Earnings Call Transcript - SO Q1 2022

Operator, Operator

Good afternoon. My name is Kelly, and I will be your conference operator today. I would like to welcome everyone to The Southern Company First Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. I would now like to turn the call over to Mr. Scott Gammill, Investor Relations Director. Please go ahead, sir.

Scott Gammill, Investor Relations Director

Thank you, Kelly. Good afternoon and welcome to Southern Company’s first quarter 2022 earnings call. Joining me today are Tom Fanning, Chairman, President, and Chief Executive Officer of Southern Company; and Dan Tucker, Chief Financial Officer. Let me remind you 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.

Tom Fanning, Chairman, President, CEO

Thank you, Scott. Good afternoon and thank you for joining us today. As you can see from the materials we released this morning, we reported strong adjusted earnings results for the first quarter ahead of our estimates. The economies within our Southeast service territories are among the best in the United States, and we believe we are well-positioned to achieve our financial objectives for 2022. Before turning the call over to Dan for a more detailed look at our financial performance, I will first provide an update on recent progress at Plant Vogtle units 3 and 4. Importantly, the projected completion timeline and capital cost forecast for both units are unchanged from the updates that we provided last quarter. Since that time, we've seen sustained progress consistent with our expectations for each unit. The NRC completed its follow-up inspection this week and issued its final supplemental report. The inspection verified that Southern Nuclear effectively implemented the corrective actions and remediation efforts at the site. No additional findings were identified during the follow-up inspection and the findings identified last year have been closed. With this step complete, the Vogtle site returns to the baseline inspection program. Let's focus now on Unit 3. We continue to progress towards receipt of the NRC's 103G letter. All necessary systems have been turned over from construction to testing, and nearly all the inspection records necessary for submission of the remaining ITAAC are now complete. Associated with this progress, 70 ITAAC were submitted to the NRC since our last earnings call, and 53 ITAAC remain. Of these remaining ITAAC, the last 30 to 40 are expected to be completed just prior to submitting the all ITAAC complete letter to the NRC in support of the 103G letter. Considering our progress over the last two months, we have provided an updated ITAAC completion schedule. Following receipt of the 103G letter from the NRC and as Unit 3 continues its transformation from construction to operations, our efforts will be focused on completing the remaining inspection records, system turnovers, and the necessary preoperational and component test required to load fuel later this year. Turning to Unit 4. Direct construction is now approximately 94% complete. Unit 4 continues to make progress in advance of cold hydro testing and hot functional testing. We believe we have the resources we need on site for Unit 4 and have a clear plan for transitioning additional personnel from Unit 3 as we continue our focus on increasing productivity and ensuring first-time quality. Overall, construction completion has averaged 0.9% per month since the start of the year, supportive of a September 2023 in-service and ahead of the 0.4% average projected to be needed through the year-end to achieve a December 2023 in-service date. For electrical production specifically, progress on Unit 4 is meeting our current expectations. However, electrical production will need to increase to support our projected in-service dates. The schedule changes announced last year required Vogtle 3 and 4 owners to affirmatively vote to proceed with the project, which, in late February, they unanimously voted to do. This decision underscores the importance of the 2,200 megawatts of baseload carbon-free energy, which will be vital to increasing the availability of net-zero resources for customers across the state. We value our partners on Vogtle 3 and 4 and the relationships that we have had with them across multiple endeavors for decades. We look forward to our continued partnership as we work to bring Vogtle units 3 and 4 safely online, providing Georgia with a reliable, carbon-free energy resource for the next 60 to 80 years. We are pleased with the progress at the site over the past few months and incredibly proud of the entire team at Vogtle units 3 and 4 for their relentless commitment to completing this important project safely and with the utmost quality. Dan, I'll now turn the call over to you.

