Southern Co

NYSE:SO

Earnings Call Analysis

Southern Company's Strong 2023 and Future Outlook

In an exceptional 2023, Southern Company maintained focus on customer and community, yielding a promising forecast with a $48 billion capital investment fueling a 6% annual rate base growth. Leadership transitions infused fresh energy, fortifying the industry's 'best bench'. Including Vogtle 4 impacts, the EPS guidance range contemplates 5%-7% growth trajectories, not just midpoints. Rate base growth potential remains with added capital yet unaccounted for. Nuclear PTCs are uncounted, ensuring any benefit flows to customers. The aim is the conservative, incremental credit improvement, targeting a 17% FFO to debt ratio over time.

Sound Investment and Promising Forecast for Southern Company

Southern Company detailed their substantial growth, believing the historical trend of capital increases will continue. Their five-year capital investment forecast is a robust $48 billion, underpinning an estimated 6% annual growth in state-regulated rate base, establishing a firm basis for future expectations.

Commitment to Credit Quality and Equity Financing Strategy

Upholding strong investment-grade credit ratings is central to Southern Company's strategy, as they approach the completion of Vogtle Unit 4. The anticipated reduction in construction risk and boost in funds from operations (FFO) are expected to enhance their credit profile significantly. They plan to generate roughly $350 million of new equity annually through internal equity plans to invest in subsidiary growth.

Financial Flexibility and Value Preservation

To offer financial flexibility and sustain shareholder value, Southern Company maintains an at-the-market (ATM) plan. This approach may finance potential increases in capital spending or refinance callable hybrid securities, ensuring alignment with credit and long-term EPS objectives.

Exceptional Performance and Strategic Leadership Transitions

In 2023, Southern Company not only met challenges but exceeded expectations by prioritizing customer and community needs. Their continued investment in people has solidified their standing as an industry leader. The strategic implementation of 75 officer-level changes suggests a deep and talented leadership, promising to deliver robust stakeholder returns.

Guidance and Rate Base Growth Outlook

Southern Company's guidance considers the impacts from Vogtle 4, expecting it to contribute $0.08 to EPS in 2024. Their growth guidance trajectory frames 5% to 7% growth rates from the current range's top and bottom instead of the midpoint. Despite the capital plan enhancement by $5 billion, they maintain confidence in their capacity to meet their growth projections and EPS targets.

Prudent Fiscal Plan Without Dependence on PTCs

Their financial plan doesn't factor in nuclear Production Tax Credits (PTCs), relying on a robust FFO to debt metric projected to improve annually without PTCs. Although there's potential to gain from nuclear PTCs, if realized, those will benefit customers rather than alter financial metrics or earnings directly.

Strengthening Financial Metrics Post-Vogtle Unit 4

Following a strong result of 14% in FFO to debt in 2023, Southern Company predicts over 100 basis point improvement in 2024 once Vogtle Unit 4 comes online. Continuous improvement is expected annually, as regulatory lags subside and cash flow firms, signaling a robust and healthy financial future.

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon. My name is Malika, and I will be your conference operator today. At this time, I would like to welcome everyone to the Southern Company Fourth Quarter 2023 Earnings Call.

[Operator Instructions] As a reminder, this conference is being recorded, February 15, 2024.

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, executive]

Thank you, Malika. Good afternoon, and welcome to Southern Company's Fourth Quarter 2023 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 and subsequent securities 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.

[Christopher Womack, executive]

Thank you, Scott. Good afternoon, and thank you for joining us today. 2023 was an exceptional year for Southern Company, a year in which we proved once again that we can do extraordinary things, including delivering strong financial results in the face of unprecedented headwinds and the successful completion of Plant Vogtle Unit 3, the first newly constructed nuclear unit in the United States in over 3 decades. Since its July 30th in-service date, Unit 3's performance has exceeded our expectations, delivering over 5 million-megawatt hours of safe, reliable, carbon-free energy across Georgia.

Other noteworthy items for 2023 included constructive resolution of the Vogtle 3 and 4 prudence process, resolving all issues of reasonableness, prudence and cost recovery; successfully completed construction and commissioning for a brand-new 720-megawatt combined cycle plant on schedule and on time at Alabama Power's plant, Barry; acquired 2 new solar projects at Southern Power, which once construction is complete, will add an additional 350-megawatts of carbon-free generation to its portfolio of fully contracted renewable generation; continued progress toward our greenhouse gas emission reduction goals, including our interim goal of a 50% reduction versus 2007 levels by 2030, achieving a 49% reduction in 2023; earned a National Accounts Award for outstanding customer engagement by the Edison Electric Institute and top honors from J.D. Power for residential and business customer satisfaction. And just last week, Southern Company was ranked as the #1 most admired electric and gas utility in Fortune magazine's World's Most Admired Companies list for 2024.

These achievements reflect our team's steadfast commitment to keep the customers and the communities we are privileged to serve at the center of everything we do.

Throughout 2023, our electric and gas franchises continue to excel at the fundamentals, and started this year strong as evidenced through our preparations and execution during January's winter storm, Heather, when electricity demands reach all the time winter peaks and Southern Company gas system continue to reliably serving customers throughout severe weather conditions across its 4 state territory.

Our ability to navigate through such severe weather events further demonstrates how our customers benefit from the combination of outstanding operational performance by each of our utilities and the value of our vertically integrated state-regulated business model. Our state's long-term integrated planning processes, which include adoption of important planning assumptions like a 26% winter reserve margin for our electric utilities, benefit our customers by providing a reliable and resilient mix of energy resources.

Before turning the call over to Dan for a financial update, I'd like to provide an update on Vogtle Unit 4. We continue to make meaningful progress toward the completion of Unit 4 with initial criticality achieved yesterday. Initial criticality represents a key step during startup, whereby operators for the first time safely begin the self-sustaining nuclear reaction to create heat for steam production.

As we approach the initial sync with the grid, Unit 4 continues with the remaining start-up and preoperational testing activities that perceive the declaration of in service, which is projected in the second quarter of 2024.

Our 2024 adjusted earnings per share guidance range, which Dan will [indiscernible], shortly assumes Unit 4 achieves commercial operation in April.

