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Barclays upgrades Southern, Goldman resumes coverage

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Barclays upgrades Southern, Goldman resumes coverage

Afterclosing its acquisitionof AGL Resources Inc. and locking in a pipelinedeal with Kinder MorganInc., Barclays Capital Inc. and Goldman Sachs favorably revised theiroutlooks for Southern Co.

Barclayson July 14 upgraded Southern to "overweight" from "equal weight,"and bumped its price target up $3 to $62. Barclays' new 2016-18 EPS estimates are$2.86, $3.02 and $3.17, respectively, from $2.88, $3.02 and $3.16. A $62 price targetfor Southern implies a 20% total return for the company, shares of which closedJuly 13 at $53.37.

Factorsdriving Barclays upgrade include waning risk from long-running overhangs and Southern'sshift into gas infrastructure investment. The three key areas of risk include theAGL acquisition, coupled with delays and growing costs at the development of 's integratedgasification combined-cycle project in Kemper County and Georgia Power Co.'s new Vogtle nuclear reactors.

If theKemper project, formally known as PlantRatcliffe, achieves commercial operation as currently scheduled by theend of third quarter 2016, Barclays sees, "very little risk left associatedwith the plant." As for the SECinvestigation regarding Kemper cost and service date estimates, Barclaysnoted Southern has said it does not constitute a material risk.

MississippiPower plans to seek a rate increase in the range of 15% in 2017, assuming the Kemperplant has entered service, which Barclays anticipates will have "little impact,"on Southern's earnings. In the rate proceeding, Barclays sees any clawback of ratebaseas unlikely, and noted Southern has avenues of cash recovery through bonus depreciationand research and experimental tax credits.

On Vogtle,Georgia state regulators have been supportive, in Barclays' view, and the "modest"rate impact on customers is now expected to be in the 6%-to-8% range, with 4.5%of that having already occurred. On the AGL deal, concerns over financing from adebt and equity standpoint, with the associated credit rating agency actions, arenow behind the company.

Throughthe AGL acquisition, the equity interest in Kinder Morgan's Southern Natural Gas Co. LLC and the aggressive renewable asset acquisition strategy by , Barclays describedSouthern as looking, "more like an infrastructure company each day." NotingSouthern's investments in unregulated, but contracted, renewable and pipeline assets,Barclays said the strategy, "reduce(s) risk while providing solid growth opportunities."

Goldmanreinstated Southern at "neutral," from a "not rated" designation,with a $54 price target implying a 6% total return. Following the recent AGL andSouthern Natural Gas acquisitions, Goldman revised its EPS forecast for Southernin 2016, 2017 and 2018 to $2.82, $3.11 and $3.25. Its prior EPS estimates for 2016and 2017 was $2.88 and $2.90.

"Weexpect SO, due to a decline in regulated capital spending and strong cash flowsfrom renewable projects, to see an improvement in free cash flow going forward,"Goldman Sachs said in its report. "However, given increased leverage levelsof ~65% debt/capital ratio in 2016, we also forecast modest equity issuances of$700m/year in 2017/2018 to help SO improve key credit metrics."

Goldmanalso noted the SEC investigation into Kemper, Mississippi Power's 2017 rate proceedingand Vogtle as higher regulatory risk factors than Southern's utility peers. Theserisks could drag down Goldman's 2018 estimates, depending on what happens. For example,Goldman assumed in its 2018 estimate an additional $300 million in Kemper-relatedrevenue increases. Every $100 million-change, Goldman noted, impacts Southern'sEPS by 7 cents to 8 cents. Goldman expects the addition of AGL to contribute 6%to Southern's 2016 earnings, 13% to 2017 earnings and 13% to 2018 earnings.