Southern Q2 2021 Earnings Report

Southern EPS Results

• Actual EPS: $0.84
• Consensus EPS: $0.79
• Beat/Miss: Beat by +$0.05
• One Year Ago EPS: N/A

Southern Revenue Results

• Actual Revenue: $5.20 billion
• Expected Revenue: $5.00 billion
• Beat/Miss: Beat by +$202.08 million
• YoY Revenue Growth: N/A

Southern Announcement Details

• Quarter: Q2 2021
• Date: 7/29/2021
• Time: Before Market Opens
• Conference Call Date: Wednesday, July 28, 2021
• Conference Call Time: 7:54PM ET

Southern (NYSE:SO) Company (NYSE: SO) is an Atlanta-based energy holding company that provides electric and gas utility services and owns power generation assets across the United States. Founded in 1945, the company operates a portfolio of regulated electric utilities and affiliated businesses that generate, transmit and distribute electricity to residential, commercial and industrial customers.

Southern’s principal regulated electric subsidiaries include Georgia Power, Alabama Power and Mississippi Power, which serve large portions of the southeastern United States. The company also conducts wholesale and competitive generation through Southern Power and provides natural gas distribution and related services via Southern Company Gas. Its generation mix includes conventional thermal plants, nuclear facilities and a growing fleet of renewable energy projects such as utility-scale solar and wind.

The company is involved in major infrastructure and grid modernization initiatives, including investments in transmission upgrades, distributed energy resources, energy efficiency programs and technologies to support reliability and decarbonization. Southern Company’s operations encompass both regulated utility service and competitive energy businesses, enabling it to serve retail customers, wholesale markets and industrial clients.

Listed on the New York Stock Exchange under the ticker SO, Southern Company is a prominent energy provider in the southeastern U.S. and is actively pursuing strategies to adapt its generation portfolio and grid capabilities to evolving regulatory and market demands related to clean energy and resilience.

Southern Q2 2021 Earnings Call Transcript

Key Takeaways

• Completion of Unit 3 hot functional testing validates critical systems at full temperature and pressure, with fuel load now expected by year-end 2021 or early 2022 and commercial operation in Q2 2022.
• Revised schedules push Unit 3 to Q2 2022 and Unit 4 to Q1 2023, driving a $460 million increase in Georgia Power’s share of capital costs and an after-tax charge of $343 million in Q2.
• Second-quarter adjusted EPS of $0.84 beat last year by $0.06, led by higher customer usage, strong customer growth and constructive state regulatory actions.
• Weather-normalized retail sales rose 6% year-over-year, with usage recovering to 97–98% of pre-pandemic levels and new connects exceeding forecasts by 25%.
• Five years post-acquisition, Southern Company Gas has boosted its regulated business mix, customer satisfaction, rate base growth and divested non-strategic assets, reinforcing the strength of the regulated utility model.

Presentation

[Operator]

Good afternoon. My name is Rita, and I will be your conference operator today. At this time, I would like to welcome everyone to The Southern Company second 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. As a reminder, this conference is being recorded Thursday, July 29, 2021. I would now like to turn the call over to Mr. Scott Gammill, Investor Relations Director. Please go ahead, sir.

[Scott Gammill, Director of Investor Relations at Southern Company]

Thank you, Rita. Good afternoon, and welcome to Southern Company's second quarter 2021 earnings call. Joining me today are Tom Fanning, Chairman, President, and Chief Executive Officer of Southern Company, and Drew Evans, 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 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 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 Fanning.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Thank you, Scott. Good afternoon, and thank you all for joining us today. Drew and I will cover our usual business updates in a few moments. First, let me provide an update on Vogtle Units three and four. Unit three hot functional testing is complete. Through testing, we have validated the operation of critical primary and secondary systems at full temperature and pressure and demonstrated that the design basis is sound. The completion of hot functional testing marks the last major milestone before fuel load and represents a significant step towards placing Unit three in service. Though the duration of hot functional testing was longer than we originally anticipated, we remain committed to getting it right for all aspects of the project.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Taking into account the length of hot functional testing for unit three, the remaining activities for both units, and recent productivity trends, we now project placing unit three in service during the second quarter of 2022 and unit four in service during the first quarter of 2023. From a cost perspective, Georgia Power's share of the total project capital cost forecast increased by $460 million, largely driven by our updated schedule, recent productivity trends, and replenishment of contingency to fund expected future risks. As a result, Georgia Power recorded an after-tax charge of $343 million during the second quarter. With unit three hot functional testing complete, our next and final major milestone for unit three is fuel load. We project fuel load to occur sometime near year-end 2021 or early in 2022. As we approach fuel load, our commitment to get it right remains our top priority.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