Dan Tucker, CFO

Thanks, Tom, and good afternoon, everyone. As Tom mentioned, we had a very strong start to the year. Our adjusted EPS for the first quarter of 2022 was $0.97, $0.01 lower than last year and $0.07 above our estimate. The primary driver for the variance to last year was higher non-fuel O&M, which reflects a trend towards more normal operating conditions relative to significantly reduced levels during the first quarter of 2021, and then largely offset by constructive state regulatory actions and robust customer growth at our state-regulated utilities. When looking at adjusted EPS compared to our estimate for the quarter, the main drivers were continued strong customer growth and cost control. A detailed reconciliation of our reported and adjusted quarterly results as compared to 2021 is included in today's release and earnings package. Turning now to retail sales in the economy. In the first quarter, weather-normal retail sales were approximately 1% higher than first quarter 2021. This increase reflects stronger commercial and industrial sales from the continued economic recovery in our service territories, somewhat offset by lower residential sales as schools and businesses continue to transition from remote environments to hybrid or in-person modes throughout the quarter. We also continue to see robust customer growth with the addition of nearly 11,000 residential electric customers and over 7,000 residential gas customers during the quarter. This level of customer growth is driven by a strong labor market recovery and our Southeast service territories are expected to reach pre-pandemic levels of employment later this year. Additionally, the Port of Savannah, which is the fourth-largest port in the nation and a major contributor to jobs and economic growth in Georgia, experienced a 3% year-over-year increase in container volumes in the first quarter of 2022, ahead of 2021's record pace as elevated U.S. consumer demand continues to drive record cargo levels. Recent figures from the Georgia Port Authority also signaled that congestion is easing with only a handful of ships currently at anchor outside of the Port of Savannah, down from a peak of around 30 in mid-September of last year. Additionally, the recent approval of the Garden City Terminal West expansion is expected to increase the Port of Savannah's annual capacity by more than 15% by the end of 2024. The economic development pipeline in our service territories remains robust. In the first quarter of 2022 compared to the first quarter last year, economic development announcements in our regulated electric service territory saw a 168% increase in payroll additions and a 66% increase in business investment, respectively. The first quarter closed with 230 active projects in the pipeline for the State of Georgia alone, which is well above historical averages, and new job additions in Georgia exceeded 7,000, an all-time high for the first quarter of the year. We remain encouraged by the economic trends that we are seeing as we continue to monitor the implications of supply chain constraints, labor force participation, and inflationary pressures on our outlook. And I have two final topics before turning the call back over to Tom. First, for the second quarter, our adjusted EPS estimate is $0.80 per share; and second, I'd like to highlight our recent dividend increase announcement. Earlier this month, the Southern Company Board of Directors approved an $0.08 per share increase in our common dividend, raising our annualized rate to $2.72 per share. This action marks the 21st consecutive annual increase, and for three quarters of a century dating back to 1948, Southern Company has paid a dividend that was equal to, or greater than, the previous year. This remarkable track record reinforces Southern Company as a premier sustainable investment. And as we mentioned on our last call, we believe once Vogtle 3 and 4 are completed, our Board will have the opportunity to consider accelerating the rate of dividend growth, further supporting our objective of providing superior risk-adjusted total shareholder return to investors. Tom, I'll now turn the call back over to you.

Tom Fanning, Chairman, President, CEO

Thanks, Dan. Sustainability has always been a top priority for Southern Company. In recent years, our plans and progress have received heightened interest from our investors, customers, communities, employees, and other stakeholders. We have a long, strong history of constructive engagement with all stakeholders, and we are excited about the recent release of a dedicated sustainability website, which provides additional transparency on core environmental, social, and governance topics. This new site highlights the tremendous work underway across our company to help us reach our sustainability and business objectives, as we seek to build the future of energy. Additionally, just this week, we published a report outlining our just transition principles and look to continue enhancing our disclosures. We know that stakeholders are increasingly interested in information related to our sustainability efforts, and we remain committed to open and transparent communication. In closing, I'd like to take a moment to recognize the great job that employees throughout Southern Company do each and every day. National Lineman Appreciation Day, which was observed this month, specifically recognizes the important contribution of line workers and those supporting them to our country. From extreme heat to bitter cold to answering the call of those that need thousands of miles away for days and weeks at a time, the hard work and unwavering dedication that these men and women display, day in and day out, is truly inspirational. Moreover, last month, the Edison Electric Institute and the International Brotherhood of Electrical Workers presented the prestigious Edwin D. Hill Award to Alabama Power and the IBEW System Council U-19. Through the National Utility Industry Training Fund and the electrical training ALLIANCE, Alabama Power and the IBEW are providing current and prospective employees with the appropriate training necessary to install and maintain the fiber infrastructure that enables grid automation and resiliency and improves community access to broadband. It is an honor to receive this award, and we remain committed to continued support and investment in our workforce to ensure that our employees have the skills and training needed to successfully meet the ever-evolving needs of the customers that we have the privilege to serve. Thank you for joining us this afternoon. Operator, we are now ready to take your questions.

Operator, Operator

Thank you. Our first question comes from Shahriar Pourreza with Guggenheim Partners. You may proceed with your question.

Tom Fanning, Chairman, President, CEO

Shar, how are you? Shar, are you there? Are you on mute? If you do, you owe us $20. Operator, I don't hear Shar. You want to go to the next question?

Operator, Operator

Yes, certainly, one moment. Our next question comes from Julien Dumoulin-Smith from Bank of America. You may proceed with your question.

Julien Dumoulin-Smith, Analyst

Thanks for the time and opportunity. Appreciate it. Thanks for the comments too. So just on Unit 4, I just wanted to talk a little bit about productivity here. How is that trending versus historical and your own expectations? And then more specifically, if you can, just given all the comments about inflation and specifically the labor environment, what exactly are you seeing there? And just both on the availability of literally being able to get fuel and then is the cost of those individuals?

Tom Fanning, Chairman, President, CEO

Yes. I think simply, Dan can fill in some blanks here. But Unit 4 remains on track with our expectations. We are consistent with our expected timeframes and budgets; all good in that regard. I think we gave you the data that suggests that the 0.9% kind of average monthly increase in construction is consistent with a September timeframe and is in advance of better than the 0.4% that we need to hit the year-end. So that's your three-to-six-month stuff. Importantly, as we said in the script, I just want to make sure you know, all of our production for Unit 4 is consistent with our expectations. We are moving people from 3 to 4. And so, we expect their productivity and their production to increase over time. So consistent with our estimates, we need to increase. We have plans to move people over to effectuate that increase. With respect to the inflation and pay, we frankly went over that here getting ready for this call. We believe we're still top decile pay for the Southeast, and we feel like most of that risk is behind us. Dan, do you want to add anything else?

