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Guggenheim downgrades Southern to 'neutral,' Moody's downgrades Georgia Power

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Guggenheim downgrades Southern to 'neutral,' Moody's downgrades Georgia Power

Rating agencies reviewed their outlooks on Southern Co. on Aug. 8 just hours after the company disclosed a $1.1 billion pretax loss tied to its troubled Alvin W. Vogtle Nuclear Plant expansion.

Southern subsidiary Georgia Power Co. assumed a greater share of Vogtle's costs from the other three owners after realizing it underestimated the changes needed to lower risks and stay on schedule with the project, which is already years behind schedule and billions of dollars over budget.

Guggenheim Securities analyst Shahriar Pourreza wrote in a note that this increased stake — along with the existing liability of building a complex, multibillion-dollar infrastructure project — casts a darker shadow on the company's shares until at least November 2021 and November 2022, the scheduled completion dates of the two new Vogtle reactors. He downgraded Southern Co. stock to "neutral" from "buy."

Vogtle is also owned by Oglethorpe Power Corp., the Municipal Electric Authority of Georgia and Dalton Utilities, who together hold a 54.3% interest in both the existing and new reactors.

Even though Georgia Power announced $400 million in new contingency plans to its total project cost, implemented after corporate affiliate Southern Nuclear Operating Co. concluded the previous contingency was insufficient to offset forecast cost increases, that was not enough to assure Guggenheim that Vogtle costs wouldn't increase or that the venture wouldn't be abandoned altogether.

"[R]emaining constructive on shares going forward could turn into something more negative given the binary risks with Vogtle now tipping in the wrong direction," Pourreza wrote. "For now, we can't work through the nuclear overhang and are stepping to the sidelines."

Guggenheim reduced its price target for Southern stock to $47 from $50. Shares closed Aug. 8 at $46.88, down 4.48% from the previous day's close. The stock continued to hover around that price in after-hours trading.

Moody's Investors Service also took action on Southern Co. and its subsidiaries on Aug. 8, downgrading Georgia Power's senior unsecured rating to Baa1 from A3 and placing the ratings on review for downgrade. Moody's affirmed its rating of the parent company and maintained a negative outlook.

"The downgrade of Georgia Power is prompted by the $1.1 billion additional increase in the utility's share of Vogtle new nuclear project costs, which has materialized only 8 months after a revised cost estimate and construction schedule was reviewed and approved by state regulators, demonstrating the ongoing challenges and execution risk with the continued construction of the Vogtle project," Moody's Senior Credit Officer Jeff Cassella said in a news release.

Moody's also affirmed its rating of Southern utility Alabama Power Co. with a negative outlook, while upgrading utility Mississippi Power Co.'s senior unsecured rating to Baa3 from Ba1 and maintaining a positive outlook.

The $1.1 billion increase in Georgia Power's share of the Vogtle cost is an additional $400 million of contingency, along with $700 million in base capital costs. Southern Chairman, President and CEO Tom Fanning said on an Aug. 8 earnings call that the utility would not immediately seek recovery of the $1.1 billion. While stating Georgia Power has the right to request that amount at any point, Fanning said the utility would not do so just after going through contentious Vogtle proceedings with state regulators.

Fanning was unclear if and when Georgia Power would ever pursue recovery of the $1.1 billion. Executive Vice President and CFO Drew Evans said on the call that Southern would issue $800 million in incremental equity, a move seen as a compensation for the write-off.

Management reinforced the reactors' in-service dates, but admitted the project is entering a difficult 18-month period of complicated construction tasks requiring highly skilled laborers. Georgia Power and Southern Nuclear want to accelerate progress, however, and are aiming for a 40% productivity increase and the hiring of 1,100 workers — all by October.

Further inflating risk is the possibility that one of the other Vogtle owners could vote against Georgia Power's decision to not seek recovery of the $1.1 billion. If that happens, the project would be canceled and construction would cease, which would mean the United States would not, at least temporarily, have any active nuclear projects.

"[W]hile we aren't assigning a high probability to that outcome, we're well familiar with the political and financial fall-out that can occur with nuclear abandonment," Pourreza wrote, referring to the V.C. Summer venture in South Carolina, which was scrapped in July 2017 due to similar schedule delays and cost overruns.

Guggenheim contemplated downgrading Southern shares even further to a "sell" rating, but Pourreza said investors have already been somewhat discounting the stock due to the nuclear risk. "[O]ur base case is that [Southern] will tread water for now," he wrote.

Wells Fargo Securities analyst Neil Kalton wrote in an Aug. 8 note that while the Vogtle charge is "disconcerting and we have low confidence" in Georgia Power's remaining cost-to-complete estimate of $4.4 billion, his firm is reiterating its "market perform" rating and forward price target of $47.