As the operator of these units, safety is our paramount objective, and we strive to meet first-time quality standards prior to significant testing and operations activities. We will not sacrifice those commitments to meet schedule or milestone dates. The scope and time required for the work remaining prior to fuel load includes, one, completion of the nuclear fuel systems and the associated documentation or paper, as I referred to it in the past. two, completion of remediation work and additional work identified during hot functional testing. three, completion of the work necessary to implement our plant support systems. four, a reduction in productivity levels consistent with recent site performance. The unit three ITAAC submittal and review process is ongoing and continues to follow our construction and testing activities on-site. To date, 208 ITAAC have been submitted to the NRC.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

We will submit the remaining 191 as we approach fuel load. Recently, the Nuclear Regulatory Commission conducted a special inspection of electrical quality issues that we had identified earlier this year and the remediation efforts that are underway. The on-site inspection is complete, and we expect the NRC's report to be published within a couple of months, though that exact timing will, of course, be determined by the NRC. Turning to Unit four, direct construction is now approximately 84% complete, and we achieved initial energization in May. Our revised construction productivity assumptions are consistent with recent trends, and as I mentioned, we now project an in-service date during the first quarter of 2023 for Unit four. Our updated timeline for Unit four is reflective of several factors. Unit four has experienced a slower-than-expected recovery from our COVID-19 related staffing reductions in early 2020.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Recall at the time, the staffing reduction disproportionately impacted Unit four, as we shifted our focus to Unit three critical path work fronts. Recall, we reduced the density of personnel on the site and effectively moved people from Unit four to Unit three. Second, Unit three timeline leading up to and during hot functional testing delayed our plans to transition resources to Unit four. More recently, we have staffed Unit four independently as work on Unit three continues. Third, over the past three months, the growing economy and demand for skilled labor has impacted our ability to attract and retain electricians. As a result, we experienced higher-than-expected attrition. Attaining the necessary levels of craft labor to meet construction milestones for Unit four has been more challenging than expected.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

In recent weeks, we have seen positive staffing trends driven in part by offering the enhanced electrician compensation, which has helped to mitigate further schedule impacts. Construction completion for Unit four has averaged 1.4% per month since the start of this year. To achieve a November 2022 in-service, we estimate Unit four would need to average 1.9% construction completion per month. To support a first quarter 2023 in-service, Unit four would need to average construction completion of approximately 1.3% per month for the rest of this year. Looking now at cost, the $460 million pre-tax charge recorded during the second quarter reflects the schedule updates for both units, including updated assumptions for construction activity and support resources, as well as replenishing the contingency for potential cost risks associated with completing both units.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

In conclusion, while the timing of Unit three hot functional testing took longer than originally expected, I am encouraged by the success of the test. Even so, with completion of this enormous milestone, we still have a lot of important work ahead of us to get to fuel load. For Unit four, we are focused on progressing through the next several milestones while continuing to navigate through the COVID-19 pandemic and broader economic recovery efforts that have impacted productivity at both sites. As a company and a management team, we remain focused on bringing Vogtle Units three and four safely online to provide Georgia with a reliable carbon-free energy resource for the next 60-80 years. As always, I want to thank our employees, contractors, co-owners, and community partners for their unwavering dedication to this important statewide project.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Drew, I'll turn it over to you now for an update on the financials.

[Andrew W. Evans, CFO at Southern Company]

Thanks, Tom, and good afternoon, everyone. I hope you all are well. First, I want to touch on the financial impacts of today's Vogtle update. We continue to be very committed to credit quality for both Georgia Power and Southern Company. Therefore, Southern Company will contribute capital down to Georgia Power to maintain its target capital structure and credit profile. We expect to fund the cash need at the parent company as it is incurred by reinstating new issuances under our internal equity plans, primarily the dividend reinvestment plan, which is expected to produce approximately $400 million over the next year. Importantly, with this financing strategy, we expect to maintain Southern Company's credit profile with consolidated credit metrics above current downgrade thresholds.

[Andrew W. Evans, CFO at Southern Company]

This has a de minimis impact on earnings given our size. We continue to see our long-term EPS growth rate in the 5%-7% range. We are also reiterating our 2024 projected EPS range of $4-$4.30. Turning now to earnings. We had strong performance in the second quarter of 2021 with adjusted earnings per share of $0.84, $0.06 higher than both last year's second quarter and our estimate. Recall in the second quarter of last year, we were experiencing the peak impacts of the COVID-19 pandemic on our kilowatt-hour sales. This peak was primarily related to shelter-in-place mandates and working remote, and in response, we implemented significant cost savings initiatives.