Dan Tucker, CFO

Yes. I would like to emphasize that we have a comprehensive plan in place for transitioning the electric craft from Unit 3 to Unit 4 as we move forward. As you would expect, we are applying all the lessons learned from Unit 3 to enhance our productivity in Unit 4.

Tom Fanning, Chairman, President, CEO

One last point there. Attrition is at normal levels. So it's progressing as we expected.

Julien Dumoulin-Smith, Analyst

Excellent. Thank you, guys. And then just if you can comment here on the tender timeline with the co-owners, that looks like it's coming up here in mid-June and mid-August. How should we think about the timing for resolution of the disagreements around the baseline costs, COVID costs, before that window opens in the middle? How will that resolution be communicated? And what are your expectations today?

Dan Tucker, CFO

Julien, I don't want to dive too deep into this. That's a conversation that frankly just needs to take place in the right form with us and our co-owners. As Tom mentioned in our prepared remarks, these are partners that go back with us decades, and we have a track record of resolving any sort of disagreements constructively. We'll let this play out over the course of the year. The timeline you referenced is a 180-day clock that started back in March just to, kind of formalize that. That's certainly a backdrop to these discussions. But let's let that play out on its own throughout the rest of the year.

Tom Fanning, Chairman, President, CEO

Yes. And you should know that this is not a discrete kind of engagement we have with our co-owners. I was with them last week at the site. You should view us as having a real-time conversation here. Anything else, Julien?

Julien Dumoulin-Smith, Analyst

I got more, but I'll let other folks jump in here. But thank you, guys.

Tom Fanning, Chairman, President, CEO

All right. Feel free to jump back in, if you like. Thank you for joining us.

Julien Dumoulin-Smith, Analyst

Good luck, guys.

Tom Fanning, Chairman, President, CEO

Yes, thank you.

Operator, Operator

Our next question comes from Steve Fleishman with Wolfe Research. You may proceed with your question.

Tom Fanning, Chairman, President, CEO

Hey, Steve.

Steve Fleishman, Analyst

Hi, everybody. Hi, Tom. Hi, Dan.

Tom Fanning, Chairman, President, CEO

Let me quickly say that I want to compliment you on your call to action here. I thought that was really well done. Good job. I'll share that with our folks as well.

Steve Fleishman, Analyst

Of course. Now that you mentioned it, I'm curious if you're hearing anything from D.C. that indicates anyone might actually listen and take action on the slimmed-down BBB or other energy policies.

Tom Fanning, Chairman, President, CEO

I'm sure you didn't notice my brief comment on Squawk Box this morning. One of the headlines from the media was about the need for the United States to unleash the American energy economy. We have been discussing this with individuals like Gene McCarthy and Secretary of Energy Jennifer Granholm and others. This is an ongoing conversation. The Senator mentioned that there are many good ideas. The challenge we face in Washington right now is reaching consensus. How can we get the right number of people to agree on the right number of issues and accomplish this in a timeframe that is ahead of the November elections? I believe people understand the issue, especially now. With Russia using its energy policy as a weapon, it's time for the United States to take action.

Steve Fleishman, Analyst

I hope they do. My second question relates to your diverse energy mix, which includes gas, coal, renewables, and nuclear. I noticed you included data in your slide deck that highlights this mix and shows that while gas prices have increased significantly, your renewable metrics remain fairly consistent. Could you provide some insight into why there hasn't been more of a shift away from gas?

Tom Fanning, Chairman, President, CEO

Well, I think it’s a little…

Steve Fleishman, Analyst

We see more coal…

Tom Fanning, Chairman, President, CEO

Yes, we've maintained a positive relationship with our state regulators. In the past, we implemented hedging programs, and currently, about 30% of our natural gas consumption is hedged at approximately $3 per million Btu. This has positively influenced our dispatch curves, likely making them more favorable than expected due to the hedging program. As we've mentioned many times over the years, these benefits ultimately go to our customers, and we do not profit from this. Dan, do you have anything to add?

Dan Tucker, CFO

Yeah, a couple of things. So one thing that is occurring, Steve, is we are being a little conservative might be the right word in terms of looking towards our peak season in the summer in our electric business and just making sure that we're holding on to enough coal there as well. So there are times when we're we might have otherwise switched the coal but because we're looking ahead. And what's behind that, and I think you may have touched on a little bit of this in your report, transportation of energy is one of the things that is certainly a hot topic. And frankly, we don't have enough of. People talk a lot about natural gas pipes on coal, it's obviously with the rails. And with the lack of available personnel and other things, rails are having to reprioritize their own train sets and personnel and frankly, coal is not at the top of their list right now. And so we're just having to be thoughtful about how we do that.

Tom Fanning, Chairman, President, CEO

The good news there is that the flagship, if you will, of our coal units is Plant Miller in Alabama. It is the cheapest best controlled plant, it has plenty of coal for the summer. So that one is in good shape. The other thing that I just want to make sure people here loud and clear. In no way does this negatively impact our long-term objective of achieving net-zero by 2050. You have to understand that long-term strategy should be robust and be able to manage the exogenous factors that change our plan day-to-day. Mike Tyson, you have a plan until you get hit in the face and then what happens. Certainly, the tactics will vary depending upon what's happening in the worldwide energy market. But our long-term strategy remains intact.