Dan, I'll now turn the call over to you.

[Daniel Tucker, executive]

Thanks, Chris, and good afternoon, everyone. As you can see from the materials we released this morning, we reported strong adjusted earnings per share of $3.65 for 2023, which was the very top of our 2023 guidance range. The primary drivers of our performance compared to 2022 are higher utility revenues and lower nonfuel O&M expenses and income taxes, somewhat offset by higher depreciation and interest expenses. Mild weather was also a significant headwind, with 2023 marking the mildest year in our history for our electric service territories.

Our ability to deliver 2023 adjusted results at the very top of guidance is a great testament to our team and to the resilience and strength of our portfolio of companies. A detailed reconciliation of our reported and adjusted results compared back to 2022 is included in today's release and earnings package.

Turning now to electricity sales in the economy. Weather-adjusted retail electric sales were down 0.4% for 2023 compared to 2022. Strong usage drove commercial sales growth of 1.3% for the year, which was partially offset by lower residential usage with both commercial and residential sales impacted by the return to the office dynamic.

We continue to see robust residential customer growth with the addition of over 46,000 residential electric customers and nearly 27,000 residential gas customers. Since 2020, we've added over 200,000 residential electric customers, which represents the highest 4-year total in decades.

Industrial sales finished down for the year nearly 2%, largely due to continued slowing in housing and construction-related sectors as well as lower sales to chemical companies due to outages and long planned plant closures.

Consistent with the drivers detailed in Georgia Power's recently filed 2023 Integrated Resource Plan update, economic development in our Southeast service territory remains incredibly strong. Several years of extraordinary success in attracting new and expanding businesses to our states underpins our long-term electricity sales forecast.

While electricity sales growth is projected to remain around 1% to 2% for 2024 and 2025, growth from 2025 to 2028 is projected to accelerate to an average of approximately 6% annually, with Georgia Power's total retail electric sales growth projected to be approximately 9% annually over this same period. The magnitude and velocity of this growth are significant drivers for the increased capital investments reflected in our current outlook. This projected growth also represents a tremendous opportunity to derisk our outlook and benefit customers as a substantial projected growth in kilowatt hour sales from new manufacturing facilities and data centers has the potential to put downward pressure on existing customers' rates.

Turning now to our earnings projections for 2024 and beyond. Our adjusted earnings per share guidance range for 2024 is $3.95 to $4.05, and our projected long-term adjusted EPS growth rate is 5% to 7% from that range.

In early 2021, we provided the investment community with a stable post Vogtle 3 and 4 construction and EPS projection with an initial and reasonably wide 2024 guidance range. It is perhaps the greatest of understatement to say that the world has changed a lot since early 2021.

On a macro basis, we've seen significant inflation and higher and then higher for longer interest rates, which alone has translated to interest expense for 2024 hundreds of millions of dollars higher than any of us assumed 3 years ago. Additionally, relative to our projection in early 2021, the projected in-service date for Vogtle 4 moved into 2024 from 2023.

In the face of these challenges, we've continued to work extremely hard to grow our business and to create value for investors. Compared to our projections in early 2021, our state-regulated utility rate base for 2024 is projected to be approximately $6 billion higher, while lower O&M expenses and higher sales are projected to contribute hundreds of millions of dollars more than previously projected to help maintain affordability and help pay for those investments.

We estimated adjusted earnings of $0.90 per share for the first quarter of 2024. Our capital investment plan continues to be well over 95% attributable to our state-regulated utility businesses. The current 5-year capital investment forecast, totaling $48 billion, reflects a $5 billion increase in state-regulated utility investments relative to our forecast a year ago. This 12% increase in capital spending reflects our ongoing efforts to further increase the resiliency of our electric and gas networks and our technology infrastructure. It also partially reflects new resources proposed in Georgia Power's 2023 IRP update, about 60% of the brick-and-mortar megawatts proposed.

We have maintained our disciplined measured approach to capital forecasting for our state-regulated utility businesses. Given the magnitude of change in our projected sales growth and the timeframe in which new resources are needed to serve higher peak demands, we felt it was appropriate to go ahead and reflect certain new resources in our capital plan.

Additionally, our capital investment forecast tend to grow, especially in the later years as the visibility into customer additions improves, regulatory processes unfold, compliance obligations evolve and our long-term integrated system planning is refined.

While the increases in this year's 5-year forecast represent an outsized upward adjustment due to the scale and velocity of the projected growth in the near term, we do believe it's reasonable to expect a historical trend of capital increases to continue going forward.

On its own, our capital investment forecast of $48 billion supports annualized state-regulated rate base growth of approximately 6%, providing a solid foundation for our long-term outlook. Any upside to the capital forecast will simply serve to add durability to an already strong outlook.

Strong investment-grade credit ratings remain a priority. We continue to believe that in order to be a high-quality equity investment, a company must also have high-quality credit. As we near completion of Vogtle Unit 4, the reduction in major project construction risk and the improvement in our FFO should strengthen and meaningfully improve our credit profile to help ensure we preserve what we believe will be a positively differentiated profile. We are also turning on our internal equity plans to fund the incremental capital investment at our subsidiaries that I highlighted earlier. These plans typically provide approximately $350 million of new equity annually.

Additionally, we'll preserve our financing flexibility and optionality with a continuous focus on preserving and improving shareholder value. For example, we will continue to maintain an at-the-market or ATM plan to partially finance potential additional increases in capital spending in our subsidiaries or potentially, to partially refinance [ callable ] hybrid securities if we determine doing so preserves or improves our credit and long-term EPS objectives.

Southern Company strives to deliver a superior risk-adjusted total shareholder return, and we believe the plan that we've laid out supports that objective. Our customer and community-focused business model the growing investments in our premier state-regulated utility franchises, and the priority that we place on strong credit quality and our remarkable dividend history all contributes toward making Southern Company a premier investment.

Chris, I'll now turn the call back over to you.

[Christopher Womack, executive]

Thank you, Dan. Again, let me say, Southern Company had an exceptional year in 2023. We didn't just meet challenges head on, we rose above them while remaining committed to keeping customers and communities in the center of everything that we do.