[Andrew W. Evans, CFO at Southern Company]

Therefore, it is no surprise that the primary drivers of our quarterly earnings this year as compared to last year were increased customer usage at our state-regulated utilities, coupled with strong customer growth in the Southeast, as well as constructive state regulatory actions. As you would expect, with rising kilowatt-hour sales versus last year, our non-fuel O&M was higher due to increased maintenance and planned outages at our generating units. Weather impacts for the quarter were negligible year-over-year. When looking at adjusted EPS as compared to our estimates for the quarter, the main drivers of the increased earnings were customer growth that remains higher than our expectation. New connects are exceeding forecasts by 25%, and continued expense discipline. Year-to-date through June 2021, adjusted EPS is higher by $0.26 compared to the first six months of last year.

[Andrew W. Evans, CFO at Southern Company]

Drivers are similar to those for the second quarter, increased usage, stronger customer growth, constructive state regulatory actions, and are partially offset by higher non-fuel O&M. Year-to-date, weather impacts were $0.08 favorable compared to the prior year and $0.05 unfavorable as compared to normal. A detailed reconciliation of these reported and adjusted quarterly and year-to-date results as compared to 2020 are included in today's release and the earnings package. Turning to the economies in our service territory, we continue to see significant improvement from the lows we were experiencing at this time last year related to the pandemic. In the second quarter, weather normal retail sales in aggregate were up by 6% compared to last year, with commercial and industrial segments up sharply and modest declines in residential sales.

[Andrew W. Evans, CFO at Southern Company]

We have been analyzing retail sales compared to pre-COVID-19 levels to assess recovery relative to historical norms. Early data indicate that in aggregate, our retail sales have recovered to between 97% and 98% of 2019 pre-pandemic levels. Sales in the residential segment remain elevated due to continued hybrid working, while industrial and commercial sales remain slightly below the 2019 comparable, something like 97% of the 2019 level. In the industrial segment, we're seeing strong momentum across nearly all sub-segments. Commercial sales are also improving, though sales may take longer to reach historical norms. As the COVID-19 Delta variant becomes more widespread in the service territories, we will closely monitor for any signs of change but have yet to see any material impacts. Underpinning these positive sales trends is a strong labor market evidenced by shrinking unemployment rates that are below 4% in both Georgia and Alabama.

[Andrew W. Evans, CFO at Southern Company]

In addition, customer growth remains robust with new connects significantly outpacing our expectations across the electric utilities, reflecting construction of new homes as well as new commercial businesses and continued in-migration. Economic development continues to be very active in the Southeast. In Georgia alone, there are over 200 active projects with the potential to bring over 30,000 jobs in the coming years. Capital investment and job announcements are far outpacing what we experienced even before the pandemic. These are positive signals for continued improvement of both customer growth and sales. With our solid adjusted results through the first half of the year, we are well-positioned as we head into the peak electric load season.

[Andrew W. Evans, CFO at Southern Company]

Our estimate for the third quarter of 2021 is $1.22 per share on an adjusted basis. Consistent with historical practice, we will address earnings for the year relative to the EPS guidance after the third quarter. With that, Tom, I'll turn it back to you.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Thanks, Drew. We understand that Vogtle news often dominates our earnings calls, but I think it's important that we also focus on the terrific performance we see across our businesses. As Drew highlighted, our adjusted financial results through the first half are outstanding, and operationally, we are performing well. We have already endured a tropical storm in Georgia earlier this summer, and our system has demonstrated resilience during the extreme temperatures experienced throughout this week in the Southeast. I would like to mention one more topic before we take your questions. Five years ago this month, we closed on our acquisition of AGL Resources, now known as Southern Company Gas. Our objective with the transaction was to deliver even greater customer and shareholder value by continuing to invest in high-quality, predominantly state-regulated utility assets. We have done just that.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

We bolstered investment at the regulated gas utilities, continued to strengthen the position of our retail natural gas franchise in Georgia, and divested non-regulated assets. Over the past five years, Southern Company Gas has, one, increased its J.D. Power customer satisfaction scores. Two, increased its regulated business mix to 90%. Three, increased its authorized equity ratios to 55%. Four, increased our annual growth in rate base by an average of 14% annually. Fifth, raised $3 billion from the sale of non-strategic assets, some at all-time high P/E multiples, and reduced risk by selling assets like the Atlantic Coast Pipeline and the Sequent Energy Management business. seventh, all while increasing opportunities for talented leaders to take on new and important roles across the Southern Company enterprise. A great example of that is sitting right next to me.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Drew Evans, our chief financial officer, is doing a terrific job, and his breadth of experience and engaging thought process has helped us all. In summary, the acquisition has far exceeded our own expectations. The positive results of our gas business are indicative of the approach we take across all of our businesses and to the nine million customers and communities we are privileged to serve. This approach best positions our state-regulated, utility-centric business model for the future as we seek to maximize our return to shareholders on a risk-adjusted basis. Once again, I want to thank everyone for being with us this afternoon. Operator, we'll go ahead and open the floor for questions.

