Earnings Call Transcript - SO Q4 2022

Operator, Operator

Good afternoon. My name is Scott, and I will be your conference operator today. I would like to welcome everyone to the Southern Company Fourth Quarter 2022 Earnings Call. All lines have been muted to prevent background noise. After the speakers’ presentations, there will be a question-and-answer session. I would now like to turn the call over to Mr. Scott Gammill, Vice President, Investor Relations and Treasurer. Please proceed.

Scott Gammill, Vice President, Investor Relations and Treasurer

Thank you, Scott. Good afternoon, and welcome to Southern Company's year-end 2022 Earnings Call. Joining me today are Tom Fanning, Chairman, President and Chief Executive Officer of Southern Company; and Dan Tucker, Chief Financial Officer. In addition, Georgia Power's CEO, Chris Womack, who will be succeeding Tom as President and CEO in the coming months, is also joining us. 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 Fanning.

Tom Fanning, Chairman, President and CEO

Thank you, Scott. Good afternoon and thank you for joining us today. Southern Company had another exceptional year in 2022. As you can see from the materials that we released this morning, we reported strong adjusted earnings per share consistent with the very top of our guidance range. These results were due in no small part to the culmination of the hard work of thousands of people throughout our company to put in day in and day out to provide customers with clean, safe, reliable and affordable energy. Our operations team, generation fleet and power delivery system worked exceedingly well in 2022 which included meeting an all-time peak load of over 41,000 megawatts in June and navigating well in extreme winter cold event over the Christmas weekend that pushed electric demand to a system peak load of nearly 38,000 megawatts, a December record. Our success with these events is a testament to the value of our vertically integrated state-regulated business model delivers to our customers and the communities we are privileged to serve. A great example of the benefits which come from our state's long-term integrated planning processes is the 26% winter reserve margin factored into the capacity planning process. This winter reserve margin, which is significantly higher than typical summer reserve margin inherently recognizes that peak demand in the winter occurs during the dark early morning hours when solar resources are diminished and cold temperatures can have unintended adverse effects on generation and fuel supply equipment. Such thoughtful planning assumptions, along with robust winterization programs and a continuous focus on resilience investments are top of mind across all of our state-regulated utilities. Let's turn now to an update on Vogtle Units 3 and 4. Since our last call, the site team at Unit 3 has turned to testing and start-up process in support of the unit's next major milestone, initial criticality. During this process, as disclosed in January, we identified vibrations associated with certain piping within the passive cooling system, which required additional time to remediate. The site team cooled down the unit and successfully remediated the vibrations, allowing them to resume the testing, which precedes initial criticality. During this work, we identified a few additional issues to address, consistent with our focus on optimal long-term performance and getting it right. We've added some additional time to the Unit 3 schedule to address these items and to reduce the risks associated with other potential issues emerging. We now project placing Unit 3 in service in May or June of 2023. Turning now to Unit 4. Substantial progress continued throughout the last quarter. We successfully completed cold hydro testing in early December. Electrical production and terminations through year-end were sustained at levels supportive of our year-end 2023 in-service objective. All required systems necessary to start hot functional testing on Unit 4 have been completed and turned over to the initial test program. Component and system testing activities are steadily increasing and are now critical path in support of the next major milestones for Unit 4, hot functional testing and fuel load. We have seen a marked improvement in testing results for Unit 4 compared to the Unit 3 process, which reflects the increased focus on first-time construction quality and timely documentation. Even with the improved results, somewhat slower than planned testing productivity has consumed margin in our schedule. The site working Vogtle continues to reflect a couple of months of remaining margin for a 2023 in-service date. After careful consideration and given our experience on Unit 3 and the degree of critical work ahead of us, we are further risk adjusting our Unit 4 schedule to reflect a range of the projected in-service date between late 4th quarter of 2023 and the end of the first quarter of 2024. Turning now to cost. Georgia Power's share of the total project capital cost forecast reflects a projected increase of $201 million to fund the extension of Unit 3 and Unit 4 projected in-service dates to the end of the second quarter 2023 and to the end of the first quarter 2024, respectively, plus modest increases in the projected cost of resources to complete the remaining work and testing on Unit 4. As a result, Georgia Power recorded an after-tax charge of $150 million during the quarter. We've included project schedules for the next major milestones for each unit, including initial criticality for Unit 3 and the start of hot functional testing for Unit 4 in the materials provided for this call. Our priority remains bringing Vogtle Units 3 and 4 online to provide Georgia with a reliable, carbon-free resource for the next 60 to 80 years. We will continue to take the time needed to get it right and will not sacrifice safety or quality to meet schedule.

