The Southern Company - Q2 2023

Transcript

Operator (participant)

Good afternoon. My name is Tommy, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Southern Company second quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remark, there'll be a question-and-answer session. At that time, if you have a question, please press the one by the four on your telephone. If any time the conference you to reach an operator, you may press star by the zero. As a reminder, this conference is being recorded today, August 3rd, 2023. I would now like now to turn the call over to Mr. Scott Gammill, Vice President, investor relations and Treasurer. Please go right ahead, sir.

Scott Gammill (VP of Investor Relations and Treasurer)

Thank you, Tommy. Good afternoon, and welcome to Southern Company's second quarter 2023 earnings call. Joining me today are Chris Womack, 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-Q, and subsequent filings. In addition, we'll present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measure are included in the financial information we released this morning, as well as the slides for this conference call, which are both available on our investor relations website at investor.southerncompany.com. At this time, I'll turn the call over to Chris Womack.

Chris Womack (President and CEO)

Thank you, Scott. Good afternoon, thank you for joining us for what is such a pivotal and exciting time for our company. As many of you know, on Monday, we announced that Plant Vogtle Unit 3 successfully achieved commercial operation. While work remains to bring Unit 4 online, this incredible milestone is something to be celebrated. This decade-plus journey, which involved developing a global supply chain, managing through a global pandemic, 10s of thousands of American craft workers and engineers, and millions of labor hours, combined with a group of committed co-owners and regulators that had the courage to support new nuclear power as an option when others didn't, proves that we can accomplish monumental things when we share a common vision. Vogtle Unit 3 is now serving Georgia customers with over 1,100 megawatts of 24-hour, 7-day-a-week carbon-free electricity. Turning now to Unit 4.

Since our last call, the project team continues to make substantial progress, as highlighted by completion of hot functional testing, receipt of all 157 fuel assemblies, submittal of all ITAACs, and most recently, receipt of the 103(g) finding from the U.S. Nuclear Regulatory Commission, signifying that license acceptance criteria for Unit 4 have been met. The project team's current focus is on working through final testing and system turnover to operations that, when complete, will allow fuel load for Unit 4. Recall, as we contemplated in the VCM 17 order, Georgia Power can file its prudence request with the Georgia Public Service Commission following fuel load on Unit 4.

Following fuel load, the project team will conduct final preparations and testing of systems primarily associated with the electrical power production side of the plant, and achieving the pristine conditions in the nuclear island necessary for startup activities and initial criticality. Importantly, the project capital cost forecast is unchanged since last quarter, and we continue to project Unit 4 will be placed in service between late fourth quarter 2023 and the end of the 1st quarter 2024. The successful completion of this important project is critical for Georgia's and our nation's energy future. We look forward to these units providing reliable, carbon-free energy to customers for decades to come. Dan, I'll now turn the call over to you for a financial update.

Dan Tucker (CFO)

Thanks, Chris, and good afternoon, everyone. For the second quarter of 2023, our adjusted earnings were $0.79 per share, $0.04 higher than our estimate and $0.28 lower than last year. The primary drivers of our performance compared to last year were milder than normal weather conditions, higher depreciation and amortization and interest expense and changes in rates and pricing, somewhat offset by lower income taxes and O&M expenses. A detailed reconciliation of our reported and adjusted results as compared to 2022 is included in today's release and earnings package. Weather in our electric service territories during the first half of 2023 has been the mildest on record, with the fewest aggregate degree days in the 129-year history of climate data reported by the National Oceanic and Atmospheric Administration, more commonly known as NOAA.

The negative 16 per share EPS impact relative to our weather normal EPS guidance range is our largest ever negative weather-driven variance for the first six months of a year, which is a significant headwind for the full year. While 2022 was a year in which we were able to fix the roof while the sun is shining and position the company well coming into 2023, we have been and will remain keenly focused on cost management, along with our constant focus on safety, reliability, and customer satisfaction in the second half of this year. Our adjusted earnings estimate for the third quarter of 2023 is $1.30 per share. Turning now to retail sales and the economy, year-to-date, 2023, weather normal retail sales were in line with sales levels for the first half of 2022.