[Operator]

One moment please for the first question. Our first question comes from the line of Julien Dumoulin-Smith from Bank of America. Please proceed with your question.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Hey, Julien. How are you?

[Kody Clark, Analyst at Bank of America]

Hey, this is actually Kody Clark on for Julien. How are you?

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Oh, okay. Great. Fantastic. Glad you're with us.

[Kody Clark, Analyst at Bank of America]

Maybe first, if we can talk about hot functional testing. I'm wondering how you're thinking about the post-test analysis that you're kind of working through right now? You took temperature back down to ambient, and I'm wondering if you're assuming that you have all the data now that you can kind of proceed, or is there still the potential risk for additional remediation work there?

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Let me call a couple things out that's interesting, I think. Number one is everything is progressing right now as we said it would. In other words, now that we've completed HFT, effectively, we take the car and lift the hood and look at the engine and see what happened. The experience in China showed that there shouldn't be any big things happen. That's our experience in China. Certainly, that's an important part of work. The other thing I just want to point out, because I know this has been a topic on prior calls, just want to raise this. If you recall, I want to say it was the first unit that went through HFT in China, actually had to reperform their HFT because they had significant operational issues concerning vibrations and a variety of other things. That took over six months.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

We have passed through those issues. We learned from them, and for the issues they experienced, our plant worked great. We are as we thought we would be. Of course, between now and fuel load, as we called out in the script, there are certainly four big areas we do have to work on. I love page five, I think, slide five on the information we've given you guys this morning. You see Vogtle Unit three's cooling tower actually have water vapor coming out of it. That was such a wonderful sight to see. I was on-site, frankly, when that was going on. Look, it was heated with effluent heat from the reactor coolant pumps, who performed beautifully during the test. Now we're going to heat it with nuclear fuel.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

We got to put all the systems necessary to get nuclear fuel in there and use that as the heat source. Secondly, as we went through the process of starting HFT and then through HFT, we found some things we can do better to improve the long-term operation of the plant. We will do those things. I called this out on the last call. We call them plant support systems, but this is essentially balance-of-plant activities, HVAC, potable water, some signage, things like that are necessary to support an operating workforce as the plant goes live. Finally, we made an adjustment. We reduced, actually, our estimate of productivity of the workforce on-site to more closely match our recent experience. That's what's left to get to fuel load.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

All of these things represent a significant effort, but I will say that the biggest risk was getting to HFT and completing HFT in an excellent manner, and we did that.

[Kody Clark, Analyst at Bank of America]

Got it. Understood. Thank you for that.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

To be specific, one more thing. We have seen no data so far that gives us any concern, if that was part of your question.

[Kody Clark, Analyst at Bank of America]

Got it. No, that's helpful. Can you give us a little bit more color on attrition at the site? I know that was brought up in some of the staff VCM testimony. What are you assuming in the new schedule and especially considering the enhanced pay that you mentioned?

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

We went through a period there, so we were really focused on getting HFT, getting into it and going through it and all that. We weren't planning on doing a lot. Further, some of the quality issues we recognized, we want to make sure that we fully understood the scope of everything that we were finding so that we didn't repeat those mistakes on Unit four, which I think we've done. At one point, during our meetings with co-owners and the NRC and the PSC staff and Dr. Jacobs and everybody that we deal with, we were seeing greater than expected attrition. We really lay that out to, I think, the improving economy in the Southeast, particularly big data centers that were attracting electricians. We actually did two stages of compensation increases that really arrested that.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

I want to say one week we hired 25 electricians, and we lost like 72. When we saw that, we were going, "Oh, man, we got to fix that." I think now we have. Recent experience would say that since the adjustment in June, so this would be maybe four weeks of activity, we've net added now. These are net adds. 350 people. We have about 1,000 now, and we'd like to get to 1,200. There's still some hiring activity going forward for Unit four. We feel good about our ability to do that. The other important point here is, Unit four now is on an independent track from Unit three. Okay. In fact, in prior earnings calls, we talked about, oh, an optimal relationship is nine months and 12 months, and we have stopped the idea.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

It no longer is applicable to think about the track for unit three. Unit four is now on an independent path from unit three.

[Kody Clark, Analyst at Bank of America]

Got it. Just one more, if I can.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Yeah, sure.

[Kody Clark, Analyst at Bank of America]

What the impact of the Delta variant is on staff and if you're assuming any impacts from this in the current schedule?