Dan Tucker, Chief Financial Officer

Thanks, Tom, and good afternoon, everyone. As Tom mentioned, we had strong financial results for the year with adjusted earnings of $3.60 per share, $0.19 higher than 2021. The primary drivers for the year-over-year increase are higher revenues associated with retail pricing, warmer weather, primarily in the second quarter of 2022, customer growth, increased usage, and investment in our regulated utilities. These revenue effects were partially offset by higher non-fuel O&M expenses and higher interest expenses. The increase in non-fuel O&M reflects long-term commitments to our regulated utilities to reliability and resiliency, along with efforts to advance maintenance activities in light of emerging cost pressures. Additional shares from the mandatory conversion of our equity units in August '22 are also reflected in 2022 EPS results. A detailed reconciliation of our reported and 2022 and back above pre-pandemic levels, we continue to see robust residential growth with the addition of nearly 50,000 residential electric customers and over 30,000 residential gas customers throughout the year. Residential customer usage also continued to outpace our expectations, reflecting sustained hybrid work practices across our service territories. Additionally, commercial sales for 2022 beat our forecast by nearly 2%, reflecting a reversion to pre-pandemic trends as the economy shifts from consuming goods to services. Industrial sales for 2022 were lower than forecast by 1.5%, driven by a chemical facility closure and weakening industrial sales momentum during the second half of the year. With interest rates rising, we have seen slowing in construction and housing-related sectors, such as lumber, stone, clay and glass, and textiles. In the fourth quarter of 2022, eight of our top 10 industrial segments experienced slower sales growth as compared to the prior quarter. Included in our 2023 guidance is an assumption of retail electric sales growth of 0% to 1%. And as in prior quarters, we continue to monitor the potential implications of supply chain constraints, labor force participation, and inflationary pressures on our outlook. The economic development pipeline in our service territories remains robust. 2022 economic development announcements in our Southeast service territories saw an increase in expected job creation and capital investment of 135% and 257%, respectively, in 2022 as compared to 2021. The pipeline of potential projects grew significantly compared to recent years with new corporate announcements and expansions representing a broad cross-section of industries, including automotive, technology, e-fulfillment and distribution, health care, and bioscience. In addition to the traditional factors that have historically drawn businesses to our service territory like transportation networks, lower cost of living and business-friendly state and local policies. Another emerging trend that continues to drive momentum in both economic development wins and the size of the potential pipeline is the diversified workforce, especially technology workers and the diverse university systems in our territories, which prominently feature several HBCUs. We're proud to have been on the forefront of helping develop this workforce through our significant investment along with Apple in the Propel Center in Atlanta. More and more, as other companies strive to have their workforce reflect the diverse global customers they serve, our Southeast service territories have become a top choice for relocation or expansion. We are proud of the significant role that our subsidiaries play in attracting new businesses to our service territories. And in 2022, Site Selection Magazine named Alabama Power and Georgia Power, Top U.S. utilities for economic development for the fourth consecutive year and recognize the state of Georgia as the second best business climate in the country. Strong economic development activity continues to differentiate our Southeast service territories from other areas of the country. Turning now to our expectations for 2023. Our adjusted earnings guidance range for the year is $3.55 to $3.65 per share. Expected drivers for 2023 versus 2022, our continued growth in our state-regulated subsidiaries, including the contribution related to Vogtle Unit 3 going into service, offset by higher parent company interest expense including financing costs for Plant Vogtle Units 3 and 4 with costs in excess of $7.3 billion seemed reasonable by the Georgia PSC and share dilution, reflecting the full-year impact of the mandatory conversion of our equity units in August 2022. We estimate adjusted earnings of $0.70 per share for the first quarter. Additionally, we are narrowing our 2024 adjusted guidance range of $4 to $4.30 which was established in early 2021. In order to acknowledge the uncertainty inherent in providing guidance three years in advance, the original 2024 range was wider than our typical annual EPS guidance ranges. Since this range was introduced in February 2021, our state-regulated outcomes have been largely consistent with our assumptions. Several upside opportunities inherent in the top end of our original range, like renewable and storage investment opportunities at both our state-regulated electric companies and Southern Power have been deferred to later years largely due to adverse market conditions, including more challenging, contracting requirements and global supply chain constraints. Financing costs, particularly parent company interest rates are a significant headwind relative to our forecast in early 2021. Rates on variable and short-term debt are significantly higher than expected, and as securities in our low-cost debt portfolio mature, new issuances, no matter the tenor, are significantly more expensive. Compounding these negative parent company interest rate effects are the growth in our state-regulated capital plans relative to early 2021 and the increased cost for Georgia Power share of Vogtle 3 and 4 which has grown by nearly $1.9 billion since early 2021. Collectively, these factors would narrow our $4 to $4.30 range, adjusted for 2024 to $4.10. Adding the potential for Vogtle 4 to be completed at the end of the first quarter of 2024 which would have a negative $0.05 per share impact solely in 2024, we are providing an adjusted 2024 earnings guidance range of $3.95 to $4.10 per share. We plan to further narrow this range during our fourth quarter 2023 earnings call early next year. We continue to see our long-term adjusted EPS growth rate in the 5% to 7% range, consistent with our updated 2024 adjusted EPS guidance range. This projected growth is supported by a $43 billion capital plan with 97% of total projected capital deployment over the next five years at our state-regulated utilities. Additionally, our history of constructive regulation, strong credit ratings and disciplined O&M spending serve to strengthen our outlook. Our robust capital investment program continues to be driven by significant investment in our state-regulated utility businesses, our total base capital investment plan of approximately $43 billion which excludes the capital required to complete Vogtle Units 3 and 4 reflects a $2 billion increase in state-regulated utility investments relative to our previous five-year forecast. These increases in our forecast are the result of greater visibility into infrastructure required to serve major customer additions and expansions, further improve our grid and protect our technology infrastructure, as well as investments related to the transformation of our generation fleet. We have continued to maintain our disciplined approach to capital forecasting within our state regulated utility businesses. Consistent with past practice, we don't include placeholders, and we don't include capital that isn't expected to earn or allowed regulated returns. The result of this approach is that our capital expenditure forecasts tend to grow especially in the later years as our visibility into customer growth increases as regulatory processes unfold as compliance obligations evolve and as our long-term system planning is refined. We fully expect this trend to continue. Additionally, we continue to believe Southern Power has a significant opportunity to continue growing through investments that facilitate fleet transitions and the growth of clean energy infrastructure across the United States. Southern Power's business model has been distinctive since its beginnings in the early 2000s, focusing on long-term contracts with creditworthy counterparties and a risk-adjusted return profile that aligns well with our overall value proposition. We've allocated up to $3.5 billion over the five-year plan with approximately $500 million in 2023 and $750 million annually for the remainder of the forecast period. These allocations of capital are not included in our base capital forecast. Our financial plan is anchored to our base capital forecast of $43 billion. As I have already suggested, we believe upside potential exists in our state-regulated subsidiary forecast and our Southern Power allocation, which, if realized, would result in total spend of over $46 billion. We also continue to believe many of the same drivers for additional potential investment over the next five years could translate to investment opportunities beyond 2027, as we continue our journey to achieve net zero greenhouse gas emissions. We've included a three-year financing plan in the appendix to today's slide deck. This plan, which is consistent with our updated capital investment plan and the potential capital investment opportunities that we have highlighted, continues to assume no equity need over our five-year planning horizon. As always, we will maintain our discipline and the flexibility to use all the financing tools at our disposal to drive value for shareholders. Credit quality and strong investment-grade credit ratings remain a top priority and we continue to believe that to be a high-quality equity investment, a company must maintain a strong credit profile. As we complete Plant Vogtle Units 3 and 4, we believe the expected reduction in construction risk and the projected improvement in FFO to debt metrics further position us to support our credit quality objectives. Tom, I will now turn the call back over to you.