We've seen positive residential and commercial growth and strong commercial usage, offset by lower industrial sales. Year to date, we've added nearly 24,000 electric customers and 13,000 natural gas customers, trends which continue to outpace pre-pandemic levels. Chris, I'll now turn the call back over to you.

Chris Womack (President and CEO)

Thank you, Dan. In closing, I'd like to take a moment to acknowledge that Southern Company was recently awarded the number nine overall spot on Forbes' ranking of America's best employers for women, the highest ranking within our industry. We are honored to be selected to this list once again. Workforce and leadership diversity is a tenet of ours and ensures we have the variety of experiences and perspectives to better serve our customers. We will continue to emphasize a culture where all employees feel valued, respected, and able to accomplish their professional goals. Thank you for joining us this afternoon and for your interest in Southern Company. Operator, we are now ready to take questions.

Operator (participant)

Thank you very much. We'll proceed with our first question on the line. It's from Shahriar Pourreza from Guggenheim Partners. Please go right ahead.

Chris Womack (President and CEO)

Shar, good afternoon.

Shahriar Pourreza (Senior Managing Director and Senior Equity Analyst)

Hey, guys. Good morning, Chris. Chris, that was the world record for the fastest prepared remarks. Congrats there on that one.

Chris Womack (President and CEO)

Thanks, Shar. Always-

Shahriar Pourreza (Senior Managing Director and Senior Equity Analyst)

There you go.

Chris Womack (President and CEO)

I always appreciate your comments and your analysis.

Shahriar Pourreza (Senior Managing Director and Senior Equity Analyst)

There you go. Chris-

Chris Womack (President and CEO)

And your perspective.

Shahriar Pourreza (Senior Managing Director and Senior Equity Analyst)

Thank you. Just starting on Georgia's economic backdrop, obviously, you guys have seen a step change in the pace that major industrial customers have been announcing, you know, new capacity needs. How many, I guess, new gigawatts are you seeing now in Georgia versus the prior update with the state? What is the prior IRP embed? How should we sort of think about any updates to capacity needs, including the viability of the remaining coal assets, as you're thinking about this incremental demand? Could we see a drastically different IRP being filed? Thanks.

Chris Womack (President and CEO)

Shar, we're working through that analysis now. I think we have said to you before, and we've commented about all the wonderful economic development activity that we've seen across the state of Georgia over the past couple of years. 250+ projects, $20+ billion of investment, 60,000 jobs that I know the governor has reported. I, I think, you know, we've talked about the impressive activity that we've seen. We've not turned that into the, the, the capacity needs at this time. That's some work that we're doing, that we're doing, and I'm sure forthcoming, we'll work with the commission on what all that means and then figure out what it means for us in terms of capacity needs going forward.

Shahriar Pourreza (Senior Managing Director and Senior Equity Analyst)

Yeah.

Chris Womack (President and CEO)

I think it's a little bit premature.

Dan Tucker (CFO)

Just order of magnitude, Shar. Look, again, we're, we're kinda going through the analysis, but it's fair to say what we've seen from a economic development announcement perspective in the past is hundreds of megawatts at a maximum in a given year, and, and now we're having instances where it's thousands, potentially, in terms of the announcements, and so just the pace has accelerated. You mentioned industrial. There, there's certainly a lot of large industrials involved with that, particularly around the electric transportation sector, but it's also data centers. You know, it's a story that's playing out in a lot of places. Just as an example for ours, I mean, as we sit here today, data centers are roughly 2.5% of our overall electric load. Five years from now, that will be well into the double digits in terms of percentage of our load.

That's the pace of growth we're seeing.

Chris Womack (President and CEO)

Shar, I think bottom line is.