Steve Fleishman, Analyst

Great. One last question separately on Vogtle. And so when you made the update at year-end to the schedules, it mainly seemed to be related to the paperwork issues with the electrical contracting, which seems to be getting resolved. So other than that issue, is there anything else that we should be most focused on in terms of getting to the goal line of fuel load?

Tom Fanning, Chairman, President, CEO

Sure. If I could rephrase your question, it’s similar in nature. Currently, my main concern regarding Vogtle 3 specifically is the ITAAC situation, which appears manageable. We have 53 remaining ITAAC, and we expect to need about 30 to 40 to complete the process. This work will unfold in a somewhat uneven manner as we submit the request for the 103G letter. Overall, it seems manageable. Reaching 103G is always a challenge, and we don’t take anything for granted, as timing is a variable we need to consider. However, that aspect seems to be in decent shape. My greater concern is the tasks that need to be completed before fuel load. These tasks cover various areas that aren’t primarily related to nuclear safety as the 103G tasks are. Examples include the fuel transfer system, aligning electric buses throughout the facility, and general demobilization efforts. This includes removing temporary lighting for permanent fixtures, taking down scaffolding, closing off rooms, and preparing them for a pristine operating condition. A lot still needs to be accomplished, and only a couple of system turnovers remain. There’s still much work ahead, and I believe this task is currently more critical than reaching 103G. Additionally, I’m concerned about the transition from fuel load to full operation, particularly regarding the follow-on steam cycle and the seamless integration of the digital controls. Those are the primary issues on my mind right now. Dan, would you like to add anything?

Dan Tucker, CFO

Yes. I think it's important to understand, as you hear Tom describe what is necessary to get the fuel load and the things we're focused on there, that is largely concurrent work with the work we're doing to get to 103G. It's not sequential. It's not get to on first and then to the other. We're doing those things on parallel paths.

Tom Fanning, Chairman, President, CEO

Yes. And that's what I tried to be pointing and say now to fuel load. And the other thing that we have done, we brought a guy to the site, Pete Sena, who is our Chief Nuclear Officer; he runs our fleet. And so we've added another senior member to the team, as we think about moving from a construction environment to an operating environment.

Steve Fleishman, Analyst

Great. I remember him from PSEG. Great. Thank you.

Tom Fanning, Chairman, President, CEO

Thanks, Steve. He is terrific. Next question.

Operator, Operator

Our next question comes from Angie Storozynski with Seaport Global. You may proceed with your question.

Tom Fanning, Chairman, President, CEO

Hey, Angie, always glad to have you with us.

Angie Storozynski, Analyst

Thank you. Thanks for having me. So, I'm just wondering if you could give us any sense of what to expect from the upcoming rate case in Georgia and also how this new commodity price environment might have changed the perception of your nuclear plant under construction, both for the regulators, politicians in Georgia, and the co-owners of the project?

Tom Fanning, Chairman, President, CEO

Yes, Angie, you know that we won't disclose any details regarding the regulator ahead of time. We'll submit our filing at the end of June, at which point we will address all the issues related to the rate case. It's worth noting that the issues in the triennial rate cases, as they've been historically since around 1995 when we first submitted our Triangle rate cases, will address matters separate from Vogtle. These issues will focus on the fundamental operations of the system. We have always been treated fairly and maintain a constructive relationship. Whenever any challenges arise, we work through them. I expect that this kind of process will continue.

Dan Tucker, CFO

Yes. I would think about it, to a large extent, a lot of the capital items, in particular, are a continuation of programs introduced in the 2019 rate case, things like grid investment and Ash PON programs. So, you'll see those carried forward, just updated.

Tom Fanning, Chairman, President, CEO

Yes, but you won't expect any curve policy here. This is normal stuff for us.

Angie Storozynski, Analyst

Okay. And then on the appeal of Vogtle now that's – there's this global recognition that there has to be more of a diversification of power sources and that gas might not be the answer for everything.

Tom Fanning, Chairman, President, CEO

Absolutely. Angie, look, when you think about the energy dispatch price of Vogtle, it's going to be at about $1 per million BTU as compared to, say, a $7 dispatch price or even higher potentially of the gas fleet. Look, this thing from a dispatch standpoint is going to look like a champion. And by the way, it's carbon-free. And by the way, it's going to be probably the most reliable and safest plant. I don't want to be hyperbolic here, but it's going to be a really good asset for this state, for the Southeast, and for the nation. Look, I think we are all feeling very good about its positioning in the future transition of the fleet for the Southeast.

Angie Storozynski, Analyst

Can you discuss the sourcing of uranium and nuclear fuel in general, including processing and enrichment, and whether it relies on any sourcing from Russia?

Tom Fanning, Chairman, President, CEO

Well, you answered your own question. I think our – we moved away from Russia as a system some time ago. And we're so glad we did. We have no exposure to Russia.

Angie Storozynski, Analyst

Not even through like indirect exposure to 10x?

Tom Fanning, Chairman, President, CEO

No, not – no. I've pushed on that question with our folks many times now. And we think we're well insulated from any Russia problems.

Angie Storozynski, Analyst

Great. Thank you.

Tom Fanning, Chairman, President, CEO

Thank you.