Tom Fanning, Chairman, President and CEO

Thank you, Dan. Southern Company strives to deliver superior risk-adjusted total shareholder returns, and I believe the plan we've laid out will support that objective. Our customer and community-focused business model, our growing investment in our state-regulated utility franchises, the priority we place on credit quality and our action towards achieving net zero greenhouse gas emissions all contribute to making Southern Company a premier sustainable investment. Our remarkable dividend track record remains a vital component of our value proposition. For three quarters of a century, we have paid a quarterly dividend that is equal to or greater than the previous quarter, including sustained dividend increases for more than 20 years. In closing, I'm sure that most of you are well aware of the recent announcement of Chris Womack to succeed me as President and Chief Executive Officer in the coming months. I will remain as Executive Chairman of the Board of Directors. In conjunction with this announcement, there are a number of other senior leadership changes, which highlighted the depth of talent we've worked hard to develop at Southern Company. I expect each of these leaders will flourish in their new roles, further strengthen the Company's deep bench and bring a fresh perspective to each of our businesses. With Chris Womack and his team leading us, the future of Southern Company is in great hands as we continue to strive to make the communities that we have the privilege to serve better off because we're there. And as we continue our relentless pursuit to provide customers with clean, safe, reliable and affordable energy. With that, I'll turn the call over to Chris Womack for a few brief remarks before we get to Q&A.

