Plant Vogtle Expansion and Solar Investments Mark a New Era of Growth and Sustainability in Energy

What are the underlying business or industry changes driving this perspective?

• Successful completion of Plant Vogtle Unit 3 and meaningful progress towards the completion of Unit 4, with expected in-service in Q2 2024, will add significant carbon-free generation capacity, enhancing energy security and sustainability. This is likely to positively impact long-term revenue and earnings.
• The acquisition of 2 new solar projects, adding an additional 350 megawatts of carbon-free generation, aligns with sustainability goals and increases renewable energy capacity, granting diversification of energy sources.
• Continued focus on greenhouse gas emission reduction, achieving a 49% reduction in 2023 and moving towards the interim goal of a 50% reduction by 2030.  Strengthens the company's commitment to sustainability, potentially improving investor sentiment and market positioning.
• The company's $48 billion capital investment plan, reflecting a $5 billion increase in state-regulated utility investments relative to the previous year, is aimed at enhancing the resilience of electric and gas networks. The investments should support long-term rate base growth of approximately 6%, laying the foundation for sustained earnings growth.
• Projected electricity sales growth, especially from commercial sales driven by customer growth and the robust economic development in the Southeast service territory - With sales growth projected to accelerate to an average of approximately 6% annually from 2025 to 2028, this promises to apply downward pressure on existing customers' rates, potentially improving financial performance through increased utility revenues.

How have these above catalysts been quantified?

• Analysts are assuming Southern's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.7% today to 17.2% in 3 years time.
• Analysts expect earnings to reach $5.0 billion (and earnings per share of $4.5) by about March 2027, up from $4.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.6x on those 2027 earnings, down from 19.0x today.
• To value all of this in today’s dollars, we will use a discount rate of 5.97%, as per the Simply Wall St company report.

What could happen that would invalidate this narrative?

• Reliance on new constructions like Plant Vogtle Unit 3 and 4 for future capacity could encounter unforeseen delays or cost escalations, potentially impacting expected earnings and net margins due to higher capital and operational expenditures.
• If the mild weather experienced in 2023 becomes a recurring pattern, it could continue to negatively impact utility revenues, especially since weather conditions significantly influence the demand for electricity and gas services, thus affecting net income.
• The significant investment in capital projects ($48 billion over the next five years) coupled with the necessity to occasionally issue equity to fund these investments could dilute earnings per share (EPS) if the projected sales growth and consequent revenue increases do not materialize as expected.
• The projected acceleration of electricity sales growth relies heavily on sustained economic development and the successful attraction of high-energy-consuming businesses such as data centers to the region. Any slowdown in economic development activities or failure to attract these businesses could result in lower-than-expected sales growth, impacting revenue and earnings.
• Increased competition and regulatory challenges in operating and expanding the gas utility business, particularly mentioned about Nicor Gas and considerations in Illinois, could impose additional operational constraints and financial burdens, potentially affecting net income margins if these challenges lead to higher costs or limit business expansion opportunities.

• The analysts have a consensus price target of $74.5 for Southern based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with this, you'd need to believe that by 2027, revenues will be $29.4 billion, earnings will come to $5.0 billion, and it would be trading on a PE ratio of 18.6x, assuming you use a discount rate of 6.0%.
  
• Given the current share price of $69.42, the analyst's price target of $74.5 is 6.8% higher. The relatively low difference between the current share price and the analyst target indicates that they believe the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.