Despite rising cost, Southern CEO Fanning defends Kemper IGCC

Southern (NYSE: SO) subsidiary Mississippi Power has increased its cost estimate for the 580-MW Kemper County integrated gasification combined-cycle (IGCC) project, which will result in an estimated probable loss of $540m ($333m after tax) for the first quarter of 2013.

CEO Tom Fanning said in an April 24 quarterly earnings call that increased costs from piping and an additional work shift were chief reasons for the increase. Southern will eat the increased costs, Fanning told investment analysts during an April 24 earnings call.

But the Kemper project remains a good deal, Fanning said. Like a nuclear plant, the project involves high capital costs on the front end but low fuel and operating costs for decades to come, he said.

Southern and Mississippi Power decided to both enhance the quality of the piping and start an overnight shift to ensure meeting the 2014 commercial operation date. Missing the online date could have financial impacts, Southern officials said.

“This is not representative of the type of performance that Southern delivers,” Fanning said. “This is unusual performance for us and something we are going to work very hard not to repeat.”

Mississippi Power does not intend to seek any joint owner contributions or rate recovery for any costs for the Kemper IGCC that exceed the $2.88bn cost cap, “except for amounts subject to the cost cap exceptions,” Southern said in a Form 8-K filing on April 24 with the Securities and Exchange Commission (SEC).

Sierra Club blasts company over Kemper news

The 8-K filing said it is possible that further cost increases could result. “Obviously, we are disappointed. Nobody wanted to see this overrun,” Fanning said.

The Mississippi Sierra Club said that the price news came only weeks after the utility told the Mississippi Public Service Commission that the project was on time and on budget.

“Either Mississippi Power managed to spend $600 million over the last few weeks, or the company misled the PSC, its customers, and its shareholders,” said Louie Miller, director of the Mississippi Sierra Club. “The plant, which uses untested and experimental technology, will still be under construction for another year, during which time costs could continue to rise.”

Mississippi PSC recently approved two-step rate increase associated with the Kemperp. The seven-year rate plan is pending approval at the Mississippi PSC and is expected to result in no further changes to base rates for the Kemper project through 2020, Southern said.

The Kemper project would gasify lignite coal from a neighboring mine complex operated by a unit of North American Coal. Most of the carbon dioxide (CO2) from the plant would be captured.

Fanning touches on nuclear construction, coal and solar

Construction of the two new nuclear units at the Vogtle station in Georgia is 40% complete. The first nuclear island concrete has been completed at Vogtle 3 and the cooling tower foundation has been completed at Unit 4, Southern reported.

The CEO also said Shaw Group’s purchase by CB&I (NYSE:CBI) could make it a little simpler to resolve a dispute over vendor costs at Vogtle.

Fanning also cited two major renewable energy agreements announced recently.

A Southern subsidiary and Turner Renewable Energy have agreed to purchase the 139-MW Campo Verde Solar facility in California from First Solar (NASDAQ: FSLR). The facility has a 20-year power purchase agreement with Sempra Energy (NYSE: SRE) utility subsidiary San Diego Gas & Electric. Commercial operation is expected this fall.

Also, Georgia Power has signed two long-term deals with EDP Renewables to purchase 250 MW from two wind units in southwest Oklahoma. The Georgia utility will start receiving the wind energy in January 2016.

Natural gas and oil accounted for 47% of the Southern generation mix in the first quarter of 2013 compared to 45% in Q1 2012. Coal’s generation share remains unchanged at 32%. Nuclear has dipped from 19% to 16%. Hydro increased from 4% to 5%.

Southern also said its combined-cycle gas fleet is running at 70% capacity in early 2013. Southern coal units that burn Powder River Basin coal (the biggest one is the Scherer plant in Georgia) are running at 62% capacity. Non-PRB coal units are running at 25% capacity.

Ideally, Southern would like to have about 40 days of supply in its coal stockpiles – although the levels are probably around 60 days now, the CEO said.

Of course, the coal burn could increase as gas prices increase. Fanning noted that natural gas prices have increased from $2.50 to $3.50/mmBtu from the first quarter of 2012 and spot gas prices are around $4.25.

On another topic, Fanning said Southern is still awaiting the result of a root cause analysis of an April explosion and accident at the Bowen fossil plant in Georgia.

Southern reported first quarter 2013 earnings of $81m, or 9 cents a share, compared with earnings of $368m, or 42 cents a share, in the first quarter of 2012.

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.