Shahriar Pourreza (Senior Managing Director and Senior Equity Analyst)

Yeah.

Chris Womack (President and CEO)

Go ahead. I think something we're very excited about. We're very excited about it, and I think it's a real positive contribution, positive factor, that we're excited about here in the state.

Shahriar Pourreza (Senior Managing Director and Senior Equity Analyst)

Do you have a sense, Chris, on when you and Kim and Dan and, and the team could update us around that potential opportunity? I know it's really early in the process, but we're obviously seeing the amount of customers that are moving to Texas, and it's very material, so... I mean, to, to Georgia, which is really material. I'm just kind of curious on what the timing of that could be?

Chris Womack (President and CEO)

Yeah, Shar, I think it's a little bit premature, as soon as we get to that point and we, we figure out and have conversation with the commission, I'm sure we'll, we'll share that with you, share that with the industry.

Shahriar Pourreza (Senior Managing Director and Senior Equity Analyst)

Okay, perfect. Then lastly, Chris, we're obviously approaching, you know, the prudency case once we see unit 4 fuel load. Anything you can provide in how we should be thinking about a potential settlement, or this, should we be thinking about this as, like, a rate case, and whether the potential for, like, a special election could impact the process, if at all, especially if fuel load takes longer than planned?

Chris Womack (President and CEO)

Yeah. Shar, I think there are a couple of questions you, you embedded there together. First, around prudence, we have to get the fuel load. Once we get the fuel load, we'll figure out what happens. The having, having transparency in the process is very important, but right now, once we get the fuel load, then we'll figure that out. We'll work, work with the commission and the staff on that process. I think the other you made reference to the makeup of the commission. I mean, I.

Shahriar Pourreza (Senior Managing Director and Senior Equity Analyst)

Mm-hmm

Chris Womack (President and CEO)

... you know, the sense is that we'll get through prudence with the current commission. We have no idea what will happen in, in the Rose case, so we're still waiting for, for that order and for that, for that decision by the courts. There's nothing more I can say about that decision at, at this point in time.

Shahriar Pourreza (Senior Managing Director and Senior Equity Analyst)

Okay, perfect. Thank you, Chris and Dan. Very helpful. I appreciate it, and congrats.

Chris Womack (President and CEO)

Thank you.

Dan Tucker (CFO)

Thanks, Shar.

Operator (participant)

... We'll get to our next question on the line. It is from Carly Davenport with Goldman Sachs. Please go right ahead.

Dan Tucker (CFO)

Hey, Carly.

Carly Davenport (VP and Equity Research Analyst)

Hey, guys.

Dan Tucker (CFO)

Carly, how are you?

Carly Davenport (VP and Equity Research Analyst)

Doing well. Thanks so much for taking the questions today. Appreciate it. Maybe just starting in terms of what we saw during the quarter for, for weather-normalized demand, you know, a little bit weaker on the industrial side, but commercial still looks quite strong. Can you just talk about how things are evolving relative to your forecast and kind of how you could see that evolving as we continue to move through the year?

Dan Tucker (CFO)

Yeah, absolutely, Carly. We saw this earlier this year as well. You know, from an industrial perspective, we're seeing, you know, two different dynamics play out that are negatively impacting growth. One is the housing sector. When it comes to things like lumber, stone, clay, and glass, to a degree, textiles, particularly where it involves carpet, just given the broader trends in the housing industry, we're, we're seeing that it impacts some of our, our usage in the short term. Then the other thing is chemicals from an industrial perspective. We've had one particular facility in Alabama that has slowed pretty significantly. Again, some of that was anticipated very early in the year, and so it's just playing out as we anticipated. Just wasn't anticipated when we kind of put our forecast together right before the end of the year.