I am extraordinarily proud of the hardwork, the collaboration, the perseverance and the leadership that our teams show throughout the year to enable us to achieve these outstanding results. Having a team prepared to rise to such new heights doesn't just happen. For decades, Southern Company has prioritized investing in our people with a focus on positioning our leaders and their teams to provide the exceptional service customers expect to deliver the innovative solutions needed in an evolving energy landscape and to support growing the communities we are [indiscernible] to serve.

As you all know, our company implemented a leadership transition in early 2023. Rather than simply fill a handful of vacant seats, we embraced it as a grand opportunity. During 2023, we facilitated 75 officer level changes throughout the company. The changes brought renewed energy and excitement, and more importantly and intentionally, the movement served to further strengthen what we believe to be the deepest and best bench in the industry.

I am excited about the future of this company, and I'm excited about our team and its ability to deliver the results, all our stakeholders, customers and investors alike expect from Southern Company.

Thank you again for joining us this afternoon and for your continued interest in Southern Company. Operator, we are now ready to take questions.

[Operator]

[Operator Instructions] Our first phone question is from the line of Shahriar Pourreza with Guggenheim Partners.

[Shahriar Pourreza, analyst]

Just quickly on the new guidance that you rolled forward. Does the new '24 estimate range still include a Vogtle charge? So should we be adding back $0.05 or so to grow off the 5% to 7% like you've talked about in the past? And sort of that new 6% rate base growth estimate now comes with equity, I guess, what's the comfort level of hitting the midpoint of that EPS growth range, which you just reiterated?

[Daniel Tucker, executive]

Yes. Thanks for the question, Shahriar. And I know there's a lot of focus on this. I think we're always fascinated with the precision with which everyone wants to inhale all this down.

The -- so let's start with the guidance range. Yes, it absolutely includes impacts from Vogtle 4, not only being in '24 at all, but certainly going into, as we've assumed in the guidance range, April. I mean, if you add all that up, that's $0.08 of incremental impact on 2024 relative to what it would have been if the project been lined in 2023.

And -- but we haven't adjusted a range by that full amount, by any means. And what we're doing is using the flexibility, not unlike what we did in 2023 with the mildest year ever to kind of mitigate that. Those are the kind of mitigations and flexibility items that aren't necessarily available every year. You have to maintain the system, you've got to make sure you're prioritizing service to customers. And so that flexibility is limited. We're using it this year and that will diminish what we have the opportunity to do going forward.

But also, I think what's not factored in is a couple of other important nuances. We thought 40 slides was enough, but maybe we needed 1 more slide to kind of draw how we always think about our guidance range and our growth range. We don't think about the 5% to 7% being off of the midpoint. We've always kind of drawn those trajectories off the top of it and off the bottom of it.

So 7% off the top, 5% off the bottom. I think if you do that from this current range, it captures every reasonable estimate that's out there for 2025 and 2026.

When it comes to the rate base growth, look, we were at 6% last year. We just added $5 billion of capital to the plan. We didn't add all the capital that we see as possible. That kind of incremental capital additions opportunity still exists.

So yes, our ability to grow rate base, and yes, it's mitigated ever so slightly by a fraction of a percent of increased shares over time. Our ability to hit our numbers is as solid as it's ever been.

[Shahriar Pourreza, analyst]

Got it. Okay. That's helpful, Dan. And then just lastly, I know one of your peers has spoken pretty extensively on sort of nuclear PTCs, and obviously expects to receive hundreds of millions of dollars a year to fund sort of that capital plan.

I guess, does the plan today -- do you expect to receive anything material on the nuclear PTC fund? Is it part of any of your credit metrics or funding plans?

[Daniel Tucker, executive]

Yes. We -- yes, thanks, Shahriar. We have not factored any cash flow from nuclear PTCs into our outlook. We've got a terrific plan with an improving FFO to debt metric that's several hundred basis points above any of our threshold over time, and frankly improves every year in the forecast that I look at without those nuclear PTCs.

Is there the opportunity for us to capture some of those PTCs? We think there very well could be. We're not counting on it. And to the extent we do, we'll flow those to customers to the most practical amount of time possible. And so we're -- it's not going to be a factor in kind of how our metrics or earnings look.

[Operator]

Our next question is from the line of Steve Fleishman with Wolfe Research.

[Steven Fleishman, analyst]

So just -- I think you've talked about targeting a 17% FFO to debt, which is differentiated. When do you expect you'll be there, let's say, in 2025, when you have first full year of bulk units running? When do you expect to be there?

[Daniel Tucker, executive]

Yes. So I've always kind of said, we see a forecast that gets us to 17-ish, it's the way I've characterized it in the past. So let me tell you where we are, Steve, here today, and I think it's still differentiated and a terrific story and we're doing everything we can to make sure we're being conservative in the way we think about this.

So if we just think about Moody's metrics, our actual result for 2023 was 14%. Keep in mind, that's before Vogtle 4 is in service.

2024, with Vogtle in service on the timeline, we believe those metrics will improve by more than 100 basis points in 2024. The weight of the incremental capital that we're deploying and the fact that some of this is kind of long live construction, you think about building new gas plants at Georgia or other things, there's a bit of regulatory lag that weighs a little bit on credit metrics. And as that resolves itself, cash flow improves.

So with the forecast that I see go from 14 to over 15 in '24, and about a 50 to 60 basis point improvement every year after that over time, and that's a function of that capital, it's -- we're issuing the equity to kind of continue the improvement. And then there's a little bit of impact in the short term for under-recovered fuel that as that gets collected and the debt goes away, that also kind of adds to that upward trajectory.

So in my 5-year forecast, we get kind of in that mid-16 towards 17 range. But again, every year in the 5 years is an improving story, and still hundreds of basis points above our thresholds.

[Steven Fleishman, analyst]

Great. And my other question, just the -- I mean the -- can you just talk to this growth, particularly, I guess, in Georgia, the 9% a year sales growth, which is at least seems kind of unprecedented, at least for my [indiscernible]?

[Christopher Womack, executive]

No, go ahead, go ahead. Finish your question.

