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Global trade war hurts sales as utilities focus on core growth strategies

While American Electric Power Co. Inc. and Southern Co. highlighted concerns about the impact of the global trade war and tariffs on industrial sales, company-specific capital and growth plans have so far dominated the bulk of second-quarter earnings calls.

"The biggest economic headwind we have at this point is the impact of the trade war on the businesses in AEP's service territory," AEP Chairman, President and CEO Nicholas Akins said on the company's July 25 earnings call.

Scotia Capital (USA) Inc. analyst Andrew Weisel said AEP is "perhaps the most exposed to global trade wars" of the utilities in the firm's coverage.

"We have little reason to question the company's ability to deliver on EPS growth above the midpoint of the 5%-7% targeted range, but recognize some fairly unique risks. Hence we stay on the sidelines," Weisel wrote in a July 29 earnings roundup.

The primary focus of AEP's call, however, was the company's $2 billion plan to acquire three wind projects under development in Oklahoma from Invenergy LLC nearly a year after canceling the 2,000-MW, $4.5 billion Wind Catcher Wind Farm.

"We're optimistic that this more flexible approach will succeed as a replacement plan for last year's failed Wind Catcher project," Weisel wrote, adding that regulators in Oklahoma and Texas remain a wildcard.

Southern Executive Vice President and CFO Andrew Evans told analysts and investors the company's industrial sales "were down due to global trade concerns and a strong dollar's impact on trade, as well as changes in production levels and some timing."

The July 31 earnings call came a day after the staff of the Georgia Public Service Commission released a report skeptical of the construction timeline and estimated in-service dates of the Alvin W. Vogtle Nuclear Plant expansion.

Vogtle units 3 and 4 are scheduled to come online in November 2021 and November 2022, respectively. Southern subsidiary and Vogtle majority owner Georgia Power Co. is focused on ramping up productivity at the site to bring units 3 and 4 online months earlier.

"Based on what we know today, we continue to expect that we have sufficient schedule and cost contingencies to meet this objective," Southern Chairman, President and CEO Thomas Fanning said on the call.

"We are far from nuclear engineers or construction experts but we read the [regulatory staff] report and didn't see anything too damaging and we also don't see any incentive for [Southern] to be overly aggressive in their comments to Wall Street about costs/delays," CreditSights analysts wrote in a July 31 research report.

Weisel said it is "inevitable" that Southern will tap into the $400 million cost contingency for the Vogtle project to keep the project on track.

"[W]e expect the company to increase cost estimates rather than risk in-service delays, which will likely drive more equity needs," Weisel wrote.

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Dominion Energy Inc. and NiSource Inc. executives worked to assure investors that their capital and growth plans remain on track despite recent headwinds.

Dominion is looking to the U.S. Supreme Court to settle a federal permit dispute for the 600-mile, stalled Atlantic Coast Pipeline LLC project. The Dominion-led pipeline project has hit a series of legal setbacks, including a U.S. Circuit Court of Appeals decision that struck federal authorizations allowing the pipeline to cross the Appalachian Trail.

"We are confident that the 4th Circuit's ruling will be overturned," Dominion Chairman, President and CEO Thomas Farrell II said on a July 31 earnings call.

The U.S. Court of Appeals for the 4th Circuit on July 26 also removed a U.S. Fish and Wildlife Service authorization for the project.

"While a clear setback, [Dominion] believes there is nothing in the court's opinion on the four [endangered] species that they expect would prevent the biological opinion from being reissued in time to recommence construction by the end of this year," CreditSights analyst Andrew DeVries wrote in a July 31 report.

Meanwhile, NiSource again raised its estimate for costs from the September 2018 Massachusetts gas explosions. The company now expects to spend $1.67 billion to $1.72 billion to cover the cost of pipeline replacement and restoration, third-party claims and other expenses following the deadly series of Boston-area fires and explosions.

"Going forward, with four major civil claims related to the event now resolved, and the restoration work nearly complete, we don't expect any significant future adjustments to the estimate," NiSource Executive Vice President and CFO Donald Brown told analysts and investors.

NextEra Energy Inc. executives told investors they have not made a decision on whether to combine the company's flagship utility Florida Power & Light Co. and Gulf Power Co., which NextEra acquired from Southern.

NextEra's strategic plays with its Florida utilities are seen as key to future financial success as the company weighs a potential combination to streamline regulatory activity.

Guggenheim Securities LLC analyst Shahriar Pourreza said in a July 24 note that general rate case filings anticipated in 2021 for Florida Power & Light Co. and Gulf Power Co. are "now likely better aligned with [the] potential merger" of the two utilities.

A potential merger could also streamline filings and proceedings related to Florida's new law that directs investor-owned utilities to submit long-term plans for hardening grid infrastructure to state regulators and recover costs from related activities.

Pourreza said undergrounding wires is seven to eight times more capital intensive than installing traditional above-ground lines. NextEra Executive Vice President of Finance and CFO Rebecca Kujawa said the grid hardening process will be "a multi-decade investment opportunity" since there will be more long-term visibility for grid improvements.

"We firmly view hardening and undergrounding as laying the foundation for a long, top-of-the-range performance at FPL," Pourreza added.

Public Service Enterprise Group Inc.'s second-quarter earnings took a hit compared to earnings that same period in 2018. Executive Vice President and CFO Daniel Cregg cited the impact of lower capacity market prices and cheaper natural gas in the northeastern U.S. as factors during the company's July 30 call.

Guggenheim, in a July 30 report, outlined a continued decline in gas prices and the utility losing "its basis and locational advantages" as potential risks.

Public Service Enterprise Group also is in negotiations over its future role in Ørsted A/S’s 1,110-MW Ocean Offshore Wind Farm in New Jersey and will either be the project's service provider or a co-owner.

"The size of the opportunity for capital investment may be meaningful," Guggenheim's Pourreza wrote, though the analyst noted that PSEG's management has said that its stake would represent a minority interest in the facility.