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Absolutely. What we have, we went through a period where there was just a handful of positive tests, and they are up a little bit. Let's see. I guess we've had, since the start of the pandemic, something like 2,600 people impacted. Right now, we have somewhere around 65. Okay? That would be our latest data. That's an increase. Probably a week or two ago, it was 25, and about a week before that, it might have been 10. Yeah, it is picking up. The other thing we're seeing is that for those that are impacted, the severity of the illness associated with the virus has been less significant. Okay? Hey, one other thing I do want to say, I don't think we have a slide here that shows the progression of HFT.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

It took us a while to get to full temperature, full pressure, but once we got there, the plant is running like a champion. It really has been stable. Lots of little things along the way. We fixed them, and once we got there, it's been very stable.

[Kody Clark, Analyst at Bank of America]

Okay. That's great. Thank you for taking my questions. I'll jump back in the queue.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Thank you for joining us. Appreciate it.

[Operator]

Thank you. Our next question comes from the line of Jeremy Tonet from JPMorgan. Please proceed with your question.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Hey, Jeremy. How are you?

[Analyst at JPMorgan]

Hi. Good afternoon. It's actually Ryan on for Jeremy.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Very good with you, sir.

[Analyst at JPMorgan]

I guess, just wanted to ask one on any expectations that you have heading into this kind of NRC report, and then very explicit about the unit four timeline. If there's anything kind of baked in there for unit four regarding what might come out of that report and any kind of additional remediation or adjustments that might be required.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

This doesn't give necessary to the NRC report, but rather this really was involved in the time it took to get to HFT and the remediation plans we put in place to satisfy the kind of quality issues we saw in the paper. Remember, paper is shorthand for turning over from construction to system testing to documentation of the nuclear quality necessary to submit an ITAAC. Okay? When I say paper, that's actually a big deal, and I've said that in the past three or four calls, what a big deal it was, and it has been a big deal. We put in processes in place to improve that effort, and our new schedule does include the effect of those processes. Okay? The only other thing I want to say about the NRC is, this is their report and it's in their hands.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

I certainly, as I wouldn't speak for a state regulator in any of our jurisdictions, I'm not going to speak for the NRC. I will say, as we have been completely transparent in all of our site meetings with all the co-owners, all everybody there, the NRC is fully aware of what we found, and they are fully aware of our remediation practices. That's about all I want to say about that. Let the NRC speak for themselves beyond that.

[Analyst at JPMorgan]

No, understood. Totally understand. I guess just, you guys mentioned the kind of the internal equity program that's going to come in, and just kind of want to get a sense on the timing there. Does it sound like just over the next year with the $400 million in DRIP, or will that kind of maybe take longer as those kind of plans potentially come online? Just kind of want to make sure I understood the message there.

[Andrew W. Evans, CFO at Southern Company]

Yeah. Maybe I can give you a couple of sort of boundaries on this. Understand that what we'll experience or what we just reported in terms of increased costs, we won't actually experience until we start to move later into construction. These are incremental to budgets that really begin sometime next April. The sum total of those things led to the write-down that we reported today of $343 million. We are incredibly focused on credit and felt like there was a necessity to fulfill commitments that we'd made to the rating agencies related to our coverage ratios in particular. The simplest thing for us to do is to turn on the DRIP plan, whether that's temporary or permanent. We'll just sort of monitor as we continue to monitor construction. The intent is for it to be quite temporary.

[Andrew W. Evans, CFO at Southern Company]

A single year of that program generates about $400 million, which I think what we've just described to you is a.

[Andrew W. Evans, CFO at Southern Company]

A divot created by this expectation that's only three-quarters of what we could issue under those plans in a particular year. I would say that our single biggest purpose for this is that we have made commitments to rating agencies and to bondholders to maintain credit through construction, and that is our singular intent.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

I think you said it in the script, too, Andrew W. Evans, that with respect to the plans, the financial plans we put in place, the guidance that we did forward, the 5% to 7%.

[Andrew W. Evans, CFO at Southern Company]

Right

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

4 to 430. The impact of turning on for some time the DRIP is de minimis.

[Andrew W. Evans, CFO at Southern Company]

De minimis.

[Analyst at JPMorgan]

Understood. I appreciate the color. I'll leave it there.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Michael Lapides with Goldman Sachs. Please proceed with your question.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Hey, Michael. How are you?