[Steven Fleishman, analyst]

I just -- I guess, just how are you differentiating kind of proposed growth projects between ones that are in your plan or ones that you're kind of holding back from because you're not sure they're going to happen? And just -- is this a conservative risk-adjusted number? Or how should I think about that? How are you doing it against your peers because it's so huge?

[Christopher Womack, executive]

Yes, it is an unprecedented growth that we continue to witness from economic development activities. And so yes, this is a very conservative look. I mean we look for -- we factor in build permits, building permits in terms of actual announcements of ground has been broken. I mean, so we look at not just companies that are forward looking and making site visits, but there's been some demonstrated commitment that they will, in fact, be building a project in the state.

So we go through those thresholds before we make those filings in terms of being -- having some certainty that these projects are, in fact, real. We've just seen unprecedented economic development activity, say, for the past 3 years. And we continue to have an aggressive pipeline. But as we go to the commission for this updated IRP, we just factored in those companies, those businesses that has clearly demonstrated and taken actions that we think of -- that shows some firmness in their participation, in their operating businesses in the state.

[Daniel Tucker, executive]

Yes. And I'll just add to that, that the momentum in the economic development activity has continued, even since filing that 2023 IRP update. And so thank goodness, we've got a filing in 2025, and we do this periodically. It's going to continue to evolve. There's a lot still lingering out there that, in our conservative nature, we're not counting on yet, but it's not unlikely.

[Christopher Womack, executive]

Yes. But Steve, this is a very conservative look as we make these decisions.

[Steven Fleishman, analyst]

And then just one last thing on this. The 9% since everybody is very focused on data center growth, like how much of it is data centers relative to manufacturing or other growth? Yes.

[Christopher Womack, executive]

Data centers represent right now, we think somewhere around 80% of that emerging load.

[Operator]

Our next question is from the line of Carly Davenport with Goldman Sachs.

[Carly Davenport, analyst]

Maybe just to start on the new 5-year plan. Could you just talk a little bit about what drove the assumptions you made around including some of that spend on the incremental resource needs in the Georgia IRP?

And then with the commission order sort of expected there in April, how would you think about updating the capital plan if it's necessary after that decision?

[Daniel Tucker, executive]

Yes, Carly, it's a great question. So -- and I think I alluded to this a few minutes ago, it really is about the velocity and magnitude of this growth that we just kind of characterized for Steve. It's right in front of us. These resources are needed sooner than later. And so we think there's -- it was reasonable to kind of break trend for us a little bit and get slightly ahead of regulatory outcome to reflect directionally what's happening.

And so just to kind of fuel the curtain back a little bit, we were very specific in what we included. If you go back and look at the proposal that Georgia Power put in front of the commission back in the fall, it included a lot of various owned resources. And what we've included in the capital plan is essentially the new combustion turbines, there's 3 of those, and then 2 specific storage projects that are kind of located near military bases in [indiscernible] Air Force base. That leaves hundreds, I think, over 800 megawatts of storage projects and a small storage or solar kind of not included in there.

We will get a decision in April, but again, as a reminder, there's a whole another process coming in 2025. So there may be a degree of clarity in April. There may be further clarity coming out the '25 process. And as those play out, we'll continue to obviously keep the investment community apprised and update our projections accordingly.

[Carly Davenport, analyst]

Great. That's super helpful. And then maybe just as we think about executing on Vogtle Unit 4. Just any insights on kind of the near-term milestones that we might get updates on that we can gauge project progress there? And then to the extent that timeline does slip beyond kind of the April that's embedded into current guidance, can you talk a little bit about some of the levers that you might have to pull there to sort of offset those impacts?

[Christopher Womack, executive]

Yes. Carly, let me start by saying with the initial criticality achieved yesterday, we continue to progress through testing and start-up. The next major milestone is thinking to the grid, and that could occur later this month. We expect Unit 4 completion during the second quarter. And as we take in account the experiences we got from last year with our Unit 3, as we look at moving through Unit 4, and we could have worked through these units -- how we work through these issues that could arise.

But we view this as a long-term investment and we'll make sure we're taking time to get it right. But right now, as we look at where we are, we are planning on the unit being online in April, and we think we have a number of weeks of margin to accomplish that objective.

[Daniel Tucker, executive]

Yes. And Carly, I'll speak to the flexibility. I mean, obviously, I mentioned earlier, we're kind of already deploying some of that flexibility to address what we expect to be a [indiscernible] today in April in service because beyond that, we've laid out, it's roughly $0.03 for every month. But that's partially why we have a range, right? I mean it's a $0.10 range out there. So it could be a function of moving us within the range for the year or depending on the circumstances as the year plays out, whether it's weather or something else, we might have some greater degree of flexibility. It's just too early in the year to really be that detailed about exactly how that might play out.

[Operator]

Our next question is from the line of Julien Dumoulin-Smith with Bank of America.

[Julien Dumoulin-Smith, analyst]

A couple of quick questions, following up on what you guys have said of late. Just on this big number on sales growth. Just to clarify, I mean, in your forecast, I know you've got this pending IRP that technically lines up against that sales. Are you seeing an improving ROE in the outlook? Or is this really underpinned at this point by just the IRP and the extent to which the IRP doesn't fully reflect that sales outlook? Is there something more to go as you work through the process? Question one, if you will.

[Daniel Tucker, executive]

So I'm not sure where you're headed with improved ROE.

[Julien Dumoulin-Smith, analyst]

Just from improving returns from the additional sales, if you will.

[Daniel Tucker, executive]

Certainly not improving returns from an overall, say, regulated utility perspective. From a -- we really view that as the opportunity to kind of put downward pressure on existing customers' rates. I mean, our objective from an ROE perspective is regular, predictable, sustainable. I think you'll continue to see it play out that way.

Just to be clear, Julien, on the sales growth that we've laid out here, so this is roughly 6% in the long term for Southern, that 9% number for Georgia Power, this is actually based on a more conservative view than what's in the IRP update because the IRP update had to put some degree of expectation for additional success from an economic development perspective so that we do stay ahead of this from a resource perspective.

It's not a huge differential, but what it also kind of reinforces is as this continues to play out, those numbers have the potential to continue to go up.