What we're really encouraged by is what we're seeing on the commercial and residential side. You know, I, I spoke to the customer growth that we're seeing from a residential perspective. Again, we've seen sustained levels well above what we were seeing pre-pandemic. From a commercial perspective, just a lot of different stories playing out in that regard. Some of it's economic development, some of it's this data center dynamic that I mentioned, and certainly a lot of it is just commercial, naturally following the residential growth. As it pertains to how it's impacting our results, you know, what's important to remember is kind of the, the revenue contribution of these two classes on a relative basis.

You know, 1% change in industrial sales is only about $20 million of impact, whereas 1% change in residential and commercial is more like $40 million-$50 million. In terms of a net implication for us, you know, we're getting the benefit of the residential commercial more than offsetting what we're seeing on industrial.

Carly Davenport (VP and Equity Research Analyst)

Got it. That's super helpful. Thank you. Then maybe just on the financing front, in the context of the current rate environment, just you've got some financings kind of still outstanding for the rest of this year. Just how are you thinking about execution of the plan that you have as we move through 2023?

Dan Tucker (CFO)

Yeah, Carly, look, we're always gonna kind of keep our options open, the flexibility. You've seen us, you know, do the convertible debt instrument earlier this year. We typically lean, you know, on an ongoing basis toward just senior unsecured stuff of the parent. A lot of different instruments we've used across the, the utility franchises. I, I wouldn't characterize anything in our plans as out of the ordinary. We're gonna be monitoring the market and making sure we're, we're being thoughtful about, as we always are, maturities, about, you know, the, the mix between fixed and variable, and, and like everyone's doing, monitoring the rates as, as actively as we can to, to make sure we're, we're getting to the market when it makes sense.

Carly Davenport (VP and Equity Research Analyst)

Appreciate the color. Thank you.

Dan Tucker (CFO)

You bet, Carly. Thank you.

Operator (participant)

We'll get to our next question on the line. It is from Julien Dumoulin-Smith from Bank of America. Go right ahead.

Dan Tucker (CFO)

Julian, how are you?

Julien Dumoulin-Smith (Senior Equity Research Analyst)

Hey, good afternoon, team. Thanks for the time. Hey, hey. Great. Thanks so much. Really appreciate it. Hey, look, just coming back to the other subject here on procurement, you know, on the renewables front. I, I know we talked about this last quarter here. Curious to hear your latest thoughts, both on the utility side and ownership. I think that had always been kind of back half of this year. How's that looking on that front in Georgia? Separately, I think, Dan, last time we connected here, you, you were talking about the Southern Power effort, looking like it was a tad bit more competitive in this environment, in terms of your ability to actually win and, and accrue projects on that side of the house.

You wanna talk about some of the progress and maybe the evolution just with the rate environment where it is?

Chris Womack (President and CEO)

Yeah, Julian, let me start on the renewables front. As you know, in the 2022 RRP, Georgia had another 2,100 megawatts of renewables approved during that proceeding. The first RRP will begin later this year, targeting some 1,300 megawatts of renewable resources with operation dates between 2026 and 2027. I think you may have also seen Alabama Power guide its renewable generation certification, modified, some 2,400 megawatts over a 6-year period. I think that will also be later this year. We're proceeding, and we're looking forward to opportunities for us to own some renewables. You know, clearly, we'll take advantage of the normalization of tax treatment by between PTCs and ITCs and pursuing it from a best cost perspective.

We think we've got support from our commissions, for us to own more renewables, we're looking forward to those processes as they proceed later this year. I think your other question, Dan, you want to talk about pricing?

Dan Tucker (CFO)

I think the other question was around Southern Power.

Chris Womack (President and CEO)

Yeah, Southern Power.

Dan Tucker (CFO)

Yeah, Julian, the, the same continues to hold true. The, the radar screen of active, viable opportunities for Southern Power is, is, is as strong as it's ever been. Look, we, we fully expect to be able to continue to deploy capital in, in the right way there. We'll, we'll keep the same discipline we've always had in terms of the, the hurdles we look for, the risk profile, you know, long-term contracts, creditworthy counterparty. I think my, my short message there on Southern Power would just be stay tuned. There's good things happening.