[Michael Lapides, Analyst at Goldman Sachs]

I'm well, Tom. Thank you, Tom and Drew, for taking my questions as always. Really one on Vogtle and one on Georgia, and specifically in Georgia, how do you envision two regulatory processes playing from here? First of all, the timeline for kind of how you think about getting Vogtle three and the rates and kind of really the proceeding for that or the docket for that. Then the second question is, with Vogtle moving around in schedule a little bit, how you think about the rate case that you're supposed to file next year and whether you'll just kind of push that off and try and do all of this in one big docket.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

To my admonition before, we certainly will not front-run anything with the regulators or really kind of the plans that we have. Michael, you know, you've been around forever, and you follow us and do a great job with that. We've already laid out a framework to address cost recovery and prudence, and in fact, the Unit three rate proceeding right before the Commission is currently one of those early steps. Let's leave it there, that there's a whole lot of moving pieces, and in the constructive way, really, since I was involved in putting in place this accounting order methodology back in 1995, we've been able to manage really complex situations in a constructive way. My sense is, with all the moving pieces here, we have a tough regulator, but I think they'll do a fair, constructive job with it as we move forward.

[Michael Lapides, Analyst at Goldman Sachs]

Got it. A question about the jurisdiction no one ever talks about, no one ever asks, but obviously one of the better places to be a utility. How are you thinking about Alabama in terms of how continued change in the generation fleet may play out, as well as kind of how the pace of grid investment may change over the next three to five years?

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Grid investment is an interesting question, and that's a much bigger than Alabama question, right? When we look at California, and we look at ERCOT, and we look at the dysfunction in the so-called operating, the so-called organized markets, it is very clear that all of our jurisdictions, Mississippi, Alabama, Georgia, have a very well-founded and orderly way of evaluating a transition to a generating fleet and the integration, importantly, of transmission into the overall integrated resource plan. We have processes in place. All of our companies have embraced, to some degree, the idea of renewables. Recall in the past, Georgia Power was cited as the Investor-Owned Utility of the Year by the solar industry. Recently, Alabama Power has embraced the idea of solar being part of their mix.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Everybody has a different way to approach the problem, but I would say all of our utilities have a very constructive, effective way of addressing the problem. In a way where we're accountable, whether it's fuel procurement, generation, transmission, distribution, sales, we are accountable, and we work with the Commission to develop optimal answers for our customers. That is the best market structure, and we've been able to do it for years. My sense will continue.

[Michael Lapides, Analyst at Goldman Sachs]

Got it. Thank you, Tom. Much appreciated, guys.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Paul Patterson with Glenrock Associates. Please proceed with your question.

[Paul Patterson, Analyst at Glenrock Associates]

Hey. How are you?

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Hello, Paul. How are you?

[Paul Patterson, Analyst at Glenrock Associates]

All right. How are you doing?

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Fantastic. Thanks for being with us.

[Paul Patterson, Analyst at Glenrock Associates]

Absolutely. This question just came up, I think, when I heard somebody else ask about COVID. I'm just curious, what percentage of your workforce is vaccinated? Do you have a number on that?

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

We don't know, but I would argue it's somewhere between 35 and low 40s.

[Andrew W. Evans, CFO at Southern Company]

Probably not materially different than what we see in the general population.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Yeah

[Andrew W. Evans, CFO at Southern Company]

in the Southeast would be-

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

We're not requiring people to disclose it, for example. We are requiring certain behaviors in the workforce. That if you're not vaccinated, you'll wear a mask, you'll socially distance, et cetera.

[Paul Patterson, Analyst at Glenrock Associates]

Okay, great. With respect to sales growth and COVID, I'm just wondering, as we've gotten further along, just sort of if there's any change, what your outlook is post-pandemic effects. When we're back to normal, is there a new normal in terms of what your expectations for total retail sales might be, or what's your thought, I guess? Obviously, we've had a rebound and what have you, so it's kind of noisy here. Just going forward, assuming, let's say, in 2021, excuse me, at the end of 2021, we're back to normal, let's say. How would you think, is there any change, I guess, in what your sales growth expectations are for retail sales growth now, given the pandemic-

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Yeah

[Paul Patterson, Analyst at Glenrock Associates]

The change in it?

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Paul, let Drew and I double-team this because I think he brings a different perspective than me. We've given you a part of a chart package, I guess page 11. It shows that to pre-pandemic, residential is still up. Here's one of the interesting things to consider. When we evaluate our workforce pre-pandemic, roughly 80% were kind of permanently in the office, with about 20%, maybe 25%, mostly virtual. Think call centers and things like that. Okay. When we've tried to analyze what the new normal will be, the numbers are changing pretty significantly, and it varies by local location. It varies by work function. Kind of wrap your head around this. I think we're going to be between 20% and 25% kind of permanently in the office with about, round numbers, 50% being hybrids. Sometimes they're in the office, sometimes they're working virtually.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Then we'll have that 20%, 25% completely virtually. If the rest of the world starts to follow this idea of a new normal, then I would expect residential sales to be up prior to 2019 levels. Okay. Industrial appears to me to be racing back to pre-COVID. We're kind of at 98% there. The economic development activity that we see, especially I'll give you one. Amazon, I think it's Amazon, is bringing 1,000 jobs and investment of $250 million. That's one. I said, if you guys watched Squawk Box this morning, I told them that in the economic development data, in forward-looking investment now. This hasn't happened, but these are announced projects, versus 2020 are up 85% and versus 2019 are up 65%. There's this burst of activity from investment, and jobs created is somewhere in the mid-20s. What's happening? Residential may remain elevated.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Industrial is going to catch up. Commercial's still a little bit of a question.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

We'll see. Drew, what would you say to all that?