[Julien Dumoulin-Smith, analyst]

Yes. Excellent. And then just pivoting back to the FFO to debt quickly. I mean, the 17% that you guys were talking about once, I mean, what is -- has that changed at all? Just in terms of how you're thinking about pro forma Vogtle 4 coming on?

[Daniel Tucker, executive]

No, nothing's changed in terms of what I believe the financial profile supports which, again, my objectives, I've said this before, I think our parent company being a BBB+ kind of the A category for all the utilities, I think the profile we see ahead of us fully supports that.

The only thing that's changed is a slightly slower ramp-up in those metrics because of the incremental capital that we're deploying. But in terms of where we stand relative to any of our thresholds, it's several hundred basis points above any of those in every year, and every year improves.

[Julien Dumoulin-Smith, analyst]

Wonderful. And then just quickly on the reactor cooler pumps, I know there was a little bit of talk in the [indiscernible] here. What's sort of the status on [ V4 ]? And then just to the extent to which that there is some root cause impact on some of the other -- there's a need to evaluate the adjacent reactor cooler pumps, if you will. I know there's some language in the [indiscernible].

[Christopher Womack, executive]

Yes. And so yes, we've done all the analysis, we sent the pump back to the manufacturer. And we think we identified the cause of the issue, but a root cause analysis has not been performed yet. But we have tested all the other pumps. And with the new pump, we made sure there were not any similar issues, but we think we're in pretty good shape with the pumps as we go forward.

[Operator]

Our next question is from the line of Nick Campanella with Barclays.

[Nicholas Campanella, analyst]

I guess just a follow up on the question that Julien had on the root cause. I think you just mentioned the possibility of having to go look back at Unit 3 pumps in the [indiscernible]. And just what's the actual risk [indiscernible] line? And when is that no longer going to be an issue?

[Christopher Womack, executive]

I guess, man, as we have looked at the pump that we sent to the manufacturers, as we identified what we thought the issue was, we think it's not an issue with the other pumps. I mean, we test the other pumps. We assess the pump, the new pump that we installed. And we think we just have a good handle. And on these pumps, I think you consider the run time. I think that provides good color to kind of, I guess, the confidence we have in the pump and what we've identified as the issues and things we have to do to make sure we don't have similar issues as we go forward.

[Daniel Tucker, executive]

Yes. I think globally, there's 24 of these things running like a champ right now.

[Nicholas Campanella, analyst]

Absolutely. Yes, that's helpful. And then just on the capital plan, and reflecting roughly 60% of the IRP, I know that you kind of get a decision in the first half of this year. So just how do we kind of think about tweaks to the financing plan? Is it just going to be another fourth quarter update this time next year? Or is there a mid-period opportunity in the cards?

[Daniel Tucker, executive]

Look, none of these regulatory outcomes will be -- they'll all be in the light of day. I think it will be clear what's approved and what's yet to be approved. I kind of laid out what we've included already, which is those combustion turbines and 2 very specific storage projects. And so I think we'll be able to provide color along the way. We'll certainly do more formal updates every year as we normally do, but I think there'll be interim opportunities.

And the other interim opportunity that will continue to exist is we've remained extremely conservative when it comes to owning in renewables in any of our electric service territories. We also are very optimistic that, that will happen. And as that gets clarity, we'll make sure that, that's known as well.

[Christopher Womack, executive]

But you'll also see great transparency through this process, man, as the commission and Georgia works through the process, many staff is filing testimony today, and they may have a different perspective. But you'll see that process play out and that leads us to the decision in April by the commission. But you've seen these IRP processes before. So those processes will continue as we go forward, and you'll see real time kind of how it unfolds.

[Operator]

Our next question is from the line of David Arcaro with Morgan Stanley.

[David Arcaro, analyst]

Let's see. Thinking about that load growth trajectory, is 6% rate base growth still the right kind of parameter to think about longer term? 6% load growth, 6% rate base growth, is that enough to kind of handle the system strain, the generation need to strain on the T&D system over time? Or is there potential upward growth rate pressure on that rate base growth number as you get into later years of this decade?

[Daniel Tucker, executive]

Yes. Look, I think, Dave, what we've tried to imply is there certainly is upward potential here. We've remained incredibly conservative and measured in how we forecasted. We're not trying to get too far ahead of any regulatory processes. We'll get these decisions in April. We'll have a 2025 process. We believe there's more economic development activity that is likely to come to fruition.

And so given all of that, it is certainly not unreasonable that our capital budget will continue to rise to serve that incremental load. And so there certainly could be upward, using your words, pressure on that rate base.

[David Arcaro, analyst]

Got it. That makes sense. And I was wondering if you could elaborate a little bit on how you're thinking about the rate impacts, coming from that load growth? Are these -- are these low-priced new commercial customers when you're thinking about data center and manufacturing customers such that there is a lot of grid investment that has to be covered by others within the system or other opportunities here? It sounded like you kind of see the opposite where you're bringing in a lot of revenue that ends up being downward pressure on the rest of the system. So I'm wondering if you could elaborate a little bit on how you see rates progressing over time?

[Daniel Tucker, executive]

Yes. No, go ahead, Chris.

[Christopher Womack, executive]

No, we do expect to see rate decreases for our customers with these additional sales and the customer growth that we'll experience. We think that should more than offset the cost of the resources needed to serve. And so we -- affordability is something we pay a lot of attention to, and there are things we do internal. And we think that one of the benefits of this sales growth is having the opportunity to put downward pressure on rates for our customers across the board. And so that's kind of how we see it and how we evaluate each project. I want to make sure that is, in fact, putting downward pressure on rates.

[Daniel Tucker, executive]

If you think about where probably every utility company was a year ago, one of the greatest risks facing all of this was affordability. We see this as a tremendous opportunity to derisk our outlook.

[Operator]

Our next question is from the line of Jeremy Tonet with JPMorgan.

[Jeremy Tonet, analyst]

Just wanted to come in, I guess, on the debt funding side, if I could start. I understand the Georgia Power debt funding increase driven by the IRP there. But at the holdco, just wondering what's the main contributor to the kind of big step up there of expected debt issuance? It looks like several billion in the 2024 plan now, and I think it was much less than that before. So just kind of curious, I guess, on the holdco debt issuance step-up expectations.