Chris Womack, CEO of Georgia Power

Thank you, Tom, and good afternoon, everyone. I cannot be more excited to have the privilege to lead Southern Company in the months and years ahead. It is an important time in our industry as the energy landscape continues to evolve and customers' needs continue to change. Southern Company is at the forefront of that evolution, and we are building the future of energy. It is an honor to lead teams that are dedicated to innovating and delivering world-class customer service and reliability to customers while also moving boldly forward in our journey to continuously represent our values and improve the communities we serve. Tom and his predecessors, along with the thousands of team members across the enterprise Tom mentioned earlier, have built a solid foundation for Southern Company. And we've got a lot of important work ahead of us to continue to build upon their legacy. Thank you all again for joining us this afternoon. I look forward to getting the opportunity to get out and interact more closely with each of you in the investment community during the weeks and months ahead. Operator, we are now ready to take questions.

Operator, Operator

We do have a question from Shar Pourreza with Guggenheim Partners.

James Ward, Analyst

Tom, Shar is actually on the road traveling at West. It's James Ward here on for him. Thank you. Very much appreciated. Glad to be here. I just wanted to first congratulate Chris, on your new role and Tom, on your planned transition and the evolution of your role in the Company. So congrats to you both. So I have a few questions here. Quick one off the bat. I just had a few inbound questions from people. To clarify, the 5 to 7 base remains the 2024 midpoint, but now it's the midpoint of $3.95 to $4.10, is that correct? Or is there another way to think about the base for that 5 to 7 going forward post-Vogtle?

Dan Tucker, Chief Financial Officer

Yes. James, this is Dan. So look, we were very intentional in choosing the words consistent with our adjusted guidance range. Those words were really acknowledging of two things. Thing one is just like we did with the $4 to $4.30 will further narrow this range as we get line of sight on Unit 4 and have our fourth quarter earnings call next year. Thing two, that it acknowledges is that the $0.05 impact for Vogtle 4 potentially going into the first quarter of 2024 is a one-year effect and so the growth rate will be off of that narrowed range when we get to 2024.

Tom Fanning, Chairman, President and CEO

The other thing is the $0.05 reflects a full charge, assuming you go in at the end of the quarter. I'm really I would be a little disappointed if that's where we end up. Right now, as we stand, adding that extra quarter we got five months of margin on Unit 4. Hopefully, we can do better than that.

James Ward, Analyst

That's very clear and that's great. Okay. So it'd be a higher base than what some people might have been reading it out. That's good to hear. Looking at your new capital plan and then assuming that some or all of the CapEx beyond the base plans are able to be added. Could you give us a bit more color on how much of that $3 billion could potentially end up at the regulated utilities versus Southern Power? And then as a follow-up, in the slides, you show the 11 different categories there, the examples of where that incremental investment could be renewables, transmission, et cetera. In your view, which of these categories are most likely to end up in the plan? What's kind of low-hanging fruit, if there is such a thing or just what is most probable and in sort of what years if we were to be building kind of an upside scenario versus a base scenario that we're trying to look at what would make the most sense to kind of prioritize there?

Tom Fanning, Chairman, President and CEO

Yes. If it was me, do you include the graphs you've done in the past about how the CapEx shows? We have yes, there you go. Was that Page 21 is what I'm looking at. I do know what you guys see. We have a history of always undershooting, especially our outward year forecast. And on the average, I would say that taken over the five years, we undershoot another $3 billion, just round numbers. So if you look over the entire five-year period and an upside case, may include $3 billion of additional franchise related rate base looking CapEx investments. Whether Southern Power hits its $3 billion or not remains to be seen about market conditions, supply chain constraints, and a variety of other things. We've been very clear in past calls to call out what I think have been challenging market conditions. Shorter terms, we like bilateral contracts, no fuel risk, creditworthy counterparties, et cetera. The contract conditions have gotten tougher. And we're very disciplined. We generally expect about 150 basis points premium for us to go down the bilateral contract out via Southern Power as compared to our franchise utilities. Now whether we're able to duplicate that or not, we'll see. If they don't show up, we won't invest. If you want to include more upside, I would include some portion of that $3-plus billion for Southern Power over the five-year period. I would also kind of tilt those investments towards the back end. One last comment I will make, we said it in the script, but I think it's important. When you look at additional CapEx available outside the five-year period, I think you really do start picking up some of the generation transition kind of capital that may be available. Recall, we will have a high bias towards more gas, more renewables, particularly solar in our region. Dan, do you want to add to that?

