Key Highlights

● Earnings rose on weather, customer growth and Data Center usage

● Contracted large load expanded

● Capital plan grew

● Adjusted Earnings outlook for the year moved higher

The Southern Company (NYSE:SO), among the most closely watched Blue-Chip Utility holdings in the US, reported higher third-quarter earnings and raised its adjusted earnings outlook for the year. The Atlanta-based group said both reported and adjusted Earnings Per Share increased from the prior-year quarter, while Operating Revenue climbed at a double-digit rate. The earnings presentation released with the results showed additional large-load contracts, faster data center usage and a Capital plan that could grow further.

Chairman, President and Chief Executive Officer Chris Womack called the growth in the Southeast “unprecedented and transformational” in the earnings release. He said the company believes it is well positioned for the present and the future, and he credited its scale, experience and customer-focused strategy for allowing it to meet rising Demand responsibly.

The quarter's significance lies less in any single earnings line than in the evidence that demand once described as a pipeline is now appearing in actual sales. Commercial electricity sales, the customer class where data centers are counted, outpaced other classes after adjusting for weather, and management's slides linked that growth to data center load ramps.

Weather Helped, but Not Alone

Warmer weather gave the quarter a clear tailwind, and the company's earnings bridge for its traditional electric companies shows weather as a meaningful positive item. It was not the largest, however. Retail revenue impacts contributed more, and retail sales added a further sizable amount. Higher allowance for Equity funds used during construction and lower income taxes also helped.

Offsets came from higher non-fuel operations and maintenance costs and from interest expense and other items. At the consolidated level, non-fuel operations and maintenance expense rose from the prior-year quarter, and taxes other than income taxes increased sharply. Earnings from equity method investments climbed, and the allowance for equity funds used during construction rose as the building program expanded.

The higher share count was another notable drag. The company's adjusted earnings commentary lists dilution from additional shares among the factors partly offsetting growth, reflecting equity raised to help fund the capital program. Its segment comparison shows the share increase taking a visible amount off per-share results both for the quarter and for the year to date.

Adjusted earnings exclude several specified items. In the latest quarter, those included accelerated Depreciation from wind repowering at Southern Power, a loss on Debt extinguishment, a change in a related tax benefit and an estimated loss from a disallowance at Nicor Gas. The company said remaining repowering charges are expected through next year, with the projects completing by the third quarter of that year.

A Sales Table That Tells the Data Center Story

Total electricity sales rose from the year-earlier quarter, and retail sales rose by more. Weather explains much of the difference between the actual and weather-adjusted figures, especially in the residential class, where reported sales climbed sharply but the adjusted gain was far smaller.

The commercial class looks different. Its reported sales also rose strongly, but the weather-adjusted gain remained large, far above those of the residential and industrial classes. The presentation describes commercial growth as led by data center load ramps and reports that data center usage rose by more than half against the prior-year quarter, with a similar increase for the year to date.

That usage trend has been steepening over a matter of quarters. Market commentary noted a year ago that data center usage was up by a much smaller percentage in the third quarter of last year. By the first quarter of this year, the growth rate had risen sharply, and by the second quarter it had surged further. Market data both reported in August that operating data center load across the system had passed one gigawatt.

Weather-normalized retail sales growth was described in the presentation as the highest in recent history. Growth extended across all customer classes and all operating companies. Residential gains were supported by new customers added since the prior-year quarter, and regulated utility customers overall grew modestly, with the electric companies adding at a faster rate than the gas distribution business. Wholesale sales also increased.

Georgia Power at the Center

Among subsidiaries, Georgia Power was the standout. Its Net Income available to common rose substantially from the prior-year quarter, and it remains by far the largest profit contributor in the group. Alabama Power also recorded a solid increase, while Mississippi Power posted a smaller gain.

Southern Power, the competitive generation business, reported a sharp quarterly improvement from a very low base, although its year-to-date earnings were still down because of repowering-related depreciation. Southern Company Gas earned slightly less in the quarter, but its year-to-date earnings remained higher than a year earlier.

Georgia also accounts for much of the regulatory attention. The presentation notes that the state's large-load rules govern those contracts and identifies Georgia as having the largest share of large-load growth. Georgia Power and Alabama Power, according to market data earlier reporting, secured multi-year rate stabilization agreements, and Georgia Power has quantified benefits from serving large-load customers that it intends to use to lower costs for existing customers in later years.

The Contracted Book Keeps Growing

Contracted large load rose again in the third quarter, with additions split roughly evenly between Alabama and Georgia, according to the presentation. Nearly all of the contracted projects have broken ground, and the weighted-average contract length runs well beyond a decade. Further load sits in late-stage or finalizing discussions, and the prospective pipeline remains far larger, spread across a large number of projects by the company's count.

The speed of that growth stands out when read against earlier disclosures. According to market data, the contracted total stood at a much lower level in October of last year, and each subsequent quarter has moved the figure higher. In the second quarter, the additions included a long-term Georgia Power agreement with OpenAI for a data center site near Savannah. According to market data, the agreement contains a flexible demand response feature for peak shaving, which it said was the first such provision Southern had codified with a data center customer.