[Daniel Tucker, executive]

Yes. So in terms of the change kind of planned versus plan, Jeremy, it's largely driven by the CapEx as well, right? I mean, ultimately, the parent company is funding Georgia Power's equity contribution. And while we're financing that partially with new equity through our plans, certainly -- it's certainly not all being funded directly with new shares. So there's incremental debt there.

And then just the overall magnitude of the parent company issuances is largely driven by maturities. If you look a couple of pages beyond, there's, I think, over $5 billion worth of maturities in the same time period. So the amount that's kind of new money is much smaller.

[Jeremy Tonet, analyst]

Got it. And just curious if you're able to share any thoughts on the Georgia PSC elections here. Just as far as from what you guys see inside the state for those pending elections. Do you expect the ballot in the elections to happen before the November general election? Or do you think it all kind of comes in November? Just kind of curious, I guess, how you think timing could shape up there?

[Christopher Womack, executive]

I have no idea. I mean that matter is still in the court system. And so we'll observe it, just like you are. But I have no insight into how that's going to play out at this time.

[Jeremy Tonet, analyst]

Got it. And just a quick last one, if I could. If you guys are running an RFP process in the Georgia IRP, and how you think Southern Power -- Georgia Power stacks up, I guess, in RFP process there?

[Daniel Tucker, executive]

Look, just in answering that, generally, Jeremy, I mean, and we've said this before, the IRA is going to position all of our electric utilities to be much more competitive in these kind of self-build options when it comes to resources. Whether or not it plays out in this particular RFP or it's a subsequent RFP or it's a customer-specific siding, those things will happen over time. But it's also likely a function of something later in the plan. So not a '24 to '25, maybe not even '26 kind of resource. We're talking really towards the back end of the plan where that becomes a real opportunity.

[Operator]

Our next question is from the line of Durgesh Chopra with Evercore.

[Durgesh Chopra, analyst]

Just -- is there a way for us to give us a range? And I understand if you can. But just in terms of the current capital plan, was that [indiscernible] Georgia IRP? What I'm after is what like looks like a successful outcome there as we await the April decision? Just trying to see what is baked into the plan and what to look for in that April decision?

[Daniel Tucker, executive]

Yes. It's a fair question, Durgesh. But this is where I want to stop short of getting ahead of any regulatory processes here. We've kind of characterized in terms of the megawatts that we've included that it's roughly 60% of the kind of brick-and-mortar megawatts that were proposed.

And so the best way for me to characterize it without getting ahead of anything is just say that the incremental capital associated with what we didn't include won't be lost in the rounding. It's a pretty meaningful number.

[Durgesh Chopra, analyst]

Understood. I appreciate that, Dan. And then as we think about just along those lines, incremental CapEx upside. Is there a rule [ of tons ] again, just for our models, high level, how should we think about it getting financed? You've got some strong load growth. But when we're thinking about higher CapEx, what percentage could be equity finance versus debt? Any sort of guidance there?

[Daniel Tucker, executive]

Yes. I think what we've done with this update is pretty representative of how we think about additional opportunities. So we added $5 billion of capital of this plan, let's call that $1 billion a year on average. We've added roughly $350 million of equity every year.

So that 35% to 40% range is kind of representative of our consolidated equity ratio and represents pretty well what we think is necessary to maintain, if not marginally improve, but really just maintain the credit profile that's already in a really good place.

[Operator]

Our next question is from the line of Andrew Weisel with Scotiabank.

[Andrew Weisel, analyst]

A couple of quick follow-up questions, really. One, just to clarify, the equity of $350 million per year. That's through '26 in the slides. It kind of sounds like you're saying that's through '28. Should we think of that as just a run rate of $350 million per year going forward and potentially more if there's more CapEx?

[Daniel Tucker, executive]

Yes. So what that $350 million represents is us turning on what we refer to as our internal plan. So it's issuing new shares through our DRIP, through our 401(k), and that's about the run rate. And it just happens to match up pretty well with the needs associated with the $5 billion of incremental capital.

We typically also maintain an at the market plan as flexibility. And so to the extent there's incremental CapEx that emerges, which again, is certainly reasonably possible, given everything we've described, the [ ATMs ] the source that we'll tap into to help finance that.

[Andrew Weisel, analyst]

Okay. Very good. Next, on the CapEx update. Just to clarify, and sorry if I missed it. Does that include anything for Alabama solar? Or would that be incremental?

[Daniel Tucker, executive]

Yes. No, that would be incremental. There's still no new rate-based solar included. So we've remained conservative in terms of our projections there in the outlook.

And hey, just going back, Andrew, real quickly to the equity question. Just to kind of point out, since maybe it wasn't clear because we only put a 3-year financing plan out there, yes, leaving the plans on every year. And on average, kind of the average increase to shares every year is a fraction of a percent. So that's also kind of in the rounding.

[Andrew Weisel, analyst]

Sounds good. One last one, if I may. Dividend growth, you've been very consistent at $0.08 per share, about 3%. Given the CapEx outlook, is there any point in time at which you might reconsider the trajectory?

[Daniel Tucker, executive]

Another terrific question. So we had kind of alluded to the possibility of reevaluating the rate of dividend growth once we got Vogtle 4 into service, and kind of had -- we're kind of in a steady state and into the kind of below 70% somewhere.

Given our current circumstances where were we are, in a place of issuing equity, perhaps one of the most efficient sources of equity is to remain modest in the way we continue to increase the dividend. So I think for the foreseeable future, the trajectory we've been on is a reasonable expectation for the trajectory will remain on.

[Operator]

Our next question is from the line of Anthony Crowdell with Mizuho.

[Anthony Crowdell, analyst]

If I could just pitch up one quick one on the data centers and I guess, the load growth. It seems like we finally are going to get some load growth in this sector, and we're all looking at data centers has helped. But it seems that maybe the rate design question, we're all trying to figure out typically a lower-margin customer, large investment requirement. And earlier, you touched on maybe helping with some customer bills.

I just -- my question is, if you go deeper into that on -- is it going to be bigger bill impact and bigger fights and rate design or you don't think that's an issue?