Dan Tucker, Chief Financial Officer

Look, I think you covered it really well. The other thing I'd just reinforce, James, is that the 5% to 7% growth rate is based on our $43 billion capital plan opportunity to deploy more than that simply strengthens our position in that regard or potentially lengthens our position in that regard. And just going back to what Tom said about the longer term. Just recall, a lot of our coal retirement plans happen at the very end or the year after our five-year plan, and that really is where a lot of incremental opportunities also get unlocked.

Tom Fanning, Chairman, President and CEO

I mean, for example, a big slug of retirements are in '29. So as Dan said, that's outside the fact.

James Ward, Analyst

Got you. That's extremely helpful and especially the color on upside there. Very much appreciated. Yes, that helps a lot. The final question for us is in the slides, you mentioned that you expect robust customer growth across your service territories will then also, of course, only expecting flat to slightly increasing retail electric sales, building on the details that you shared in the prepared remarks. Could you give us just a bit more granularity given that these are broad rather than just regionally focused on one particular area? On these broad trends, what's driving the divergence there? Or are you just taking a more conservative approach going forward to help us understand a bit more how to look at it?

Tom Fanning, Chairman, President and CEO

Yes, we're taking a conservative approach. We have data that supports several different scenarios. This morning on CNBC, I discussed the possibility of a soft landing or no landing at all. When examining year-over-year growth in the industrial sector, we see a mixed picture—some negatives and some positives. However, the momentum statistics show that growth rates are decreasing. This suggests that while we are growing year-over-year, the pace of that growth is slowing. Though performance has exceeded expectations, it is still trending downward. On a brighter note, our economic development statistics show a 130% increase in job announcements and over 250% growth in capital investment. These projects typically manifest over a two to three-year period. Therefore, while we may experience some slowdown in the economy in 2023, we do not foresee a dip into recession and expect recovery. The Southeast has historically shown the capacity for recovery. Additionally, we anticipate a growth rate of about 1% per year over the next five years. Employment levels are at historic lows, and population growth in the Southeast, combined with a business-friendly environment, suggests that while we may face some slowing in 2023, we should see improvement in 2024.

Dan Tucker, Chief Financial Officer

And then James, just connect that back to your previous question. Look, this growth is certainly exceeding our expectations in terms of the economic development activity, and that could very well translate to the need to invest more to serve that load that was not anticipated. So we think over the next three to five years, that will all begin to be very transparent to the market.

Tom Fanning, Chairman, President and CEO

One last point. It seems that the work environment for employees, which we now refer to as hybrid, is stabilizing. We are observing that residential demand is higher than we expected, and commercial demand is also exceeding our forecasts. We will monitor how this evolves in the future, as there may still be some fluctuations.

James Ward, Analyst

Very helpful all around, especially in framing potential upside scenarios there, which it looks like you guys might be very well positioned to head into depending on how the macro environment works out. Either way, looking forward to having Vogtle done this year, as I'm sure you and everyone else are and being able to move on to everything you've just been talking about. So it looks like great things ahead. Thanks again for taking the question. Appreciate it.

Operator, Operator

We have a question from Steve Fleishman with Wolfe Research. Please go ahead. Your line is open.

Tom Fanning, Chairman, President and CEO

Steve, thanks for joining us.

Steven Fleishman, Analyst

Yes, congratulations to Tom, Chris, Tim, and the team. Can you elaborate on the additional issues related to Vogtle 3 that help reduce the risk of other problems? Can we get more details on that?

Tom Fanning, Chairman, President and CEO

Yes, sure. There were three main issues that we identified, along with other tests. We successfully evaluated many factors leading up to criticality. The first two issues were not major on their own, but as we began to heat and pressurize the plant, we noticed some vibrations. There was a discussion about whether to start the critical test and address the vibrations later, but we decided it was best to do it correctly. So we brought the plant down and added a couple of metal plates to fix the vibrations connecting to the pipes. It was a straightforward fix, but it took time to go through the necessary heating and pressurizing processes. The second issue involved a valve connected to some pipes that had a small leakage of two drips per minute. We aimed to eliminate all drips and found that repositioning a flange related to this valve would resolve the issue. I believe it's almost fixed as of today according to Pete Sena, our President of Nuclear. The final issue is still unresolved and relates to flow through the reactor coolant pumps. We are currently determining the cause of this issue, which could be either a physical problem or a calibration problem. It’s possible the flow is acceptable, but we need to ensure the measurements are recalibrated. We're focused on this matter today.