Operator, Operator

Our next question comes from Shahriar Pourreza with Guggenheim Partners. You may proceed with your question.

Tom Fanning, Chairman, President, CEO

Hey, Shar, you are back.

Shahriar Pourreza, Analyst

I am sorry about that. I got all excited that, I hung up. My apologies.

Tom Fanning, Chairman, President, CEO

Not nearly as excited as we are.

Shahriar Pourreza, Analyst

There you go. There you go. Thanks for getting me back on. So Tom, I am just curious, when you're looking at the Georgia IRP, there's obviously a fairly healthy mix between gas, solar, and storage. And essentially, all the coal has gone besides the plant. We're supposed to get a PD with the circumvention tariffs, I think, in August, and it goes through a period of rulemaking, which is about a month after the PSC decision with the IRP. So I guess, how are conversations going with stakeholders in light of this tail risk, which could cause some pricing uncertainty for some time? I mean, could we see the IRP maybe shift out pending visibility with the circumvention tariffs, investigations?

Tom Fanning, Chairman, President, CEO

That's a fascinating question. The IRP is on its own schedule, and I think it's supposed to be resolved somewhere in July, August time frame. I have not heard anything. This recent news about the circumvention investigation is really interesting. And I know some of my peers have had a lot to say about it. My only comment on that, Shar, is given a lot of my experience in national security issues, it's my firm belief that if somebody is circumventing tariffs illegally, that they should be held to account. The United States needs to protect itself from an economic standpoint in this global economy. So let the investigation run and let’s see what happens. I think here, again, it's a conversation between tactics and strategy. In the Southeast, it is clear to me that solar is a dominant renewable strategy, in the long run, despite any perturbation that we may see from this investigation. I think we stay the course there.

Dan Tucker, CFO

Yes. Shar, you raised the question in relation to the current IRP. I wouldn't ignore any aspects of this one. The IRP process in Georgia is quite lengthy. If you look back to the 2019 IRP, there are requests for proposals still being executed today. In fact, last week, we presented to the Georgia Commission a request to approve the deferral of some power purchase agreements from the last IRP by a year, and that was approved. This relates not directly to the circumvention issue, but to the overall supply chain constraints in the solar industry.

Shahriar Pourreza, Analyst

Got it. We're still waiting for the Alabama IRP as well. When considering the opportunities in Georgia along with Alabama and Southern Power, there's a significant amount of capital that we may need to think about, especially after Vogtle begins generating electricity and the associated cash flows. Could you explain how you're planning to finance the additional capital expenditures that might arise from the IRPs and opportunities with Southern Power? You've already optimized an asset, but I'm curious about your strategy for the next phase of capital expenditures, particularly after Vogtle, and how you're approaching the regional footprint and mix.

Tom Fanning, Chairman, President, CEO

Let's clarify what CapEx is. Our official five-year budget projects $41 billion. However, I personally believe it could be higher, as we often underestimate our future capital needs due to our conservative approach and the fact that we don't include any unknowns in our budget. I could see that number being closer to $45 billion, which averages out to about $9 billion a year. Some of this may come from new generation projects or developments that could start appearing in the late 2020s, possibly around 2025 or 2026. I don't believe we will need to issue any equity during this period. Additionally, we've been active in both acquisitions and divestitures, ensuring our assets are in the hands of the best owners to maximize shareholder value. If future opportunities arise for buying or selling, we will consider them, but we currently have no plans in that regard.

Dan Tucker, CFO

I have no argument to anything Tom said. I would just reiterate, we don't foresee any equity needs at the top of your outlook, even with the upside on the tailwind.

Shahriar Pourreza, Analyst

Okay, perfect. Thank you so much, guys. Congrats on the execution. Sorry about that technical glitch earlier.

Tom Fanning, Chairman, President, CEO

No sweat, my friend. Thank you for joining us.

Operator, Operator

Our next question comes from Michael Lapides with Goldman Sachs. You may proceed with your question.

Tom Fanning, Chairman, President, CEO

Hey, Michael. How are you?

Michael Lapides, Analyst

I’m fine, Tom. Thank you and thank Dan for taking my question and Tom, this one is more of a macro one. It's an industry one. It's probably even a heck of a lot bigger than just our industry here. Given all that's going on in the world, given some of the stuff that came out a few months ago regarding a nuclear plant in Kansas, just curious how you and how industry leadership and how the Board thinks about cybersecurity and managing and investing around the cybersecurity risk that exists today?