[Christopher Womack, executive]

I mean there's always -- there will always be issues. But I think as we look at increased sales, as we look at growth in customers, and then as we work with these new customers, we think this provides us the opportunity to have downward pressure on rates. And so we will work with [indiscernible] on these customers in terms of their pricing.

But once again, I just go back to the fundamentals of increased sales opportunity and this customer growth, how that supports the opportunity for us to put downward pressure all across our customer base to see downward pressure on rates. I mean, we'll evaluate each customer to ensure that, in fact, does happen, that they put downward pressure on overall rates across the company.

[Daniel Tucker, executive]

Yes. And Anthony, what it appears a lot of these data centers are beginning to do is prioritize reliable, resilient service over many other things. That gives us the opportunity to price it appropriately for the benefit of everyone else.

[Christopher Womack, executive]

And we'll look at the size, the demand, the timing, there are other factors that will go into making sure that we price service appropriately to those customers.

[Operator]

Our next question is from the line of Angie Storozynski with Seaport.

[Agnieszka Storozynski, analyst]

Great. I guess -- I know that everybody is asking questions on data centers, but I'm just -- just again, maybe just taking a step back. So when somebody wants to locate a data center in your service territory, do they just get connected to the grid? Or do they develop their own power sources? Do you actually see that they, for instance, have some preference for non-emitting resources. Do they use you more as a backup power source.

Again, just -- again, trying to understand the dynamics of those data centers being added to [indiscernible] in Georgia.

[Christopher Womack, executive]

Angie, there are a lot of considerations that go into that decision. And yes, we want to connect them to our grid. And yes, we'll have conversations with them about renewable resources and the mix. But those are conversations that we do have with them, recognizing what upgrade may be made on the system, locations, where they are. So there are a lot of kind of really detailed conversations, engineering conversations that go into making those final decisions that also then ultimately impact the pricing for that service.

[Agnieszka Storozynski, analyst]

But again, it's not self-supply, right? So they use Georgia Power, for example, as a first source of power.

[Christopher Womack, executive]

Absolutely. Yes, that's correct.

[Agnieszka Storozynski, analyst]

Okay. And then secondly, again, I know this question has been asked over and over. Just hard to believe that the load growth is not having a bigger impact on your earnings growth? And again, I don't even imagine this is like an emerging markets sort of pace of load growth, especially for Georgia and those outer years, and yet there's no impact from -- again, from our vantage point on your earnings growth. Is it just because the interest expense drag is so pronounced that it absorbs the help that you're getting from higher load growth?

[Daniel Tucker, executive]

Yes, Angie, it's a few things. Certainly, relative to where we were a year ago, and I think we've said this before, in a higher for longer environment, certainly, interest is a bigger headwind going forward. But the bigger dynamic in your question is around what we're actually investing in to serve this load or why we're investing. So keep in mind, the 6% for Southern Company sales growth and 9% for Georgia Power, that's kilowatt hour usage. That's the growth in the total kilowatt hours used.

What we invest to do is serve the peaks. And so that looks a little different than the 24/7. We've got a lot of resources. We just may have to incrementally add resources to serve the peaks, and that's what you're seeing largely in the capital deployment. And net-net, we're comfortably in that 5% to 7% growth range.

[Operator]

Our next question is from the line of Paul Fremont with Ladenburg.

[Paul Fremont, analyst]

Congratulations on the good quarter. Just to clarify, if you were not to get sort of the higher growth rate in sales after 2025, would that have an impact or change -- potentially change your 5% to 7% growth target?

[Daniel Tucker, executive]

No.

[Paul Fremont, analyst]

Okay. Great. And then I noticed that the gas capital spending is roughly unchanged. Can you sort of share with us what you're anticipating is going to happen in Illinois? And is there spending that's being shifted from Nicor to any of the other gas [indiscernible]?

[Christopher Womack, executive]

And yes, I think you got it just right. I mean, we see the opportunities to have some increased capital spending in Atlanta around the operations here in Georgia. So we think that allows that gas investments to be stable going forward. So I think you've spoken to it just right.

[Daniel Tucker, executive]

Yes. And any changes in Illinois are modest, to be fair. I mean -- and the outcome there for us, while disappointing, also provided a bit of a road map as to how to be successful going forward in navigating that jurisdiction in terms of just the things we've got to make sure we do as we deploy capital.

And keep in mind, a huge, vast majority of the capital that's deployed for Nicor Gas is compliance related. And so there's only so much to kind of not do in the first place.

[Paul Fremont, analyst]

Great. And then my last question. I mean, generally speaking, when we think of EPS growth, with respect to rate base growth, there tends to be dilution to the rate base to the level of rate base growth because a portion or the equity portion is funded either by parent debt or by parent equity. So can you help us sort of understand, at 6% rate base growth, is it possible for you to achieve? Or how would you achieve sort of the high end of your growth target?

[Daniel Tucker, executive]

Yes. Great question, Paul. So again, we were at 6% growth last year in rate base. We've added $5 billion of incremental capital to that. It's -- we kind of characterize it as approximately [ 6 ], but then also the shares we're issuing, and I think I mentioned this earlier, was that equates to a fraction of a percentage and it's kind of just in the rounding. We feel very comfortable that net-net, how all these things stack up is a conservative achievable forecast.

[Operator]

Our next question is from the line of Travis Miller with Morningstar.

[Travis Miller, analyst]

You've answered almost all of my questions. I do want to follow up on that dividend, it was one of my questions.

Just to clarify what you said, you would expect the dividend growth to stay below earnings growth for at least a couple of more years. Did I hear that correctly?

[Daniel Tucker, executive]

Yes. Yes, Travis. You did. And so again, our cadence of growth has been $0.08 per year for several years. I think it's reasonable to expect that to continue, of course, it's all subject to the Board's oversight and approval.

But what that will do is take us during this high period of CapEx, which hopefully goes on for a very long period of time, brings us comfortably down into the 60s from a payout ratio perspective. And so that's a good place to be, and we'll evaluate it every year with what the forecast looks like and what's appropriate. Right now, I think the reasonable expectation is that continued modest growth, which is just below 3%.

