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Analysts wary of 'nuclear overhang' on Southern, seek clarity on Sempra strategy

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Analysts wary of 'nuclear overhang' on Southern, seek clarity on Sempra strategy

Wall Street is growing nervous over the growing price tag of the Alvin W. Vogtle Nuclear Plant expansion and the subsequent financial hit on Southern Co.'s balance sheet. Meanwhile, Sempra Energy investors are urged to exercise patience as they wait for clarity on the California energy company's strategic plan.

Guggenheim Securities LLC on Aug. 8 downgraded Southern stock to "neutral" from "buy" shortly after the company disclosed a $1.1 billion pretax loss tied to the construction of the new Vogtle reactors. "For now, we can't work through the nuclear overhang and are stepping to the sidelines," a Guggenheim analyst wrote.

The disclosure came as Southern subsidiary Georgia Power Co. increased its share of the projected capital and construction costs for the Vogtle nuclear expansion to $8.4 billion from $7.3 billion.

"Certainly this is not news that we welcome," Southern Chairman, President and CEO Tom Fanning said on the company's second-quarter earnings call. "I think it represents a reasonable estimate as to how to proceed ... Short-term pain, but long-term gain."

Georgia Power said it will absorb the $700 million in additional projected costs and will not seek recovery of those future costs from its ratepayers. The company said it may present an increased contingency of approximately $400 million to the Georgia Public Service Commission for evaluation of rate recovery "as and when appropriate in the future."

In response, Moody's on Aug. 8 downgraded Georgia Power's senior unsecured rating to Baa1 from A3 and placed the ratings on review for downgrade. Moody's affirmed its rating of the parent company and maintained a negative outlook.

Credit Suisse on Aug. 9 downgraded Southern shares to "underperform" from "neutral" with the announced Vogtle cost increase "much higher and sooner than we anticipated." The firm said it expects a "tough reception from Georgia regulators" on the new cost estimate.

"In our opinion, attempts to increase customer responsibility for incremental costs are likely to be met with resistance," Credit Suisse analyst Michael Weinstein wrote.

Weinstein noted that Vogtle plant co-owners Oglethorpe Power Corp. and Municipal Electric Authority of Georgia need to sign off on the new budget for the continued construction of the nuclear plant expansion.

"Failure to approve would effectively cancel the project and leave [Southern] to approach regulators for a new agreement under a new ownership structure to proceed," the analyst wrote.

Sempra

Sempra Energy management on Aug. 6 provided analysts with a general update on "constructive" talks with activist investors regarding the company's strategic review, but Wall Street still seeks details.

"I think all the conversations you'd expect us to be having, they're being had," Sempra CEO Jeffrey Martin said. "I think that the most important thing is the issues that we're all focused on are the right issues."

Elliott Management Corp. and Bluescape Resources Co. LLC in June announced their campaign to unlock value at Sempra with a proposal to simplify its business structure and appoint new board members.

The San Diego-headquartered company weeks later announced a plan to sell all of its U.S. wind and solar assets and a portion of its natural gas midstream holdings. The company framed the asset sales as a pivot to a predictable, long-term earnings growth profile.

"Based on the comments, we expect a settlement [with the activist investors] is in the works and that a sale of the South American utilities is increasingly likely," Wells Fargo Securities LLC analyst Sarah Akers wrote in an Aug. 6 report. Wells Fargo raised its price target on Sempra stock to $125 per share from $123 per share.

"In terms of a spin-off or other strategic move related to the LNG business, we still get the sense that management would like to have [the Cameron LNG project] online and for the other projects to be further along," Akers wrote.

Guggenheim Securities LLC analyst Shahriar Pourreza said "some investors were likely looking for [Sempra] to provide more color on" its dialogue with activist investors. "[W]e continue to believe patience is warranted and see a re-rating story in time: the eventual de-risking of the portfolio, upside to guidance through 2020 and further LNG contract wins will help determine the timing/pace," the analyst wrote in an Aug. 6 report.

Outside of its business plans, Sempra also announced a settlement this week with state and local government bodies in California over the leak at the Aliso Canyon gas storage facility.

Sempra utility Southern California Gas Co. reached a $119.5 million settlement that will reimburse government agencies for costs associated with the leak, establish programs to mitigate emissions from the event and fund local initiatives for environmental benefit.

The facility was placed under strict restriction after a massive leak was discovered in late 2015.