Chris Womack (President and CEO)

Bottom line, Julien, I think we're very optimistic on the regulated side of what the future holds for renewables, and we'll see how that plays out-- begin to play out here later this year.

Julien Dumoulin-Smith (Senior Equity Research Analyst)

Then just as you think about the, the generation needs that the prior questioners have been really kind of poking at here, aligned with, as, as you alluded to a second ago, the added ability to own some of this renewable generation through, you through utility tax credit optimization, if you will. Can you talk about that opportunity coming together and maybe specifically the timeline that you could see that starting to play itself out? I know we just alluded to the, the prior IRP cycle, but, you know, getting that, the CapEx proposals, RFPs, and, and ultimately just seeing that load forecast updated.

Chris Womack (President and CEO)

Yeah, Julian, once again, I think it's a little premature in that regard. Clearly, as, as I spoke to you earlier about the renewable process and the RFPs, we see that forthcoming later this year. Clearly, we've got some more work to do as we analyze the implications of this economic development activity and what is mean for, for loads. We simply right now need to let the RFP process play out over the next few months and next few years. We'll keep you updated as we, as we move through the process.

Dan Tucker (CFO)

Yeah. As we've, we've said before, you know, consistent with what Chris just said, this will come together from a plan and capital deployment perspective in the latter part of our forecast horizon. It's not a 23 thing in terms of capital deployment. Might, but probably not a meaningful 24, but beyond that is where the real opportunity exists. The other thing that's coming together to help drive this, and, and I think you, you know, mentioned the economic development aspect, Julien, as all these customers are choosing to locate in our service territories, they are increasingly demanding to be served with renewable generation, and that's just helping support everything we're trying to do.

Julien Dumoulin-Smith (Senior Equity Research Analyst)

Yep, I hear you. Wish you guys best of luck, and hope to see you guys soon. All right, take care.

Dan Tucker (CFO)

Thanks, Julien.

Chris Womack (President and CEO)

All right, Julien.

Operator (participant)

Thank you very much. We'll get to our next question on the line. It is from Jeremy Tonet with JPMorgan. Go right ahead.

Dan Tucker (CFO)

Hey, Jeremy.

Jeremy Tonet (Senior Equity Research Analyst)

Hi, good afternoon.

Chris Womack (President and CEO)

Good afternoon.

Jeremy Tonet (Senior Equity Research Analyst)

Thanks. Just wanted to see, I guess, with starting off Vogtle here, some of the, you know, the issues at the finish line here, just wondering what learnings you take away from that, and do you see the same type of issues materializing for Unit 4, or are there learnings here that can kind of head that head off any issues like that?

Chris Womack (President and CEO)

Jeremy, one of the things we, we've commented for, you know, we've said it probably for, for a few years now, that, that there would be lessons learned and be transferred over from Unit 3 to Unit 4. Let me give you, give you some examples of how that is playing out. On Unit 3, hot functional testing took 94 days. On Unit 4, it took 88 days. From 94, took 42 days. Hot functional testing to complete to 103(g) was 371 days on Unit 3, 88 days on Unit 4, and from cold hydro to hot functional test start was 191 days on Unit 3 to 103 days on Unit 4.

I, I think you're seeing, clear examples of how lessons are being learned from Unit Three over to Unit Four, and that, that work, those lessons learned, will continue, I think, to, to show itself as we move through Unit 4.

Jeremy Tonet (Senior Equity Research Analyst)

Got it. That's helpful there. Thanks. Just kind of pivoting here, I think I saw that the D.C. core overruled FERC's approval of the Southeast Energy Exchange Market. Just what, what do you make of this hearing, and, and what's the path forward?