[Andrew W. Evans, CFO at Southern Company]

I think you did a nice job of it. The only thing I might add would be around customer count itself. We normally add something like 40,000 customers in a given year. This is largely residential, and we've probably added three-quarters of that in just the first half of this year. Net in-migration is a little bit difficult to separate from sort of use per customer, which is kind of what we represent here. Residential is at 3% higher than what we would've expected pre-pandemic. I think, as you described, that's probably here to stay.

[Andrew W. Evans, CFO at Southern Company]

Yes.

[Andrew W. Evans, CFO at Southern Company]

Industrial segments, we've had a couple of large industrial customers move in and out of more global productivity or based on global economics, not a lot based on the region not being a good employer. There are a couple of really strong sectors, like automotive, where there could be huge transitions that really benefit the Southeast. As with you, I'm very bullish on residential and industrial in particular. Commercial's going to take a little bit longer to normalize.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Yeah. Raw data year-over-year, manufacturing industrial is up 11.7%. The only one down there was chemicals. It was really an Olin plant that produced chlorine.

[Andrew W. Evans, CFO at Southern Company]

Chlorine

[Andrew W. Evans, CFO at Southern Company]

caustic soda, stuff like that. That's really, they've just taken down their production. Everybody else is up. We had three segments up over 30% year-over-year. Primary metals, transportation.

[Andrew W. Evans, CFO at Southern Company]

Pipeline

[Andrew W. Evans, CFO at Southern Company]

pipeline. Fascinating stuff. One last data point. We're just full of this stuff. Georgia looks like it's going to be one of the first states to hit its pre-COVID levels by the end of this year. Alabama and Mississippi are expected to hit in 2022. Those are some of the fastest recovering states in the U.S.

[Paul Patterson, Analyst at Glenrock Associates]

Okay, great. Just turning to Vogtle. The testimony by staff, I don't think you guys filed any rebuttal testimony, which is, I think, sort of the normal course here. Without getting, I'm not asking you to do rebuttal here or anything. In terms of this sort of the tension that they brought up about meeting milestones and the quality of work and what have you. Would you say with this hot functional testing that if they were to look at the situation now after that, given what you guys have found, how the plant performed with hot functional testing, that perhaps those issues would probably be diminished?

[Paul Patterson, Analyst at Glenrock Associates]

If you follow my question, in other words, you mentioned that it performed very well, and I was just wondering whether or not that sort of may indicate that this quality-of-work issue that they were bringing up wouldn't be as significant an issue, maybe as we move forward.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Here's kind of my view on that. I think there have been a number of interesting arguments that follow your question. One that has been a consistent difference we have had with the staff. For example, it has been our dogma in doing this project to fail quickly. It was, I think, a big risk mitigator from our standpoint to test early, find problems, and fix them before they became a bigger problem later. Also, the alternative to that would've been to completely construct a system and only test it when everything is done. I think that would've exacerbated the bow wave of work. The criticism, "Well, the way you're doing it costs more money." Yes, we would agree. I would also say value is a function of risk and return.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

For the additional cost we have followed in testing early and failing early, the risk mitigation characteristic overwhelmed the value. Remember, it is our posture to get it right. Okay. We found a lot of issues going in. Not deal killer, not huge issues, but issues we had to deal with going into HFT. We found more during HFT, and we finished HFT. We don't think we will repeat those in Unit four, we'll deal with that. We did go through a very rigorous argument on Unit four about whether we should estimate it being complete in the first quarter or the second quarter. I remember we came back and had another argument about it. This is like a two-hour, three-hour long argument with people on the site and everybody that is involved with the project. We landed on the first quarter.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Now let's just go through the math. Ultimately, from where we are to in service, we're projecting 16 months. Okay. We've added four months. Adding four months on top of 16 is, in round numbers, something like 25% or more. My sense is that's a good place to be. If you were to add another quarter, holy smokes, now you're getting near 50% contingency, and to me and the people on site, that felt like too much. Listen, we had good, rigorous arguments. I think we've landed in a good spot.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

