Southern Company's Kemper Project Delayed, Rates Unchanged

Electric utility firm The Southern Company’s (NYSE:SO) much delayed clean coal power plant project Kemper in Mississippi has suffered yet another setback. The project has been facing continuous criticism owing to its poor execution, cost overruns and multiple delays.

Recent Updates

Mississippi Power, a subsidiary of Southern Company, recently announced a delay in the projected in-service date of its Kemper County plant until the end of June. The extension of the schedule, will add $22 million to the overall cost of the plant. The company also revealed that it needed to redesign and replace a key component in its plant – syngas cooler super heater system – in order to establish long-term sustained operations. Sustained operations will also require relocation of ash loading process together and other minor improvements. This will add another $164 million to the operating costs of the project. Therefore, the latest glitch would hike the overall cost of the plant by $186 million.

While the company expects the facility to become functional by the end of June, the redesigning of the syngas cooler super heater would need another 18 to 24 months of construction time. Further, the company also intends to undertake additional improvement projects over the next few years to fix leaks and other issues relating to the plant’s performance, safety and operations.

The Kemper Project

Kemper project had been central to ex-President Obama’s Climate Plan as it is based on clean coal. Notably, the project also received the support of President Trump.

The 582-megawatt electric power plant is designed to pipe synthetic gas through a chemical plant to remove carbon dioxide and other chemicals, and then burn the gas in turbines to generate electricity. It is designed to capture up to 65% of carbon dioxide emissions from the plant.

Challenges Galore

The project found it difficult to get its two gasifiers to operate consistently. The plant is already three years behind schedule and is over $4 billion beyond the stipulated budget. The overall cost of the plant was estimated to total to around $3 billion in 2010. However, with several delays adding to the project’s cost, the current price tag of the plant has ballooned over $7.3 billion. In the past 18 months, the company announced 10 delays owing to project management problems.

Further, the additional improvement projects will add to costs and negatively impact certain economic aspects of the Kemper.

The economics of the Kemper project is a major cause of concern for the company as the plant is not competitive at the current natural gas prices. According to the viability analysis undertaken by the Southern Company, the project will be economical with natural gas prices at $5 per million British Thermal units. This seems quite unlikely for many years according to Energy information Administration forecast.

Rate plan Updates

In 2015 Public Service Commission allowed the company a 15% rate hike for the plant’s incremental costs to be passed on to ratepayers.

Though the company was again to file rate plans for the project in early June, it recently announced that there would be no rate increase. The company has planned to keep the current customer rate in place for at least 11 months and has not filed a full-rate review on recovery of the project’s costs. According to the spokesperson of the company, “Its plan to avoid further raising customer rates is likely to reduce whiplash to customers when rates rise later to pay for Kemper, would pay off accumulated costs more quickly and would help the company wean itself off financial support from Southern Co. while maintaining credit ratings.”

Mississippi Power is considering to develop a traditional rate case and a rate mitigation plan to address these costs, however, the timing of that filing is uncertain.

Zacks rank & Key Picks

Southern Company is one of the largest and best-managed electric utility holding companies in the U.S. The firm dominates the power business across the southeastern region.

The utility currently carries a Zacks Rank #4 (Sell). Southern Company’s shares have rallied almost 7% over the last six months, underperforming the Zacks categorized Utility- Electric Power industry’s gain of around 10.5%.

Southern Company stock has continued to lag behind its peers for the last several months. Issues with its power plants – both Kemper and Vogtle – have likely hampered its performance and could continue to do so in the near future.

Some viable players from the same industry worth considering include Pampa Energia S.A. (NYSE:PAM) , RWE Aktiengesellschaft (OTC:RWEOY) andAtlantic Power Corporation (NYSE:AT) . While Pampa Energia and RWE sport a Zacks Rank #1 (Strong Buy), Atlantic Power carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Pampa Energia is expected to report year-over-year growth of 38,200% in its earnings in 2017.

RWE is expected to report year-over-year growth of 42.45% in its earnings in 2017.

Atlantic Power is expected to report year-over-year growth of 19.54% and 183.33% in its sales and earnings respectively in 2017.

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