Chris Womack (President and CEO)

Yeah, I mean, it remanded it back to FERC to clarify a couple of issues around the power pool, and there were some questions about, you know, who could participate in SEEM, and SEEM, there has to be interconnections. I think they're simply remanded back for clarification of a couple of issues, but nothing big there. I mean, SEEM continues to operate and perform very well. Everybody's very pleased with the results of SEEM. It's going to be remanded back to FERC, like I said, with a couple of issues that they'll clarify for SEEM going forward.

Jeremy Tonet (Senior Equity Research Analyst)

Got it. That's helpful. Thanks. Just last one, if I could. What are you expecting on hydrogen regs from Treasury, and what do you think Southern Power's potential to participate could be with, with Vogtle, the potential for green hydrogen here?

Chris Womack (President and CEO)

Let, let me say something quickly about hydrogen now that Dan touched on any, any rules from, from Treasury. You know, we're, we're participating in a number of processes DOE has with Hydrogen Hub, so we're excited about that. As you may recall, we did a 20% blend at our Plant McDonough gas site. We're excited about all the technology activity and the considerations that are going on around hydrogen. You know, we look forward to seeing if we can develop this market, get the pricing right, get the transportation of, of the product right, and then we can find off-takers. I mean, we're thrilled by the possibility and how Vogtle can continue to serve customers in Georgia. There are a lot of aspects of hydrogen that we get really excited about.

Clearly, there's a lot of work that we've got to work through to get to that point to make it viable, commercial, commercially viable.

Dan Tucker (CFO)

Yeah, Jeremy, in terms of the Treasury regs, certainly like most in the industry, I think for us, it makes sense that those are as broad as possible going in to help kind of drive the deployment of the technology. Otherwise, it, it just may be cost-prohibitive for a lot of people to get it out there. Whether that's a permanent broadness or it's a temporary broadness that transitions to something more specific, you know, I think that's gonna be in the hands of the Treasury group. In terms of Southern Power's opportunity to play there, certainly Southern Power's wheelhouse is providing, you know, utility scale, renewable generation to counterparties.

To the extent that we find opportunities in this space to serve, you know, an electrolyzer or another entity with a long-term contract, and it's a creditworthy counterparty, and it meets all of the same criteria, it certainly expands our universe of opportunities.

Jeremy Tonet (Senior Equity Research Analyst)

Got it. That's helpful. I'll leave it there. Thanks.

Chris Womack (President and CEO)

Thank you.

Operator (participant)

We'll get to our next question on the line. It is from David Arcaro with Morgan Stanley. Go right ahead.

Dan Tucker (CFO)

Hey, Dave.

Chris Womack (President and CEO)

How are you, David?

David Arcaro (Executive Director and Senior Equity Analyst)

Hey, doing well. Thanks for taking my questions. You know, wondering if you might be able to touch a little bit on Form Energy. You had an agreement reached at Georgia Power this quarter. I was wondering, how you're thinking, long-duration energy storage might play a role in your system over time?

Chris Womack (President and CEO)

Yeah. Once again, we're excited about the relationship that we've established with Form. you know, we have utilized, you know, the kind of four to six-hour batteries, but we think a 100 megawatt- 100-hour long-duration storage battery, some 15 megawatts, is, is, has got to be a part of the mix, and it's got to be a part of the system and the grid going forward. We're excited about what Form is doing. We were at their ground-breaking ribbon cutting up in West Virginia a month or so ago. We are excited about Form and looking forward to the, their development as we go forward. We think this has got to be part of the technology mix, as we go forward, and we're hoping they're gonna be successful.

As you know, we pay a lot of attention to research and development, and we think as we look at a lot of solutions, whether it's emissions control or just making sure we maintain a reliable and resilient grid, we think technology advancement is very, very critical. We're excited about the work that Form is doing, and we're glad to partner with them.

David Arcaro (Executive Director and Senior Equity Analyst)

Great, that makes sense. Then, secondly, you know, obviously, a big weather headwind that you're working through, and, could you touch on the cost control, just your, your confidence level in being able to manage and, and find flex in your O&M budget for this year? Where are the key areas that you're looking at in terms of offsetting the headwind so far?