One of the things that we're particularly watching, if you say, "What is the riskiest thing you're thinking about right now?" The work ahead of us, the big work is getting the nuclear fuel ready to go to be inserted into the reactor vessel. When we looked at the testing of our spent fuel pool, we found greater than acceptable leaks in the pool. We tested Unit four, and while that testing is still ongoing, we believe that Unit four is looking good. This is not a design problem. We think it is a welding problem, frankly, on Unit three. We're undertaking a complete remake of the bed of the spent fuel pool in order to assure, the floor of the pool, to assure that it will work when it's called upon.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

That kind of is the biggest thing in my mind right now that I know about, okay? I feel very confident that what we've learned on three through the end of ITAAC and now it works, we'll apply that on four in a good way. I will say this. I'm sorry for going on here, but let me just finish with this. We completely respect the staff's opinion, we completely respect Dr. Jacobs. We respect our co-owners. Anybody that has an opinion on this, they all have a point of view that is valid. I'm giving you what we think is the best answer and the best outcome. The thing that is so beautiful about this process. We'll talk about it. Everybody sees everything. There are no secrets. There's no smoking gun. Everybody knows everything as we build this plant.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

I think that transparency has worked so much to our advantage.

[Paul Patterson, Analyst at Glenrock Associates]

Awesome. Thanks so much.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

You bet. Thank you.

[Operator]

Thank you. Our next question comes from the line of Stephen Kuczynski with Southern Company. Please proceed with your question.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

No, he works for us. I don't think. Yeah. That's a mistake. Go to your next question. Sorry about that, everybody.

[Operator]

Not a problem. That will conclude today's question and answer session. Sir, are there any closing remarks?

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Yeah. My question is, what was Stephen Kuczynski doing on the phone? For those of you that don't know, Stephen Kuczynski is terrific. He is the CEO of our nuclear business, and he has direct management council oversight for the construction of Vogtle three and four. Of course, there is a staff of people there. A guy named Glen Ruch has been a hero of Southern Company, working so hard to make this thing a success. Here's the thing I would leave you with, and I think the feedback we're getting from the analyst community is right on point, so I think I'm telling you what you already know. Listen, me personally, sometimes we get frustrated with the tactics of hitting a milestone and a schedule.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

The integration of the entire plant and making it work with a heat source that's not nuclear, but still making it work as it did was prolonged and frustrating at times. You know what? Once we got it solved, and once we got the plant at pressure, at temperature, it worked great, and it was very stable. We fixed those things, and we continue to work hard to make sure we don't repeat them on four. Still a good bit of work ahead between now and fuel load. I think we've outlined that carefully for you. We look forward to getting to fuel load for unit three. Unit four, for the kind of productivity that we have suggested to you, let's just deal with the % complete per month. The 1.9 to 1.3, right? 1.9 to 1.3.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

We have done already at unit four, 1.4, and we have done kind of the 1.9 level on unit three for seven to nine months at time. These are levels we have done in the past. In the estimate we have given you, we have estimated, however, lower productivity. That's to give ourselves a little more margin on cost and schedule. We're trying to be sensitive to really hit these numbers. Outside of Vogtle, we're very excited about the progress, but outside of Vogtle, this franchise, whether we're transitioning the fleet to a low-carbon future, whether we're running the business to make it more resilient to extreme weather, or attacks in the cyber and physical realm to preserve our national security, we are doing great, and we will continue to do great. We're making progress on all of those functional fronts.

[Thomas A. Fanning, Chairman, President, and CEO at Southern Company]

Last thing I'll just mention. When I think about our DE&I efforts, when I think about diversity, and when I think about the improvement of culture. We mentioned too bringing Southern Company Gas into the fold, I guess, bringing AGL in the fold, now becoming Southern Company Gas. We have cross-populated Southern Company Gas, now run by Kim Greene. Drew Evans is over here being CFO at Southern. The cross-population, the learning, has strengthened our culture and increased, if you will, our cultural bandwidth. This company is better off in the long run for all of these efforts. I think now when we've renewed our efforts on diversity and inclusion, we'll be even better. Thank you. Exciting day today and look forward to talking with you in the future. Thanks, everyone, for listening.

[Operator]

Thank you, sir. Ladies and gentlemen, this concludes the Southern Company second quarter 2021 earnings call. You may now disconnect.

Participants

Executives

• Andrew W. Evans, CFO
• Scott Gammill, Director of Investor Relations
• Thomas A. Fanning, Chairman, President, and CEO

Analysts

• Kody Clark, Analyst at Bank of America
• Michael Lapides, Analyst at Goldman Sachs
• Paul Patterson, Analyst at Glenrock Associates
• Analyst at JPMorgan