Tom Fanning, Chairman, President, CEO

Well, we think is enormous, and we are so lucky to have people on our Board that are well steeped in it. I mean we have former Secretary of Energy, Ernie Moniz, we have Dale Klein, former Chairman of the NRC. Kristine Svinicki, former Chairman of the NRC. All these people have classification status to be able to play in this information in an unfiltered way. You all obviously know my role. I've led the utility industry for eight years and turned that over to my good friend at Berkshire Hathaway, Bill Furman, and now I chair the CISA Advisory Board. Listen, this is an enormous issue. I was the only CEO private citizen on the Cyberspace Solarium Commission. As I walk the halls of Congress, which I do as frequently as anybody, I guess, it's clear to me that there is bipartisan recognition of the importance of this issue and what we need to do about it. Unfortunately, there was no playbook. When the Cyberspace Solarium Commission came out with its report, I think it's been universally adopted in Congress. Of course, not every chapter was agreed to, but 70% of that commission's recommendations are now in law. And I'm so glad now that I get to help in operationalizing, primarily now with CISA and elsewhere with our own industry. But making this stuff come to fruition. The United States is making enormous strides and making ourselves safer. We will only do that as we reimagine the role of the private sector in preserving our national security. I think we're making terrific progress with that. And I want to give two shout-outs. First one is Jen Easterly, She's the Director of CISA. She does just a terrific job operationalizing the nation's cybersecurity agency. And then our National Cyber Director in the White House, Chris Inglis, just a brilliant guy in my wandering around before the Solarium Commission became to fruition he and I got together, and I found a real thought partner in how to advance the nation. Look, we have talent on our Board. We have talent inside the company. And I think the nation is operationalizing a real plan to make our national security better than it ever has been. A whole lot more to go, but man o man, as a nation we're better off than we were five years ago.

Michael Lapides, Analyst

Thank you for that insight. I have a regulatory question regarding the bill and its changes in Georgia. You'll be filing the GRC in the next couple of months, and we expect new rates to be implemented early next year. Following that, if everything goes according to plan with Vogtle Unit 3, those rates will take effect. Then, moving into the fall of 2023 and early 2024, the rates for Unit 4 will also start. Am I correct in thinking of this as the progression of changes to the customer bill, regardless of any fuel cost fluctuations?

Tom Fanning, Chairman, President, CEO

Yes. I'm going to let Dan hit kind of the specifics of that, but let me just say too, we still are committed to bringing the Vogtle Units in at or cheaper than what was originally discussed when we received the order on those units. So I think we're still in at less than 10%, which is a big deal.

Dan Tucker, CFO

Yes, Michael, you described the cadence of those increases exactly correct.

Michael Lapides, Analyst

Got it. Okay. And then finally, can you just remind us the changes in the fuel cost? I'm just trying to think about what pattern the customer bill? How do you look at what's going on across the southern companies, meaning Georgia, Alabama, et cetera? What's happening in the customer bill relative to what you're seeing elsewhere in the country?

Tom Fanning, Chairman, President, CEO

Look, first of all, we're starting from a great spot; I mean, overall, our rates relative to the national average bounce around anywhere from 10% to 15% below national averages. So we're starting from a good place. We've got incredibly constructive mechanisms that help not only capture what's coming, so it's all forward-looking mechanisms that are also very kind of the cadence of them is thought out very well.

Michael Lapides, Analyst

Got it.

Tom Fanning, Chairman, President, CEO

Make moving, Michael. Yes, you bet.

Michael Lapides, Analyst

No, go ahead, I didn't mean to cut you off, sorry.

Tom Fanning, Chairman, President, CEO

That's right. I was just going to say more broadly, look, we are working every day internally to keep costs down. We've got coal plant retirements coming up that will help keep O&M down and customer bills down. We're working to be more efficient in lots of different ways, turning capital into O&M savings, whether that's enterprise systems or whether that's the things we're doing the grid investment plans. And so it's not one or two things. It's being very comprehensive in how we approach not only operations but our regulatory plan.

Dan Tucker, CFO

Let me also just weigh in on the market structure issue. I know there are some with parochial interest in my opinion that are arguing for increased deregulation disaggregating the make moving sales structure that we find integrated in the Southeast to be so valuable. When you think about winter storm Uri, when you think about resilience, value is a function of risk and return, I'm afraid some of these so-called organized markets have structured around preserving somehow the lowest price. Well, yes, they get low prices from time to time, but they also get a tremendous amount of volatility and no regard for reliability and resilience. In the Southeast, in our integrated regulated market, there was one throat to choke, and it is ours. Make move or sell, we are accountable to the commission and the customers and the markets we serve. In our opinion, advancing to net zero, providing resilience, providing the lowest price to customers irrespective of where commodity prices go, Recall, we don't have a profit motive in rising and falling energy prices. We pass those along to customers at cost. This is the right market structure to pursue. And anybody that says different is misguided.

Michael Lapides, Analyst

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

Tom Fanning, Chairman, President, CEO

You bet. Always good talking with you.

Operator, Operator

Our next question comes from Jeremy Tonet with JPMorgan. You may proceed with your question.

Tom Fanning, Chairman, President, CEO

Hey, Jeremy thanks for joining us.

Jeremy Tonet, Analyst

Hi, thanks for having me. Good afternoon. Just wanted to go back to Vogtle, real quick, if I could, and maybe better understand the ITAAC. A lot was completed in the last few months. And I just want to better see, I guess, what the drivers were, with the cadence where it's less in May and then kind of steps up into July, as you said a lot right before the end. Is there like a degree of difficulty difference in these versus the others, or just any other drivers, I guess, for the lumpiness and the outlook there?

Tom Fanning, Chairman, President, CEO

No, it's really the nature of the work to perform. And I wouldn't say it's difficulty per se. It certainly has different time requirements. And like I say, the lumpiness is driven by the systems that will be completed right before we ask for the 103G letter. If I had to characterize those, I would say, of the 30 to 40, roughly half of that deals with our final electrical work, a quarter of it deals with ventilation systems and a quarter of it deals with, as you would expect, the final primary controls and monitoring systems. Once you finish that work, then you file your letter. It's just that as you do that work, it's just a big slug of ITAAC that go out with it. Again, it's not a matter of degree of difficulty. It's more a matter of timing.