Steven Fleishman, Analyst

Okay. Regarding your comment about taking these actions to mitigate the risk of other issues, are you suggesting that by implementing these measures, the likelihood of encountering additional problems in the future will be reduced once operations resume, or is it the opposite?

Tom Fanning, Chairman, President and CEO

I believe so. When we addressed the vibration on the pipe, we noticed another issue and decided it would be best to fix that as well. This process takes time, but we are committed to doing it right. We want to avoid reaching a critical point because once we do, the situation becomes significantly more difficult. It's important for us to tackle any problems we encounter now. We also check any findings against Unit 4, and so far, we believe the pipe vibration issue has been resolved for that unit. Our goal is to address as much as we can before hitting that critical threshold, as the challenges increase significantly after that point. We're focused on identifying and addressing all visible issues at this stage.

Steven Fleishman, Analyst

Okay. And I guess is the fact that you found these things kind of a concern that you're going to find more? Or is it really more the opposite that you found these things, this is just part of a big plant starting up, and hopefully, there's less of a risk from here?

Tom Fanning, Chairman, President and CEO

Yes. But that is why we test, right? I mean you should view the power ascension once you go critical as a series of tests that involve a whole variety of different conditions of the plant, taking it up, bringing it down, throwing emergency stops in there, all kinds of things. The purpose of the initial voyage, if they will, the test voyage is to find problems. And we allow for that within the schedule. And now, in fact, we have more time to allow the schedule calls for, I guess, on the original schedule, something like two months of testing, the prescribed start-up in is two months. And there's roughly a month of slack time to fix things, okay? We now have, I think, another month that we've added into our projection into the second quarter. But for sure, Steve, we'll find some.

Operator, Operator

Our next question is from David Arcaro with Morgan Stanley. Please go ahead. Your line is open.

David Arcaro, Analyst

Extend my congratulations as well. I was just wondering, a follow-up on that question. Is NRC approval? Has that been needed for any of the remediation work on these couple of issues that you found at Unit 3?

Tom Fanning, Chairman, President and CEO

We've been in constant contact with the NRC. And we did have, I think, in connection of the vibration two license amendments, but we got those in a matter of days. This was not a protracted process. And like I say, I think that we continue to work hand in glove with those guys. They were also aware of the valve leak, and they're happy, I think, with the process that we're following there. You should understand that the working relationship with all of the external parties, whether it's the NRC or whether it's the state commission or DOE, anybody. We all sit in the same meetings. We all see the same stuff. We have and complete transparency in everything we do on that side.

David Arcaro, Analyst

That makes sense. Understood. And are these issues that at this point now, you could potentially avoid for Unit 4 bring learnings from the start-up process on Unit 3 and potentially make Unit 4 smoother such that it's not a kind of a one-for-one delay here equals a delay later?

Tom Fanning, Chairman, President and CEO

Amen, brother. That's exactly what we're trying to do. And in fact, the process, I think it's been noted by many have shown that Unit 4 is going a lot smoother than Unit 3 just because of learnings from Unit 3. I think the process we went through in Unit 3 at times was somewhat painful, but I think it was certainly instructive. If you may remember, as we started, we went into HFT for Unit 3, we were turning over systems like the day before we went to HFT. For example, all systems necessary to undertake HFT have been completed. The long pole in the 10 on HFT at Unit 4 is our ITP, our integrated test plan.

David Arcaro, Analyst

Yes, I understand. Regarding a different topic, the decline in natural gas prices is beneficial for customer builds. I was curious when customers might start seeing lower prices reflected in their rates, and how this year’s plans for deferred fuel collections will interact with that.

Dan Tucker, Chief Financial Officer

David, this is Dan. So certainly, lower prices are going to benefit customers. And Georgia Power, in particular, who has the largest unrecovered balance ended the year at about $2.1 billion. They'll file at the end of February for those rates. So I certainly don't want to front-run that process. But if to the extent forecast continue to look the way they do today or further come down, the impact on customer bills will be greatly mitigated. Our other electric jurisdictions have already initially addressed the under recovery that was happening. And so these lower prices are simply going to accelerate that recovery.

Operator, Operator

And we have a question from Durgesh Chopra with Evercore ISI. Please go ahead. Your line is open.

Tom Fanning, Chairman, President and CEO

Thanks for joining us.

