Southern Co. vows to continue Miss. 'clean coal' plant despite mounting losses

Southern Co. vows to continue Miss. 'clean coal' plant despite mounting losses
Daniel Cusick, E&E reporter
Published: Thursday, August 1, 2013

Dramatic cost overruns at one of the nation's largest clean coal plants are cutting deeply into Southern Co.'s profit, company officials said yesterday, raising difficult questions about whether the company's ongoing investment in coal gasification is economically sound.

But Southern Chief Executive Officer Tom Fanning said the Atlanta-based electric utility giant remains committed to completion of the Kemper County energy facility in east-central Mississippi, adding that the plant "will help provide decades of clean, safe, reliable and affordable electricity to Mississippi Power customers."

Officials with Southern, and its subsidiary Mississippi Power Co., said this week that shareholders will absorb an additional $450 million in costs associated with the construction of the 582-megawatt facility known as Plant Ratcliffe, which will burn regionally sourced lignite coal and be equipped with carbon capture technology.

The Kemper plant's price tag is now projected at just less than $3.9 billion, nearly double what the utility initially estimated when the project was launched three years ago. And combined with the additional infrastructure required to make the plant run -- principally the building of an on-site coal mine and the installation of pipelines to carry carbon dioxide from the plant for enhanced oil recovery -- the overall project cost is now estimated in the $5 billion range, according to company estimates.

Under an agreement with the Mississippi Public Service Commission, Southern Co. will cap rate recovery from Mississippi ratepayers at $2.88 billion, meaning the utility and its shareholders will absorb roughly $1.1 billion in write-offs.

Those financial hits were painfully evident on Southern's latest balance sheet. For the six months ending June 30, earnings were $378 million, or 43 cents per share, compared with $991 million, or $1.14 per share, for the same period in 2012, the company said. In the second quarter alone, earnings were $297 million, or 34 cents per share, compared to $623 million, or 71 cents per share, in the same quarter of 2012.

'We are taking a hit here'

For the second quarter of 2013, Southern will take a $278 million after-tax charge, or 32 cents per share, due to the cost overruns at Kemper, officials said in a filing with the Securities and Exchange Commission. That's in addition to a $333 million charge (70 cents per share) incurred in the first quarter due to Kemper cost overruns (ClimateWire, April 25).

The company's stock closed at $44.84 on the New York Stock Exchange, down 0.58 percent from Tuesday. Trading volume was more than double average levels, at 9.6 million shares.

Asked yesterday on an earnings conference call whether the Kemper County plant was still a sound investment, Fanning parsed his answer, noting that Mississippi Power ratepayers will benefit greatly from the low-emissions electricity produced by the plant beginning in mid-2014. But for Southern Co. shareholders, who will bear the burden of the cost overruns through lower returns and stock values, the project has become a financial burden.

"We are taking a hit here. We know that. Nobody is happy about it, but that's the honest truth," Fanning said.

As part of its latest cost Kemper re-evaluation, Southern allocated an additional $100 million toward contingency spending as the plant moves closer to the final stages of construction. Fanning said the project faces two key milestones over the next 18 months, beginning with the first firing of the plant's gasifier late this year, followed by meeting the plant's expected in-service date of May 2014.

If the plant fails to meet its in-service deadline, Southern risks losing $133 million in federal investment tax credits provided to promote advanced energy development, officials said.

Trouble with nuclear project

Critics of Southern's generation growth strategy -- which also includes the nearly $7 billion nuclear power plant expansion at Georgia Power Co.'s Plant Vogtle near Waynesboro, Ga. -- say the utility's decisions are looking exceedingly risky from a financial standpoint, and the company will face greater scrutiny from both shareholders and public utility commissions as it seeks solutions to deal with spiraling construction costs.

Recent estimates show the Vogtle nuclear project, in which Georgia Power has a 46 percent ownership stake, faces cost overruns of at least $737 million and remains several years behind schedule. Under a newly minted deal with the Georgia Public Service Commission, Southern would limit its rate recovery efforts to $209 million, the amount it expects to spend on the plant between July and December, officials said.

Stephen Smith, executive director of the nonprofit Southern Alliance for Clean Energy, said the construction setbacks in Mississippi and Georgia, combined with more aggressive stances taken by regulators and customers over electricity prices, put Southern Co. in a rare position where it must adjust its objectives and expectations to meet tough new realities.

"For anybody who's looking at clean coal as a solution to the 21st century's energy challenges, this is not a good story," Smith said of the Kemper plant overruns. "For Southern Co.'s shareholders in particular, it's already become a bad story. And the jury is still out as to whether it will be a good or bad story for Mississippi ratepayers."

Fanning, in the conference call with analysts, maintained that the utility was well positioned for the regulatory and economic changes forthcoming in the electricity sector.

He stressed that few utilities has been as aggressive about investing in base-load electricity generation with little or no CO2 emissions, and he touted Southern's recent moves on both

energy efficiency measures and procurement of renewable energy, much of it wind power from outside the region that will be sold to customers in Georgia and Alabama.

Southern also plans to significantly increase its solar power output, in part because the Georgia PSC recently amended Georgia Power's resource management plan to include an additional 525 MW of solar generation within the state by the end of 2016. The additional generation will boost Georgia Power's solar output to roughly 800 MW (ClimateWire, July 12).

"When you consider all of that ... it would be hard to find a company that's doing more in terms of handling the GHG issue in a both practical and strategic way," Fanning said.