SOUTHERN’S SHAREHOLDERS ABSORB ADDITIONAL $450M TO COVER KEMPER

Utility Says IGCC Project Now Costs More than $4.7 Billion

Tamar Hallerman
GHG Monitor
8/2/13

The total cost of Southern Company’s flagship pre-combustion carbon capture and storage facility now tops $4.7 billion after the utility’s parent company announced this week that shareholders would have to absorb another $450 million in order to complete the 582 MW integrated gasification combined cycle plant on time. Southern Company Chairman and CEO Tom Fanning said in an earnings call with investors July 31 that the extra money was needed to cover the increased material and contingency costs to ensure that the Kemper County IGCC plant comes online by May 2014. “We hate the fact [that] we had another increase on Kemper. We’re continuing to work to make sure that that covers everything that we know,” Fanning said. “It is our best estimate. We’re going to work hard to bring that thing in now on time with the new numbers.”

Southern is racing to meet the May 2014 deadline in order to take advantage of $133 million worth of federal investment tax credits that expire at the end of that month, a goal that Fanning said “remains achievable.” The Atlanta-based utility had added an overnight shift of construction workers earlier this spring to help meet that deadline, but an April report from the project’s independent monitor, Burns and Roe Enterprises, Inc., concluded that Kemper likely won’t meet that in-service date due to late deliveries of construction materials, shortages of craft labor and “loss of productivity” due to the extended work hours. But Fanning said this week that construction is currently “progressing well,” and that a “significant portion” of start-up activity for the facility’s combined cycle unit has already been completed. He told investors that the utility’s subsidiary Mississippi Power hopes to fire up the plant’s combustion turbine later this month and heat up Kemper’s gasifier by year’s end.

Costs Continue to Rise

Receiving the $133 million in public dollars has become more important than ever to Mississippi Power, which reported to the state Public Service Commission (PSC) on July 30 that Kemper’s total costs have crept up to $4.72 billion, nearly double initial estimates. But despite the spiraling costs, Mississippi Power is restricted in how much money it can recover from its nearly 200,000 ratepayers. Under a settlement agreement with the PSC finalized earlier this year, the utility can collect $2.4 billion in rate recovery from its customers, as well as issue up to $1 billion in bonds to cover construction and financing costs. Any additional overruns must be absorbed by the utility’s shareholders.

Southern’s shareholders, though, have already eaten $540 million in cost increases from Kemper earlier this spring, and the nearly $1 billion in total overruns likely won’t sit well with the utility’s backers, Fanning acknowledged during the earnings call. “We are taking a hit here,” he said. “We understand that nobody here is happy about that, but that’s the honest truth.” Fanning compared the economics of the IGCC facility to that of a nuclear plant—high capital costs that eventually help produce “very cheap energy.” “It’s exceedingly attractive in that respect,” Fanning added. But Reuters noted this week that Kemper now costs more on a per-kilowatt basis than Southern’s new-build, 2,200 MW Vogtle nuclear plant expansion in Georgia, which now costs on the order of $7 billion.

Overall, Southern reported second quarter earnings of $297 million, down from $623 million this time a year ago. The utility giant attributed most of that loss to recent issues at Kemper. In an interview with the Associated Press, Mississippi Power CEO Ed Holland said he “cannot guarantee” that there will not be further cost increases at the facility as it reaches its final months of construction. However, he said he feels “good about the process that we are going through to forecast, estimate what we have left to spend to complete the project.”

‘Stop the Bleeding’

Project opponents used this week’s announcement to further calls for the PSC to suspend planned rate increases for Mississippi Power’s customers to pay for Kemper’s capital costs. The PSC should “hold evidence-based hearings to determine whether ratepayers should be responsible for any of the Kemper plant’s costs,” Louie Miller, director of the Mississippi Sierra Club, said in a statement. “It’s time for both Southern Company and the Mississippi Public Service Commission to stop the bleeding and do the right thing for the small Mississippi Power customer base.”

The Sierra Club has several pending legal challenges against the plant, and has for years argued that the gasification project is too expensive to be passed onto ratepayers, especially when compared to the price of new natural gas generation. After former Mississippi Power CEO Ed Day abruptly resigned earlier this spring amid allegations that top officials withheld information of cost overruns from state utility regulators while requesting rate increases, the NGO has also rallied for the PSC to hold a prudency review on the project. Commissioners granted that request, but the hearings appear to have been postponed. Fanning told GHG Monitor earlier this summer that the officials overseeing Kemper have remained prudent throughout the project’s development and construction. “We think it’s been 100 percent prudent, especially given the fact that we’ve taken, on our own, any cost overruns,” he said.

Kemper is expected to become the nation’s first large-scale power generation plant to install and operate CCS technology, with the help of a $270 million DOE grant. Southern plans on capturing 65 percent of CO2 emissions from the lignite-fired facility and transporting that 3.5 million tonnes of CO2 via Denbury Resource’s existing Green Pipeline to a depleted oil field owned by the oil and gas giant south of Houston for enhanced oil recovery operations.