Southern Earnings: Weather Hurts Earnings, but Nuclear Startup a Milestone

We are reaffirming our $68 fair value estimate for Southern SO after the company reported earning $0.69 per share on an adjusted basis during the second quarter of 2023, down from $1.07 in the same quarter last year, primarily because of milder weather. We are reaffirming our narrow moat rating.

Even more important for investors was the announcement that Southern’s new Vogtle Unit 3 entered commercial operation on July 31. Unit 4 remains on schedule for start-up by early next year. Southern’s forecast $10.6 billion share of total project costs has not changed, with only an estimated $649 million left to spend.

As investors have become comfortable that Southern can complete the Vogtle project, the stock has rallied. Southern’s stock has outperformed the Morningstar U.S. Utilities Index by 10 percentage points since mid-March, and now trades in line with our fair value estimate.

In the second quarter, mild early summer weather resulted in a drop in energy demand and earnings from last year, when Southern benefited from warmer-than-normal weather. After a relatively warm winter that also depressed energy demand, Southern’s first-half earnings are down $0.23 per share year over year because of weather differences. We assume normal weather in our long-term forecasts.

An exceptionally hot July should help Southern make up some of the weather-related earnings weakness and keep Southern on track to reach management’s $3.55-$3.65 EPS guidance range, in line with our forecast. We continue to forecast 6% long-term weather-normalized annual earnings growth, in line with management’s 5%-7% target, based on an average $8.6 billion annual capital investment during 2023-25, excluding Vogtle.

With Vogtle 3 in service, Southern can request rate recovery for some of the cost overruns and eliminate rate penalties. We continue to forecast 2024 weather-normalized earnings in line with management’s $3.95-$4.10 post-Vogtle EPS guidance range.