Chris Womack (President and CEO)

Yeah, I think, Dan said it in the, in, in the conversation early on, that we'll remain keenly focused on cost management. We know the, the weather we've seen is unprecedented, is the, the lowest, the warmest we've seen in history. We've got to correspond with that with similar focus on, on cost management. There are a number of efforts going on across the company to make sure that we are executing around cost management controls. Right now, we feel good about kind of where we are, but we know we've got a lot more work to do as we go forward through the rest of the year.

David Arcaro (Executive Director and Senior Equity Analyst)

Okay, understood. Congratulations on Vogtle Unit 3, and thanks again. Appreciate it.

Chris Womack (President and CEO)

Thank you very much.

Operator (participant)

Thank you. We'll get to our next question on the line. It is from Durgesh Chopra with Evercore ISI. Go right ahead.

Dan Tucker (CFO)

Hey, good afternoon, guys.

Chris Womack (President and CEO)

Hey, Durgesh.

Durgesh Chopra (Senior Equity Research Analyst)

Hey, good afternoon, Dan. seven minutes and 58 seconds of prepared remarks. I'll keep it real brief, hopefully. Just following up on David's question. This quarter, we had $0.04 of unfavorable weather versus normal, but you actually delivered $0.04 higher than your estimate. Is that all just cost cuts, or are there other things that we should think about, one-time orders and other things?

Dan Tucker (CFO)

Yeah, it's primarily cost reductions, Durgesh. I mean, you know, there's always some little puts and takes here and there that are a little different than our forecast, but overall, it's just the fruit of our labor. Kinda going back to, to Dave's original question in terms of where, frankly, it'd be doing a disservice to highlight any particular area of the business where we're doing that, 'cause we're doing it everywhere. You know, this is a significant lift, and we're, you know, doing everything we need to do and pulling out all the stops to deliver.

Durgesh Chopra (Senior Equity Research Analyst)

Okay, solid. Then just maybe, if you can, otherwise, I'll just follow up with Scott. Just any sort of initial takes on July weather?

Dan Tucker (CFO)

It hasn't looked like the first half.

Durgesh Chopra (Senior Equity Research Analyst)

Okay. Thanks so much. Appreciate the time.

Dan Tucker (CFO)

Thank you.

Operator (participant)

Thank you very much. We'll get to our next question on the line. It's from Nick Campanella from Barclays. Go right ahead.

Nick Campanella (Director and Senior Analyst)

Hey, everyone. Thanks for taking my questions. Hope you're doing well, congrats on the Unit Three news.

Chris Womack (President and CEO)

Thanks, Nick.

Nick Campanella (Director and Senior Analyst)

I guess-- Yeah, absolutely. Just looking forward to, you know, Unit 4 soon, and then, you know, knowing that we're getting closer to that $700 million uplift that you've detailed in slides here on the CFO. Dan, maybe you can just remind us, you know, your preferred use of those cash flows as you roll forward your plan in the fourth quarter. I know we talked about improving balance sheet in the past, but I'm also cognizant you're talking up a lot of different CapEx opportunities in your region.

Dan Tucker (CFO)

Yeah, Nick, and thanks for that question. It really is a kind of-

... all of the above strategy, if you will, in terms of, of the opportunity to, to use this cash. It's the three, the three things that we're primarily focused on. You said 1, which is to fund the capital plan, right? We'll be positioned as we had been historically, kinda pre-penalty ROEs and heavy construction on, on Vogtle 3 and 4, where our operating cash flow represents over 3x the size of our common dividend. That leaves an awful lot of cash flow to deploy against this, you know, capital plan that we expect to continue to grow. That's thing one. The number one priority of the things we're focused on, you also mentioned this, is credit quality.

What this does is provide an uplift to our credit metrics such that, you know, we're more in the 17, 17+ range for FFO-to-debt. The opportunity there is not to raise it to these levels well above our thresholds and then use that as some sort of currency to do things. That's the opportunity to just once again get back to being a premium credit utility and maintaining that position for the foreseeable future. That's thing two.

