of Illinois, Georgia, Virginia, New Jersey, Florida, Tennessee, and Maryland. The company was founded on November 9, 1945, and is headquartered in Atlanta, GA.

Earnings data Q2 2023

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Southern (SO) subsidiary, Georgia Power's Vogtle Unit 3 reaches 100% power, marking a significant step toward commercial operation.

Southern's (SO) Vogtle Unit 3 Attains 100% Energy Output

Southern Company (SO) makes a strong case for investment, given its long-term growth prospects, strong ROE and ability to increase shareholders' value.

Reasons to Add Southern Company (SO) to Your Portfolio Right Now

Final series of testing  remains before the first newly constructed nuclear unit in the U.S. in over 30 years enters service ATLANTA , May 29, 2023 /PRNewswire/ -- Georgia Power announced today Vogtle Unit 3 has safely reached 100 percent power, marking a major milestone towards commercial operation and service for customers. This milestone marks the maximum energy the unit is licensed to produce in the reactor core and is the first time the unit has reached its expected output of approximately 1,100 electric MW, which can power an estimated 500,000 homes and businesses.

Vogtle Unit 3 reaches 100 percent energy output for the first time

A Southern Company (SO) subsidiary, Georgia Natural Gas, attains its 250 million pounds carbon offset milestone.

Southern Company (SO) Achieves 250 MLB Carbon Offset Milestone

Role supports 14 counties, 78 municipalities and 230,000 Alabama Power customers. BIRMINGHAM, Ala.

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Georgia's Leading Natural Gas Marketer Offsets the Equivalent of Driving Nearly 300M Miles ATLANTA , May 23, 2023 /PRNewswire/ -- Georgia Natural Gas announced today that its Greener Life program, which helps customers make their natural gas use carbon neutral, offset 250 million pounds of carbon emissions from the atmosphere – more than double the company's record set last year. "Natural gas is an essential part of running the homes and businesses of our half a million GNG customers, and 25,000 of them have chosen Greener Life to help them decarbonize," said Keith Gallagher, director of mass markets at Georgia Natural Gas.

Georgia Natural Gas Customers Offset 250M Pounds of Carbon Emissions Through Greener Life® Program

Southern Company is forward-thinking and adaptive; it has grown revenue by 71.35% since 2013. They expect to experience a $700M improvement in operating cash flow once both units 3 and 4 of Plant Vogtle are online.

Southern Company: A Solid Company With Bright Future, But Overvalued

Agreement continues Southern Company's longstanding commitment to conservation ATLANTA , May 22, 2023 /PRNewswire/ -- Southern Company and the National Fish and Wildlife Foundation (NFWF) have signed a five-year partnership extension to keep Southern Company active in voluntary wildlife conservation work until 2028. The new agreement will mark 25 years that Southern Company has partnered with NFWF and demonstrates a corporate commitment to conservation that is one of the most sustained in the history of the Foundation.

Southern Company and National Fish and Wildlife Foundation announce five-year partnership extension

Southern Company is a stable utility stock with a 4% yield, transitioning to natural gas and nuclear energy, aiming for net-zero emissions by 2050. The company benefits from growth in the Southeast service territories due to supply chain re-shoring and has a strong dividend track record with 22 consecutive years of increases.

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Southern Company marks eight consecutive years of overall recognition; third consecutive in the top 25 ATLANTA , May 4, 2023 /PRNewswire/ -- For the second consecutive year, Southern Company has been named the top company for Black Executives by DiversityInc as part of that organization's rankings of the top Companies for Diversity. Southern Company also ranks number 24 on the overall 2023 list.

Southern Company ranks No. 1 for Black executives for second consecutive year in national ranking of Companies for Diversity by DiversityInc

ATLANTA , May 4, 2023 /PRNewswire/ -- Energy Impact Partners ("EIP") has announced the completion of fundraising for its inaugural Elevate Future Fund I LP ("Elevate"), one of the largest funds of its kind, with $111.9 million of limited partner commitments. Southern Company was a founding investor in EIP and Chris Womack, current president and CEO-elect of Southern Company, will co-chair Elevate's advisory board.

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Completion of hot functional testing marks major step towards commercial operations ATLANTA , May 1, 2023 /PRNewswire/ -- Georgia Power today announced the completion of hot functional testing for Unit 4 at the Vogtle nuclear expansion project near Waynesboro, Ga. The completion of hot functional testing marks a significant step towards operations and providing customers with a reliable, carbon-free energy source for the next 60 to 80 years.

Hot Functional Testing completed for Vogtle Unit 4

Position supports the activities of the company's Board of Directors BIRMINGHAM, Ala. , May 1, 2023 /PRNewswire/ -- Amy Riley has been elected Alabama Power's Corporate Secretary, effective June 30.

Amy Riley elected Alabama Power Corporate Secretary

Updating progress on sustainability efforts Highlighting the role of natural gas and infrastructure in supporting a clean energy future ATLANTA , April 28, 2023 /PRNewswire/ -- Southern Company Gas today released its 2022 Sustainability Executive Summary Report highlighting the company's sustainability reporting efforts and key progress and performance to reach its goal of net-zero direct greenhouse gas emissions from operations by 2050 and to collaborate with suppliers, customers and other partners to reduce upstream and downstream emissions.  "As the new leader of Southern Company Gas, I am both privileged and inspired to continue the valuable sustainability work of my colleague and predecessor, Kim Greene, during her tenure in this role," said Jim Kerr, chairman, president and chief executive officer of Southern Company Gas.

Southern Company Gas Announces 2022 Sustainability Executive Summary Report

The Southern Company (SO) Q1 2023 Earnings Call Transcript.

The Southern Company (SO) Q1 2023 Earnings Call Transcript

The Southern Company (SO) guided earnings per share of $3.55-$3.65 for this year and 75 cents for the June quarter.

Southern (SO) Beats on Q1 Earnings, Retains Vogtle Timelines

Southern Co. (SO) came out with quarterly earnings of $0.79 per share, beating the Zacks Consensus Estimate of $0.71 per share. This compares to earnings of $0.97 per share a year ago.

Southern Co. (SO) Tops Q1 Earnings Estimates

ATLANTA , April 27, 2023 /PRNewswire/ -- Southern Company today reported first-quarter earnings of $862 million, or 79 cents per share, in 2023 compared with earnings of $1.03 billion, or 97 cents per share, in the first quarter of 2022. Excluding the items described under "Net Income – Excluding Items" in the table below, Southern Company earned $867 million, or 79 cents per share, during the first quarter of 2023, compared with $1.03 billion, or 97 cents per share, during the first quarter of 2022.

Southern Company reports first-quarter 2023 earnings

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Southern Company is nearing completion of two nuclear power plants. After years of delays and massive cost overruns, Southern has just hit a huge milestone.

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Southern Company's (SO) unit, Georgia Power, invests $5 million to create scholarships, fund research and build statewide partnerships. The idea is to support e-mobility initiatives in Georgia.

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While new customer additions are likely to have boosted Southern Company's (SO) profit levels in the first quarter, escalation in costs might have offset those gains.

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