Jeremy Tonet, Analyst

Got it. That's helpful there. And then I just want to pivot towards the Georgia economy. You had a lot of good commentary there as far as what's happening? You talk about the cargo levels and strong economic activity getting back to pre-COVID levels in the near-term. I'm just wondering, if you think about, I guess, the economic activity in your footprint going forward, maybe thinking more later dated, has it changed? I mean, do you think that the growth is stronger now than maybe pre-COVID, or just from a big picture point of view, how do you think about the growth trends longer term in your area?

Tom Fanning, Chairman, President, CEO

Yes. You can check out my interview on CNBC's website. We've observed a movement of people into the Southeast, especially Georgia, which has one of the fastest-growing populations in the country. Regarding the potential for a recession, while that question can be framed differently, we currently don't see any signs of a recession in the Southeast. Here’s an interesting piece of information: our industrial sales increased by 1.7% year-over-year. That’s a solid figure, especially considering that two of our three largest single-site plants were closed, one being a chlor-alkali plant and the other a newsprint plant. If we exclude the impact of those plants, our industrial sales would have risen by over 4.5%, which is impressive. As Dan mentioned, we’re witnessing changes in the supply chain, an influx of new residents, and a low unemployment rate. I believe the chemicals industry is positioned for sustainable and positive growth in the coming years. Historically, when the global economy faces a downturn, the Southeast tends to be more resilient, experiencing milder downturns and quicker recoveries. While I cannot foresee the future, I am optimistic about the organic economic growth in our region compared to the rest of the United States.

Jeremy Tonet, Analyst

Got it. That's helpful. I’ll leave it there. Thank you.

Operator, Operator

Our next question comes from Paul Fremont with Mizuho. You may proceed with your question.

Tom Fanning, Chairman, President, CEO

Hey, Paul. Always glad to have you with us.

Paul Fremont, Analyst

Always glad be here. A couple of quick questions. One would be the cable separation remediation work that you were doing on Unit 3, is that fully completed? And is that work required as part of the ITAAC process, or is that separate from the ITAAC process?

Tom Fanning, Chairman, President, CEO

Yeah, it is part of that process. And yes, it's still underway, but it certainly is winding down.

Paul Fremont, Analyst

So your expectation based on the timeline that you put out would be that, that work will be completed before July, right?

Tom Fanning, Chairman, President, CEO

Yes. Everything that we're putting out is consistent with the time frames. We're in good shape there, I think.

Paul Fremont, Analyst

Okay.

Tom Fanning, Chairman, President, CEO

Is that your dog in the background?

Paul Fremont, Analyst

That is a Weimaraner, yes.

Tom Fanning, Chairman, President, CEO

All right. Nice dog.

Paul Fremont, Analyst

Second question, you had talked about thousands of documents potentially that you needed to locate. And this was around the time of the fourth quarter call, you said you had located 30%. Did I hear you right on this call that those documents are now either found or replaced?

Tom Fanning, Chairman, President, CEO

It's not so much found. Sometimes it was incomplete. Sometimes it was absent. We've basically wound down that work. There may be a few left to go, but nearly all are done for 103G. And for those that are required to load fuel, I think we're 75% of the way there. So there's still some work to be done, but it's not associated largely with 103G. It's more associated with the work I described for fuel load.

Paul Fremont, Analyst

Great. I think that's it in terms of questions for me. Thank you so much. And congrats on the NRC. When is the final section report due out?

Tom Fanning, Chairman, President, CEO

Next week, I think. They've already posted some stuff on their website. So – and we've already had our debrief with the NRC.

Paul Fremont, Analyst

Great. Thanks.

Tom Fanning, Chairman, President, CEO

Thank you, sir.

Operator, Operator

Our next question comes from Nicholas Campanella with Credit Suisse. You may proceed with your question.

Tom Fanning, Chairman, President, CEO

Hey, Nicholas. Thanks for joining us.

Nicholas Campanella, Analyst

Hey, everyone. Hi. Thanks for having me on. Really appreciate the time. I guess I just – I wanted to go back to Steve's question on just the comments on kind of running parallel paths with some of the remediation work and I know we're kind of waiting on the 103G, but as you get that 103G, like is the expectation at this point that you can move right to fuel load? Is there just really no more remediation that can be done? And it sounds like you're ahead of schedule on that front. So if that's the case, is there any reason why we shouldn't be kind of targeting the midpoint for COD on Unit 3?

Tom Fanning, Chairman, President, CEO

Yeah, yeah, Nick, there's more work to be done. You should not expect us to get 103G and load fuel immediately. There is more work to be done. So there will be some space in between, yeah, I know we have this chart that shows 103G letter received and start fuel load almost immediately. I would expect if I were you. If we got the 103G letter sooner, there would still be a gap of time to get to fuel load.

Nicholas Campanella, Analyst

Okay. Thanks. That's helpful. And then I guess you talked about moving folks from Unit 3 to Unit 4 and broadly, are you starting to see lessons learned from Unit 3 to Unit 4 start to translate and bear fruit? Maybe you can kind of talk to that and that would just be last part of it.

