Southern Company Takes Hit for Coal-to-Gas Power Plant Overruns in First-Quarter 2014, but Cold Winter Warms Profits

Researched by Industrial Info Resources (Sugar Land, Texas)--Southern Company (NYSE:SO) (Atlanta, Georgia) said Wednesday it took an after-tax charge of $235 million relating to cost overruns by its Kemper integrated gasification combined cycle (IGCC) power project in Mississippi. Despite the charge, the power company reported its net earnings rose fourfold to $351 million, from $81 million in first-quarter 2013, largely as a result of the unusually cold winter this year.

Industrial Info is tracking about $6 billion in projects involving Southern Company, including the Kemper project. Southern Company reported $184 million in additional costs to construct the Kemper IGCC during the first two months of the quarter.

"These costs are primarily related to decreases in construction labor productivity at the Kemper IGCC, due in large part to adverse weather, unexpected excessive craft labor turnover, and unanticipated installation inefficiencies," Southern Company representatives said in a regulatory filing. On Monday, Southern Company's Mississippi subsidiary reported an additional $61 million charge related to Kemper project construction issues.

Project construction began in 2010, and would convert local lignite into gas to be burned to provide electric power for more 187,000 customers. The 582-megawatt facility would be the first of its kind in the U.S. Thomas Fanning, the chairman, president and chief executive officer of Southern Company, said during the company's earnings conference call on Wednesday that he was confident that the various engineering systems being used in the project would work, but the challenge was to integrate them.

Southern Company also extended the expected in-service date of the project to as late as May 31, 2015, a move that could cost the company $135 million in related charges. Southern Company said the combined cycle and the associated common facilities portion of the Kemper project are expected to be in service this summer, but construction issues, including those involving the gasification system, will push back the in-service date for the remainder of the project to the first half of 2015.

In all, the project is now estimated at $5.5 billion, which is roughly twice the amount when the project was first announced. An agreement between Southern Company and Mississippi state regulators caps the amount of the project that can be charged to customers to $2.88 billion, net of $245 million of grants for the project by the U.S. Department of Energy.

However, Southern Company executives said during the company's earnings conference call on Wednesday that they were working with Mississippi utility regulators in an effort to negotiate a "global settlement" regarding its current seven-year rate plan, and the potential loss of $120 million to $150 million in tax benefits as a result of the push-back of the project's in-service date.

"Loss of these tax benefits would require further adjustment to the proposed retail rate recovery plan, which remains subject to approval by the Mississippi PSC [Public Service Commission],"the company said in a regulatory filing.

For the first quarter, earnings rose in part because of colder-than-normal winter weather, residential and industrial sales growth, and retail revenue, the company said. First-quarter 2014 operating revenues were $4.6 billion, a 19.2% increase from the first quarter of 2013. Fanning said during the earnings conference call that the winter was the second coldest in the region in 20 years. Southern Company has 4.4 million customers in the U.S, southeast.

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