In February, the contracted customers then included Google (NASDAQ:GOOGL), Meta, Microsoft (NASDAQ:MSFT) and Compass Datacenters. Service territory strength has also drawn outside attention, with Evercore ISI analyst Nicholas Amicucci citing, in that report, strong demand from large loads along with the region's regulatory environment and affordability.

Contract Terms as a Shield for Existing Customers

Public concern over who ultimately pays for new generation has made contract design a major point of discussion. According to the presentation and market data, data center contracts carry minimum terms well over a decade, along with minimum bill provisions similar to take-or-pay arrangements. Termination payments are tied to the incremental cost to serve over the remaining contract life and are backed by Collateral requirements.

The presentation adds that large-load contracts require a substantial amount of collateral by the end of the decade at an average counterparty rating in the double-A range. Those disclosures appear designed to answer a pair of related concerns at once, namely whether existing customers bear the cost of new Assets and whether the company carries too much exposure if demand falls short.

Political attention has not gone away. In February, a Goldman Sachs (NYSE:GS) analyst raised a question on Georgia legislation that would have imposed a temporary data center moratorium or stricter regulation, and in August Womack remarked, “There's noise all across the country about data centers.” He added that “Hyperscalers need to do a better Job of explaining the benefits and value.” Market commentary noted him saying that there is no statewide moratorium, although some counties may have them, and that projects in the company's territory continue to move forward.

A Capital Plan With Room to Expand

To serve this load, the base capital plan running through the end of the decade has grown repeatedly. In February, the plan had been raised from the previous figure, with roughly half of the spending going toward generation. The third-quarter presentation adds newly identified projects on top of that base and states that further opportunities could lift the total substantially. The overwhelming majority of capital spending is in state-regulated utilities, with electric utilities taking the largest portion.

The list of identified projects covers gas uprates at units in Alabama and Georgia, nuclear uprates at the Vogtle and Hatch plants and an expansion of the Southeast Connector pipeline. Other Options include further gas uprates, brownfield gas development at multiple sites and continued wind repowering at Southern Power. Requests for proposals are active at Alabama Power and Georgia Power for new generation in the next decade.

In August, Womack said the OpenAI contract moved the company beyond its recently approved capacity, indicating that demand has moved ahead of what regulators have already cleared. Chief Financial Officer David Poroch said at the time that new generation investments would represent substantial incremental Investment on top of the base capital plan. Market data also reported in May that a large Energy Department Loan closed in February, and that the department said it would help build or upgrade firm power, including new gas generation.

Asked earlier this year about the generation mix, Womack told analysts, “There's a lot of gas in the plan,” and described batteries, storage and uprates as part of an “all of the above approach,” according to market data. On nuclear, he said in the spring that the company was “not at a place to make a commitment about building a new unit.” The nuclear items now in the presentation are uprates at existing plants rather than new reactors, which is consistent with that position. Southern Power has also continued to add contracted renewables, and In February, the first phase of the Millers Branch Solar Facility in Texas had entered service.

Balancing Growth With the Balance Sheet

Funding is the natural counterpart to the capital story. The presentation states that substantial equity has already been secured through at-the-market sales, equity units, internal plans and junior subordinated notes, leaving a comparatively small remainder to be addressed through the end of the decade. Incremental capital beyond the identified plan is expected to be funded in part with equity, which indicates that additional issuance could accompany any further expansion.

The company's Credit objectives are set out in the same deck. It targets single-A ratings for each state-regulated utility and a triple-B-plus level at the parent, and it projects an improvement in its internal funds-from-operations-to-debt measure over the coming years. Interest expense is already a visible item in the earnings bridge, and construction financing is one of the risks listed in the release's forward-looking statements, which also flag cost recovery, construction schedules, fuel costs, regulatory changes and data center demand itself.

A Raised Outlook, With a Refresh Still to Come

The company raised its adjusted earnings outlook for the year above the original range issued in February, describing it as high single-digit growth. The presentation's implied fourth-quarter estimate is modest compared with the earnings already recorded earlier in the year.

Beyond this year, the company projects adjusted earnings growth in a high single-digit range through its current guidance horizon and a slightly lower rate over the long term, with a full refresh expected on its fourth-quarter call. Management also projects electric sales growing at a rapid annual pace through the end of the decade.

That refresh, along with the outcome of the generation requests for proposals, is likely to be the next major reference point. It may show how much of the prospective large-load pipeline management considers firm enough to include in its plan, and how much additional capital that would require.

Southern Company, which market data has described as the second-largest US utility, serves millions of customers through electric companies in several Southeastern states, gas distribution companies, a competitive generation business, distributed energy services and fiber optics and telecommunications operations.

What the Quarter Adds Up To

The third quarter offered a fairly complete view of how the Southeast's power demand story runs through a large utility's accounts. Sales growth appeared first in commercial accounts, profit growth appeared most strongly at Georgia Power, and cost, financing and share count effects absorbed part of the benefit. Contracted demand kept rising, and capacity plans have been stretching to keep up.

The variables to monitor are tangible: whether contracted projects continue to convert into metered load on schedule, whether regulators approve the generation needed to serve that load, and whether the customer protections described in the contracts satisfy a public debate that shows little sign of fading.