Tom Fanning, Chairman, President, CEO

Yeah, sure. We absolutely are. In fact, we've resequenced some work. Some stuff we mentioned in the past was energization of the control room and things like that. We moved that out. We've really been focused. Early on, and I think it was really smart. The site wanted to fail fast, if you will. And complete testing as soon as we were able in order to learn from whatever problems that arose and then be able to apply them critically. Now that we have a set of learnings at Unit 3, I think we have a better sense as to how to proceed on Unit 4 incorporating those learnings. And so you will see that in the Unit 4 progression.

Nicholas Campanella, Analyst

Got it, got it. Okay. And then if I could just sneak one more in. The asset sales to the best owner commentary. You've been a large acquirer of LDCs in the past. There's clear interest from private markets. I know that there's no asset sales on the table today, but just how are you thinking about how the gas business fits into the overall Southern portfolio and your wider decarbonization goals at this point? Any comments there would be helpful.

Tom Fanning, Chairman, President, CEO

I believe our gas business aligns well with decarbonization efforts. In considering America's energy policy, it's crucial to balance clean, safe, reliable, and affordable objectives. For instance, suggesting the removal of all natural gas appliances or heating systems in homes is impractical, particularly in Illinois. Eliminating gas heating doesn’t make sense there, as it would be unaffordable for many. The benefits our customers receive from gas heating and cooking methods are significant compared to alternatives. We must consider all customer impacts to achieve a clean, safe, reliable, and affordable energy landscape while striving for net-zero emissions. The idea that gas should disappear in America is misguided; we must recognize the potential of American technological innovation in addressing future challenges. I envision a collaborative approach with the Department of Energy and the U.S. government to meet our net-zero objective, including funding pivotal technologies such as storage, carbon removal, and nuclear power. We are the largest proprietary research and development organization in America and a major supporter of energy technology development with the DOE. Investing in technological innovation is essential for the nation, and claiming that we can't rely on gas in the future is shortsighted given its abundant supply and the national security implications it holds. Furthermore, with geopolitical considerations, especially after Russia has leveraged its gas supply against Europe, how can Europe trust them as a trade partner? We must take initiative to address these global challenges. The world is complex, not straightforward, and we may witness the rise of a new global economy with countries supporting our national interests and others that do not. Energy development could be a cornerstone for economic progress in the U.S., ensuring both affordability domestically and enhanced national security globally.

Nicholas Campanella, Analyst

Thanks for all your thoughts I will leave it there.

Tom Fanning, Chairman, President, CEO

Thanks.

Operator, Operator

Our next question comes from Srinjoy Banerjee with Barclays. You may proceed with your question.

Tom Fanning, Chairman, President, CEO

Srinjoy, great to have you with us.

Srinjoy Banerjee, Analyst

Thank you. good afternoon, guys. So a couple of questions just on the debt issuance side. For Southern Power, no debt issuance needs there, but some maturities coming up, so indicating deleveraging there. Could you remind us what the credit metric targets are? And then just thinking about the future for Southern Power, would we consider that a core part of Southern's broader decarbonization strategy?

Dan Tucker, CFO

So on the debt, I wouldn't think about it as deleveraging per se, I mean we 're maintaining kind of continuous metrics there. And so that was related to the second part of your question. We're targeting about a 22% FFO to debt over time. And so, we're simply as we're as we're getting the cash flow, we're retiring that debt and recapitalizing the business to support that. And then yes, on the second part. Look, the Southern Power has been and continues to be an important part of the family here. We've always kind of considered it a core business, and we'll continue to operate it that way.

Tom Fanning, Chairman, President, CEO

And its risk profile and its earnings profile is all consistent with what we think we have here: long-term contracts, creditworthy counterparties, bilateral, minimal to no fuel or transmission risk, those kinds of things.

Srinjoy Banerjee, Analyst

Perfect. And then...

Tom Fanning, Chairman, President, CEO

Go ahead.

Srinjoy Banerjee, Analyst

Got it. And just one last one, just on Georgia Power issuance needs, I think that's still slated at $1.5 billion, just given some of the credit market conditions so far. Any thoughts on whether you would look at long-dated or more front-end maturities there?

Dan Tucker, CFO

Yes, we don't want to make any premature moves in the markets, Srinjoy. We're always assessing the situation and determining what strategy works best, so let's wait until we are ready to make an announcement to see what course we take.

Tom Fanning, Chairman, President, CEO

And I'll just complement Dan's team. You look at our portfolio, I think we have it in the background material, but 18-year average life, 3.5 kind of average coupon. This is one of the more valuable debt portfolios in the United States. It is a real asset to us.

Srinjoy Banerjee, Analyst

Thank you very much.

Tom Fanning, Chairman, President, CEO

Thank you, sir.

Operator, Operator

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

Tom Fanning, Chairman, President, CEO

Well, my only closing remark will be, thank you all for joining us. We're off to an awfully good start this year, certainly in our financials, in our base business, but also with plant Vogtle Units 3 and 4. We continue to work very hard to execute, happy so far this year. We'll continue to work hard for the rest of the year and bring this thing home. Thanks, everyone, for joining us.

Operator, Operator

Thank you, sir. Ladies and gentlemen, this concludes the Southern Company First Quarter 2022 Earnings Call. You may now disconnect.