Coal power edges out natural gas at Southern during first quarter

Coal-fired power made a comeback in the Southern (NYSE:SO) generating fleet during the first quarter of 2014, CEO Tom Fanning said during the company’s quarterly earnings call April 30.

The Southern generation mix was 45% coal-fired; 35% from natural gas and oil; 15% nuclear and 5% hydro and other sources during the recently-completed quarter.

By comparison in the first three months of 2013, the company got 47% of its power from oil and gas; 32% from coal; 16% nuclear and 5% from hydro and other sources.

Southern’s combined-cycle natural gas fleet ran at 57% capacity in 1Q14 compared to 71% a year earlier. By comparison Southern’s Powder River Basin coal units ran at 71% during the recent quarter. Non-PRB coal units operated at 45%. A year earlier the PRB fleet was operating at 62% and non-PRB at 25% during the first three months of 2013.

The biggest difference was the harsh winter weather, highlighted by the so-called ‘polar vortex’ and the dramatic increase in natural gas prices that resulted during the quarter, Fanning and Southern CFO Art Beattie said the conference call.

Southern’s energy mix was 35% gas-and-oil in the first quarter of 2014 compared to 47% gas and oil in 1Q13. Coal’s share increased from 32% to 45%.

This proved once again how volatile natural gas prices can be, Fanning said.

Average temperatures were 5 degrees below normal for Southern service territories during the first quarter of 2014. The Southern system also recorded an all-time winter peak 39,130 MW during the quarter. The harsh weather did force storm crews to restore power to nearly 800,000 customers, Southern reported.

Company management said the recent U.S. Supreme Court ruling that upheld EPA’s Cross-State Air Pollution Rule (CSAPR) will probably have minimal impact on Southern. That’s because the Southern coal fleet has already been aggressively moving to comply with other EPA programs, such as Mercury and Air Toxics Standards (MATS), which also resulted in installation of new environmental controls.

Southern continues to benefit from improved economic conditions in its service territories, Fanning said.

Kemper IGCC issue hurts earnings

Atlanta-based Southern reported first quarter 2014 earnings of $351m, or 39 cents per share, compared with earnings of $81m, or 9 cents per share, in the first quarter of 2013.

The first quarter results include a $235m (27 cents per share) after-tax charge related to an increased construction estimate for Mississippi Power’s Kemper integrated gasification combined cycle (IGCC) project. The first quarter results for 2013 included a $333m (38 cents per share) after-tax charge for the Kemper IGCC project and a $16m (2 cents per share) after-tax charge related to the restructuring of a leveraged lease investment.

Southern said that the first gasifier heat-up at Kemper County is targeted for mid-to-late summer 2014. The combined-cycle is expected to be in-service this summer. Current cost estimates assume an in-service date extension to May 31, 2015.

Kemper is a “very complex animal” as Mississippi Power moves from construction to startup at the 582-MW integrated gasification combined-cycle power plant, Fanning said. “It’s so important for us to get it right at the outset. That’s what you see us doing here,” Fanning said.

The company knows that all the component parts work and is now working on the integration issues, Fanning said.

Southern’s mistake on Kemper was probably agreeing to a fixed price contract on the coal gasification project a few years back when too little of the engineering work was complete, Fanning said.

On new nuclear generation, Vogtle 3 and 4 remain on schedule for in-service dates of Q4 2017 and Q4 2018 respectively. Fanning said he had nothing new to report on outstanding contract issues between Southern and the vendor team led by Chicago Bridge & Iron (NYSE:CBI).

While Southern has the same vendor team as SCANA is using for V.C. Summer units 3 and 4, the companies have different contracts, Fanning said.

Fanning noted that non-utility subsidiary Southern Power and Turner Energy recently announced the acquisition of the 20-MW Adobe solar photovoltaic project in California. Fanning suggested the company could make another solar play before the year is over.

One of Southern’s regulated utilities, Georgia Power is moving aggressively into solar power in its state, Fanning said.

 On another topic, Fanning said increasing merger and acquisition activity is generally another sign of an improving economy. He specifically noted news of the Exelon (NYSE:EXC) agreement to acquire Pepco Holdings (NYSE:POM). Southern, however, has not had great interest in large M&A moves. Such deals can be difficult to pull off, especially in a regulated environment, Fanning said.

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.