S&P DOWNGRADES SOUTHERN CO.’S OUTLOOK DUE TO KEMPER WOES

IGCC Plant Issue ‘Raises Broader Concerns’ About Risk, Oversight

Tamar Hallerman
GHG Monitor
5/31/13

The credit ratings agency Standard & Poor’s downgraded Southern Company’s rating outlook from “stable” to “negative” late last week due largely to the unfolding controversy surrounding the utility’s Kemper County gasification project in Mississippi. S&P announced the change—which also impacts Southern’s four subsidiaries, including Mississippi Power—May 24 in response to what it said was “increased business risk as a result of a series of unfavorable regulatory, operational and risk management developments.”

Most of that heightened risk, the ratings agency noted, is tied to recent cost overruns and regulatory and ethics concerns surrounding Mississippi Power’s Kemper County carbon capture and storage project, currently under construction in eastern Mississippi. “Project costs have increased by $540 million contributing to an impairment of $540 million and introducing the potential of additional cost increases and impairments along with potential delays in the plant’s in-service date,” S&P said, noting that any delays to the plant’s in-service date, planned for May 2014, could “further reduce” the project’s value. “Mississippi Power recognized a material weakness in internal control over financial reporting, which, in combination with the company failing to provide information to the Mississippi Public Service Commission in a timely manner, raises broader concerns about effective project oversight, handling of regulatory risk and overall risk management within Southern Co,” according to S&P. Southern Company and Mississippi Power did not return requests for comment.

PSC To Hold Prudency Review

Southern installed a new CEO at Mississippi Power last week after the utility’s former top official Ed Day abruptly resigned amid allegations that he and other top employees deliberately withheld knowledge of cost overruns at the Kemper facility while asking for rate increases from state regulators. At the suggestion of the state chapter of the Sierra Club and other consumer groups, the head of the Mississippi Public Service Commission promised a prudency review of the project later this summer.

The 582 MW IGCC project, while notable in its first-mover status within the Department of Energy’s CCS demonstration project portfolio, has faced a seemingly never-ending back-and-forth with Sierra Club and state regulators in recent years after requesting that the PSC raise the cost cap for Kemper. Mississippi Power initially estimated that the plant would cost $2.4 billion for construction. However, the utility later applied for a rate cap increase to $2.88 billion—a request granted by the PSC in 2010. But costs have steadily increased, with current estimates putting capital costs closer to $4.3 billion, when incorporating the IGCC facility, its CO2 pipeline and its feedstock lignite mine. In a recent filing with the U.S. Securities and Exchange Commission, Mississippi Power attributed the cost increases to “additional cost pressures, including labor costs, piping and other material costs, engineering and support costs and productivity decreases.”

A settlement agreement finalized between Mississippi Power and the PSC earlier this year allows for the utility to 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&P, in its revised outlook for Southern, notes what it describes as a “breakdown in the regulatory construct” in Mississippi designed to ensure rate recovery of financing costs during construction, regular prudency reviews and an alignment of interests in the project between the regulators and the company that “have not materialized.”

Credit Rating to Stay Stable, For Now

Notably, S&P said that despite the outlook change, it would be maintaining Southern’s corporate credit rating for now at an ‘A,’ which could lighten the potential investor impact on the ratings agency’s assessment of the utility. However, S&P said Southern Company’s credit rating going  forward would be heavily dependent on the utility’s ability to overcome challenges at Kemper—as well as cost overruns at its nuclear plant expansion at Georgia’s Plant Vogtle—over the next two years. S&P vowed to lower Southern’s credit rating by a notch if the company fails to iron out those issues. “The negative outlook on Southern and its subsidiaries reflects the potential for lower ratings over the next 12 to 24 months if business risk remains elevated as a result of the company’s inability to resolve the challenges that have surfaced at Mississippi Power,” S&P Credit Analyst Dimitri Nikas said in the statement, adding that “if Southern is able to address these challenges in a timely manner while still preserving its significant financial risk profile … we will revise the outlook to ‘stable.” 

The country’s two other major credit ratings agencies, Fitch Ratings and Moody’s Investors Service, downgraded Mississippi Power’s credit rating and outlook last summer following earlier regulatory woes surrounding Kemper. Downgrading ratings can result in companies having to pay more to borrow money.

Leadership Rushes for May ’14 In-Service Date

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 in the Gulf Coast region to a depleted oil field owned by the oil and gas giant south of Houston for enhanced oil recovery operations.

Project officials are racing to bring the facility online by May 2014 in order to take advantage of $133 million worth of federal investment tax credits before they expire. Southern’s top official told investors last month that the utility has added an overnight shift of construction workers at the plant in order to wrap work on time. But a new report from the project’s independent monitor, Burns and Roe Enterprises, Inc., concludes that the project will likely be delayed beyond the desired May 2014 start-up date due to late deliveries of construction materials like pipes, hangers and valves, as well as shortages of craft labor and “loss of productivity” due to extended work hours. “BREI is very concerned that the construction completion date is December 2013, thus allowing start up four months to May 1, 2014 for completion of testing and commissioning. The construction percentage has been 3 percent for each of the past four months. In order to complete construction in December, the project will have to achieve nearly 5 percent each month for the next 10 months,” according to the April report, which was released publicly this week by the Sierra Club.