[Travis Miller, analyst]

Yes. Okay, very good. And then obviously, a lot of talk about the demand growth. Put another way, what does demand growth mean for operating cost growth? Is there a tight correlation there if you get 6 or whatever percent annual demand growth? Should we also see a similar increase in operating costs? Or is there not a link there?

[Daniel Tucker, executive]

Yes. There's certainly a relationship, I wouldn't call it a correlation, but to the extent we're building a new gas plant, certainly, that comes along with incremental O&M to the extent we're building new transmission distribution lines, there's some maintenance component to that. But that's also part of the cost structure that we're ensuring these new rates and revenues will cover such that the net result is the opportunity to put downward pressure on the existing rates.

[Operator]

Our next question is from the line of Ryan Levine with Citi.

[Ryan Levine, analyst]

With Vogtle's COD targeted for April freeing up some management attention and the personnel changes that were highlighted, do you see any meaningful opportunities to reduce O&M spending below the current guidance as time progresses? Or are these initiatives tabled, given all the opportunity in Georgia by the IRP process?

[Christopher Womack, executive]

No. I mean we're always looking across our hand and finding ways to be more efficient. I mean, so there's ongoing efforts to -- once again, as we look at affordability, I mean, we think about the opportunities to keep -- to drive rates from pricing down because of sales growth and because of customer growth, but also making sure that we're focused on looking internal in terms of being more efficient and finding ways to also drive down the cost of our O&M expenses.

Also making sure we take full advantage of fuel pricing. I mean you see where natural gas prices are now. So looking across the entire portfolio, I mean, that is an ongoing continuous exercise that we'll always focus on in terms of finding ways to drive down O&M and find ways to be more efficient.

[Daniel Tucker, executive]

Yes. And just as a nuance, all the costs associated with completing Vogtle 3 and 4 is a capital cost. And so those aren't O&M costs that are an opportunity to reduce.

[Christopher Womack, executive]

Yes. And the last thing I'd add, even though we've had this focus on Vogtle, but it hasn't kept us from paying attention to the fundamentals, to making sure that we provide the service that customers expect, but also being focused on the cost of our product.

[Ryan Levine, analyst]

Okay. And then what's the peak hour [indiscernible] growth forecast in Georgia? And how much lower is that than the total kilowatt hour growth number that you cited? And as you're looking to execute on this plan, how -- are there any limitations with supply chains that could constrain growth opportunities via the IRP process?

[Daniel Tucker, executive]

Yes. Look, on supply chain, I think we're in terrific shape, given our scale and just -- we've kind of seen this coming for a little while to the point where we can deploy the resources needed.

On your peak question, we'll have to follow up with you on that, Ryan. Just let's connect with the Investor Relations team and get you an answer then.

[Operator]

Our next question is from the line of Paul Patterson with Glenrock Associates.

[Paul Patterson, analyst]

Congratulations on this these opportunities that you guys have. Just with respect to the data center stuff, I mean, a, you did indicate in your prepared remarks, it seemed that this was based on actual sort of activity, physical construction activity, et cetera. Is it correct to assume that these guys -- these data centers, et cetera, have a price in mind? I mean, they wouldn't be doing this. I mean, obviously, they're using a large amount of electricity. It's part of the economics of their determination to move that this -- that they know how much they're going to be essentially paying for power if they're doing this, correct?

[Christopher Womack, executive]

I think there is -- yes, I mean, they may not know exactly what the price will be. But once again, as we sit with them, understanding their needs, what their desires are and the level of service, I mean that all goes into consideration of what the ultimate price will be. I mean, the value, location, reliability, resiliency, all of those things go into consideration as we kind of price these projects out. And so that's a part of the negotiation, that's part of the conversation that we have with it.

[Paul Patterson, analyst]

Okay. In some jurisdictions, because they have their own backup power because they have to be there in case there is an outage or something, they have to get approval from regulatory commissions, their respective state regulatory commissions. Is that the case in Georgia?

[Christopher Womack, executive]

No. I mean, like I said, I mean, we will -- I mean.

[Daniel Tucker, executive]

Yes, there's some customer-sided programs that have been proposed in the IRP, Paul, that those are being evaluated and those kind of serve the same purpose, but it's not the dynamic that you're describing in those other states.

[Paul Patterson, analyst]

Okay. Then just roughly speaking, when we're talking about the average data center rate versus the system rate. Is there a rule of thumb as to where that kind of is? Do you follow what I'm saying? In other words, I mean how much of a percentage of the average system rate for Georgia Power, let's say, with a data center customer be roughly, I mean, just roughly speaking, you're getting?

[Christopher Womack, executive]

I don't think so. I think we may be better informed as we bring some more projects online. Right now, I think -- I don't think that would be the case. And plus it could be trade secrets as well, so.

[Paul Patterson, analyst]

Okay. Then just finally, when we're looking at '26, '27 and '28 in that 9% number, for instance, for Georgia Power, does that go up a lot? In other words, is it kind of -- I mean, is '26 -- is '28 a lot higher than '26, if you follow what I'm saying? In other words, it's a 3-year period, the number jumps up a lot in that period? Do you follow what I'm saying? In other words, is it roughly the -- ratable over that period of time? Or is this sort of a hockey stick in terms of what you see in terms of demand?

[Daniel Tucker, executive]

Yes. It's fairly ratable, Paul. It's obviously not perfectly linear by any means. But that -- the significant load really begins to come in, in, say, late '25 and into '26, which is why a lot of the resource proposals you see at Georgia Power are to really serve the '26, '27 winter peak to make sure they're in place for that, and then it continues to grow from there.

[Operator]

Thank you. And that will conclude today's question-and-answer session. Sir, are there any closing remarks?

[Christopher Womack, executive]

Again, let me say, Southern Company had an exceptional year in 2023. And I am really excited about the future of this company. Let me thank everybody for joining us today, and wish everybody a happy day, and thank you very much.

[Operator]

Thank you, sir. Ladies and gentlemen, this concludes the Southern Company Fourth Quarter 2023 Earnings Call. You may now disconnect. Have a good day.

[Christopher Womack, executive]

Thank you very much.