Durgesh Chopra, Analyst

Thanks, Tom. I appreciate it. Dan, could you share your CFO to debt or FFO to debt as of year-end 2022? Also, how does that compare to your targeted credit metrics, and when do you expect to reach those targets in your planning horizon?

Dan Tucker, Chief Financial Officer

Yes, Durgesh, thanks for the question, and happy to share that. And as you know, all the agencies calculate those metrics at a slightly different way. But I think there's certainly a lot of focus on Moody's and S&P. So I'll hit on those, in particular. Moody's, we were about 12% for 2022 and S&P about 15%. And as you'd expect, those were pretty significantly impacted by the under-recovered fuel dynamics, particularly the Moody's metric in the way that they calculate that. A portion of it is the debt and a portion of it for us is also the impact that under recovering that fuel had on our tax appetite and our ability to monetize tax benefits, you combine those factors overall, really about a 400 basis point impact to the Moody's metric in 2022. As we look ahead, and we've talked about this a lot in the past, Vogtle certainly on its own has a significant impact on improving the overall financial profile of the Company as we begin to recover our investment on that in the future. As we get out to 2024, once it's in service, our metrics are closer to 17%, 18%, which are well above our targets and provide us that kind of buffer against adversity that we prefer to have in our profile.

Durgesh Chopra, Analyst

Got it. That's super helpful then. So just to be clear, like you would be outside of the fuel balance, you would be close to like 16% on Moody's basis as of the end of 2022, if you exclude the fuel balance that's on the balance sheet?

Dan Tucker, Chief Financial Officer

That's right. And as I give you that 17% to 18% projection in the future, that includes an assumption that we might still have an unrecovered balance that we continue to collect, but that it's certainly been worked down and Vogtle has kind of overlaid that to improve the overall profile.

Durgesh Chopra, Analyst

Got it. Got it. And just one hopefully, a quick one. In 2023 EPS guidance range, can you just remind us like what is your assumption for earnings from Unit 3?

Dan Tucker, Chief Financial Officer

It contributes about $0.04 in 2023 compared to 2022. This is based on the assumption that it will be in service for a little more than half the year. However, this is slightly offset by the rate base that will not earn its full return until Unit 4 is also in service.

Durgesh Chopra, Analyst

Got it. And congratulations, Chris and Tom, I much appreciate the time today.

Operator, Operator

Our next question is from Angie Storozynski with Seaport Global. Please go ahead. Your line is open.

Tom Fanning, Chairman, President and CEO

Angie, how are you?

Agnie Storozynski, Analyst

Good, good. But I will star it up a little bit. So can we talk about management succession? So, we're really glad to see the updates and congratulations to you and Chris, but I'm just wondering how the Chris' appointment reconciles with the age policy that Southern used to have at least? That's one. And then two is, we've had some negative headlines around Alabama Power. There's been a change in CEO. And I'm just basically asking if there's any link in those management changes at that subsidiary and those media headlines?

Tom Fanning, Chairman, President and CEO

Yes, certainly. The age policy is more of a guideline than a strict rule. The Board and I have had many discussions about continuing past 65. Personally, I've been committed to seeing Vogtle through, and I still feel youthful both physically and mentally. When we reached that age threshold, we looked at others in the organization, like Mac, who is just a year younger than me, and Chris, who carries a youthful energy and enthusiasm. He has demonstrated this throughout his tenure, especially at Georgia Power, where he successfully handled our three-year rate case. It was easy for us to conclude that 65 is just a number, and as long as we can contribute effectively, that's what matters. There wasn't a direct connection with Mark Crossley; frankly, he had his own issues to address, and it became quite apparent that he wasn't a viable successor. Ultimately, he made the decision to retire.

Agnie Storozynski, Analyst

Okay. So just one follow-up on Chris. So we should expect that Chris is going to stay in the current spot for the next couple of years, even crosses that 65-year-old threshold?

Tom Fanning, Chairman, President and CEO

Yes. I'll go ahead with. Chris was asked directly. He's committed to 70. No, Angie. It has nothing to do with that. It really is two things. So Dan is a conservative soul and he likes to build his plan without considering upside. So as we've done for years, the way before Dan got here, we don't put in place holders. We think about them and think about what effect they could have. Further, we don't add anything from Southern Power. And you should think about contributions from Southern Power as upside to the base case. It really isn't a constraint of capital structure or balance sheet.

Operator, Operator

We have a question from Nick Campanella with Credit Suisse. Please go ahead. Your line is open.