The third thing that we've talked a lot about is the opportunity that we'll have as our payout ratio gets kinda sustainably at or maybe a little below 70%, so call that maybe 2024, but more likely 2025, an opportunity to go to our board and for Chris and I to make a recommendation to increase the rate of the dividend growth to be more, more aligned with our earnings growth. It's, again, all of the above, but really important things that this enables us to do.

Nick Campanella (Director and Senior Analyst)

All right, thanks for that. That's it for me today. Appreciate it.

Dan Tucker (CFO)

Thanks, Nick.

Operator (participant)

Thank you. I'll get to our next question on the line. It is from Angie Storozynski with Seaport. Go right ahead.

Chris Womack (President and CEO)

Angie, how are you?

Angie Storozynski (Managing Director and Senior Equity Research Analyst)

Very good, thanks. Just, just, you know, you guys have been in this combat mode for the last, well, for a decade, almost, it feels like. I know that there's still the prudence review ahead of you, but I'm just, I'm just trying to picture Southern in a back to basics mode. I mean, what, what does it even look like? That's one. Number two is, I mean, you're clearly, the stock has rerated somewhat. What is it that you think you can do, well, besides just putting Vogtle Unit 4 online to further rerate the stock from here?

Chris Womack (President and CEO)

Angie, let me start with the first part of your question in terms of being in combat mode during this, this Vogtle period. I'd say we're gonna stay in combat mode in terms of execution. Yeah, hopefully, we're gonna be a little boring. We think boring is beautiful, but we're gonna be incredibly aggressively focused on customers being at the center of, of everything that we do, focused on the Circle of Life, making sure we're maintaining a constructive regulatory environment, providing world-class service, and using your, your language of in combat mode, but doing that in a very aggressive way that makes sure we're giving customers what they need from a reliability, but also a resilience perspective, but also making sure we're paying attention to issues around affordability.

We have a lot of work to do, and so we're gonna be very singly focused on execution, and I think that's gonna be very important as we also make the case that we deserve that premium valuation and returning back to the days of old Southern Classic.

Dan Tucker (CFO)

Yeah. It is no mistake and no accident that the first page of our deck has Circle of Life on it.

Angie Storozynski (Managing Director and Senior Equity Research Analyst)

Okay. Then just, just maybe a smaller point, but, you know, you guys, have, you know, just like everybody else, more violent and impactful storms going through your service territory. Is there anything from, one investment perspective to regulatory set up that could help you, you know, harden the grid and also assure timely recovery of any costs associated with those with the climate change, basically?

Chris Womack (President and CEO)

I would say, I mean, if you look at our capital budgets today, and, I mean, getting past Vogtle, there are no really large projects, but it's a lot of blocking and tackling with transmission distribution, with grid improvement programs, with undergrounding, with changing out circuits and improving technology, SCADA systems. A lot of that work to enhance and improve reliability, but also improve resiliency so that storms are more different, paying attention to more extreme weather. Doing the basic work to prepare for these kind of conditions and help us to maintain our, our focus on reliability and the resiliency of our system.

Angie Storozynski (Managing Director and Senior Equity Research Analyst)

Great. Thank you.

Operator (participant)

Thank you very much.

Dan Tucker (CFO)

Thank you, Angie.

Operator (participant)

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

Chris Womack (President and CEO)

Hey, once again, let me thank everybody for, for your calls today. It's a, a wonderful time for Southern Company as we brought Unit 3 commercial. With the progress, we're making on Unit 4, we'll continue to press ahead and move forward. Again, thank everybody for, for joining us today. Thank you very much. E verybody, be safe.

Operator (participant)

Thank you, sir. Ladies and gentlemen, this concludes the Southern Company second quarter 2023 earnings call. You may now disconnect and have a great rest of the day.