Tom Fanning, Chairman, President and CEO

Congrats to all management changes. I guess just hot functional for Unit 4. You have this nice slide here, Slide 8, looks like end of March to, call it, late June on HFT. Just going back to kind of the conservatism comments like where do you kind of see yourself tracking towards now with the system turnovers and the line of sight?

Nick Campanella, Analyst

The site working plan has HFT in March. We know that things can happen between now and then, but that's what it shows. Okay. And then can you just update us on the timeline for the prudency review just with the latest kind of update to the COD data?

Tom Fanning, Chairman, President and CEO

It's fuel load on Unit 4. Chris, do you want to say anything more?

Chris Womack, CEO of Georgia Power

We're scheduled to complete a prudency review on the fuel load of Unit 4 as planned, and that is the course we will pursue in accordance with our agreement with the Georgia Public Service Commission.

Nick Campanella, Analyst

Okay, so mid-summer here. All right. Thank you so much.

Operator, Operator

We have a question from Paul Fremont with Ladenburg. Please go ahead. Your line is open.

Tom Fanning, Chairman, President and CEO

Hello, Paul, I'm always glad to have you with us.

Unidentified Analyst, Analyst

Thank you so much. Going back to Unit 3. The flow-through on the reactor or cooling pumps, is that a valve issue as well? Or is that something else?

Tom Fanning, Chairman, President and CEO

Still kind of running it down. It could be a calibration issue. It could just be the way we measure the flow going through. So we're trying to guess what it is at this point. It is really not practical. They're doing all the work necessary to get to the bottom of that.

Unidentified Analyst, Analyst

Okay. And the valve issue that you talked about with the drip, that's completely resolved?

Tom Fanning, Chairman, President and CEO

Thanks. Yes, I talked to Pete Sena, gosh, 11:30 today and he thought it was taken care of. We'll see.

Unidentified Analyst, Analyst

And then how many ITAAC approvals do you think you need to move forward and actually do hot functional testing?

Tom Fanning, Chairman, President and CEO

Zero. We're good.

Unidentified Analyst, Analyst

Okay, because I thought on Unit 3, there were a certain number of ITAACs that you thought were nuclear-related where you didn't feel comfortable doing the hot functional testing without having those in hand.

Tom Fanning, Chairman, President and CEO

No. I think you're remembering fuel load there, we're in awful good shape. And if you look at where we are on four as compared to three in relation to HFT, we are light years better. I mean we're ready to go. All we got to do is finish the required tests before we get the heat going and run the plant. That really is the critical path at this point.

Unidentified Analyst, Analyst

And then last question for me. If you were to do the additional CapEx beyond the base, does that also not require equity? Or does equity come with that?

Dan Tucker, Chief Financial Officer

Based on our current projections, we would still not project any equity. And that's where when I talked about having that cushion in our credit metrics, that plays a big part of that.

Operator, Operator

And we have a question from Anthony Crowdell with Mizuho. Please go ahead. Your line is open.

Tom Fanning, Chairman, President and CEO

Anthony, how are you?

Anthony Crowdell, Analyst

Not bad, Tom, how are you doing?

Tom Fanning, Chairman, President and CEO

Fantastic, my friend.

Anthony Crowdell, Analyst

Congrats to all and I just have one quick follow-up from Durgesh's question on the credit side of the world. Just with the units going in service, do you think the credit agencies lower the downgrade threshold because of the, I guess, reduced business risk?

Dan Tucker, Chief Financial Officer

Yes. Look, Anthony, I never want to speak for the agencies. I would look like us that aren't currently building nuclear units, many of them have lower thresholds. So I think there's certainly a strong argument for that to potentially take place. I won't speak for, but they should.

Operator, Operator

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

Tom Fanning, Chairman, President and CEO

Yes, I truly appreciate everyone joining us. This year is going to be very exciting. John, we have our annual meeting where I will officially hand over the role of President and CEO, though I've already transitioned the President role to Chris. It would be wonderful, Chris, to have Unit 3 completed by that time. You'll all enjoy working with Womack. A funny story I share with everyone is that when I first got this job, I was friends with him and admired his wisdom, intelligence, work ethic, and can-do attitude. The very first thing I did was move his office next to mine. Chris has been a leader and a partner throughout my time here, and he will be ready from day one to lead this company forward. When you consider individuals like Kim Greene, Stan Connally, Jim Carr, and Jeff, along with the other team members in key positions, I believe we have an exceptionally strong team. It is quite impressive relative to our industry. After Vogtle, I think Southern will be positioned for tremendous growth. I look forward to seeing you all again soon. Thank you.

Operator, Operator

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