Southern Co. faces risks on Mississippi power plant
by Jeff Amy, Associated Press
December 28, 2012 10:55 AM | 1363 views | 6 6 comments | 6 6 recommendations | email to a friend | print
In this Nov. 13, 2012 photograph workers vehicles fill the parking lots at Mississippi Power's Kemper County energy facility near DeKalb, Miss. On Tuesday, Dec. 11, 2012, union leaders expressed their new support for Mississippi Power Co.'s Kemper County coal plant during a news conference at the Capitol in Jackson, Miss. The unions had most recently opposed the plant because contractors for Atlanta-based Southern Co. were excluding union members from the $2.8 billion project, which currently employs 2,600 construction workers. The plant, still under construction is designed to use a soft form of coal called lignite in a gasification process to generate power. (AP Photo/Rogelio V. Solis)
In this Nov. 13, 2012 photograph workers vehicles fill the parking lots at Mississippi Power's Kemper County energy facility near DeKalb, Miss. On Tuesday, Dec. 11, 2012, union leaders expressed their new support for Mississippi Power Co.'s Kemper County coal plant during a news conference at the Capitol in Jackson, Miss. The unions had most recently opposed the plant because contractors for Atlanta-based Southern Co. were excluding union members from the $2.8 billion project, which currently employs 2,600 construction workers. The plant, still under construction is designed to use a soft form of coal called lignite in a gasification process to generate power. (AP Photo/Rogelio V. Solis)
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DEKALB, Miss. (AP) — In the woods of east Mississippi, a subsidiary of Atlanta-based Southern Co. is pouring billions of dollars into construction of a power plant that burns coal but would emit less carbon dioxide. It’s a response to looming federal limits on carbon emissions as regulators try to curtail global warming.

Each day, as 2,600 construction workers toil away at Plant Ratcliffe in Kemper County, the big bet becomes more expensive. The projected cost is at least $2.8 billion, almost half a billion dollars above original expectations, and some estimates say it will go higher.

Legal challenges brought by the Sierra Club have led regulators to block the company from billing customers for the costs so far, although Southern subsidiary Mississippi Power Co. got closer to that goal with a favorable lower court ruling earlier this month.

Southern CEO Thomas Fanning stands by the plant. He says Southern’s own technology will mitigate its environmental impact and the need to exploit coal as a hedge against uncertainties in the future cost of natural gas, which is currently cheap and abundant.

But there are risks.

The Kemper plant is the most expensive project ever built by Southern subsidiary Mississippi Power Co. The company promises completion in May 2014, but some engineers monitoring construction for state regulators warn the cost could reach $3.1 billion, and completion isn’t likely until November 2014 at the earliest.

Those same engineers, with the firm Burns & Roe, say the plant’s lynchpin coal-to-gas technology isn’t certain to work.

Fanning says some setbacks at Kemper have been seen in the company stock price. Shares are down about 5 percent over the last year, but Southern’s stock has closely tracked shares of other big utilities in that time.

Morningstar analyst Mark Barnett says he respects Southern’s ability to manage big projects, but says Kemper might dent Mississippi Power’s finances if costs keep mounting. “This is an outsized project for such a small utility,” Barnett said.

As the Kemper project goes on, Southern also is at work on two additional nuclear reactors at Plant Vogtle (VOH’-gohl), about 30 miles southeast of Augusta, Ga. The $14 billion project will be funded in part by $6 million from Southern subsidiary Georgia Power Co. Southern also owns Alabama Power Co. and Florida’s Gulf Power Co.

“Vogtle and Kemper County, even despite where gas prices are today, are exceedingly attractive resources for the future,” Fanning told The Associated Press.

The plants reflect Southern’s decision not to become overly reliant on natural gas. Fanning argues gas can’t be expected to remain cheap for decades, the lifecycle utilities consider for power plants. How Kemper and Vogtle turn out are likely to define Fanning’s legacy, as the company stated in the last chapter of a 534-page history it published last year entitled “Big Bets.” The book, published for Southern’s 100-year anniversary, is meant to encapsulate past lessons for future leaders.

Part of that past has been coal. Five years ago, 70 percent of Southern’s power came from coal, with only 11 percent from natural gas. The company now generates 35 percent of its power from coal and 47 percent from gas.

But given federal regulations against carbon dioxide emissions, few utilities are now building coal plants.

Southern’s response at Kemper is to convert the coal to a gas, strip out carbon dioxide and other hazardous chemicals, and burn the gas for power.

Southern expresses confidence in technology developed and tested at Wilsonville, Ala. But Burns & Roe, the engineering firm that warns the Kemper’s cost will top $3 billion, warns “there is still a technology risk,” partly associated with scaling up the gasifier to Kemper’s larger size.

The company would sell the carbon dioxide to be pumped into the ground for energy companies seeking to push up more oil from old oil fields.

“We are the Saudi Arabia of coal — very high quality stuff. We’ve got to find a way to continue to preserve that important national energy resource to be used for the benefit of our citizens,” Fanning said. “What we’re doing here in Kemper County, I think, may be a way forward for coal in America. It is that important.”

The Sierra Club — which opposes coal-burning plants nationally — claims the plant could harm the environment and raise customer bills by 45 percent or more. Mississippi Power says the rise in bills would be closer to 33 percent before falling.

Kemper, though smaller, may be financially riskier than Vogtle. In Georgia, Southern is already collecting its financing costs from ratepayers, and regulators are approving company expenditures every six months, though they can still challenge that spending at the end of the project. Mississippi Power — Southern’s smallest subsidiary with 186,000 customers — hasn’t won regulator approval to collect any money it’s spent on Kemper.

The Mississippi Public Service Commission’s decision to hold off on rate increases until legal challenges are resolved stunned executives and investors, especially considering a 2008 state law allowed rate increases during construction.

“That decision surprised the investment community and we saw it our stock price,” Fanning said.

The Sierra Club says Southern should convert the plant to burn natural gas, an expense that could still be costly for shareholders and ratepayers. Opponents say Mississippi Power would end up spending less money than finishing Kemper, but the company would probably try to recoup the money it’s already spent.

“I think they’ve painted themselves into a pretty tight little corner, said Louie Miller, head of the Sierra Club’s Mississippi chapter. “They decided they were going to build this thing come hell or high water.”

In the 1970s, a giant construction program brought Southern to the edge of insolvency. High inflation and interest rates made it almost impossible to borrow money to complete plants in its four-state territory. The subsidiaries struggled to win rate increases from hostile state regulators, and nuclear plant overruns ballooned under new safety demands after 1979’s Three Mile Island incident.

The company history says that at one point in 1979, Mississippi Power was down to less than six months of operating cash.

The company eventually patched things up with regulators and finished its construction marathon, but not before shareholders ate $1 billion in overruns at Vogtle.

“It was like you had your hands on something big that you couldn’t control,” Ed Addison, Southern CEO from 1983 to 1995, said in the company history. “You couldn’t stop because ... too much was already invested in it.”

Fanning argues this time is different because inflation and interest rates are low and Southern has gotten better at big construction projects.

“Everything that I know, this plant was exceedingly well-built and well organized during the construction period,” Fanning said. “I suppose there is a theoretical risk of prudency. But in my view, this company is executing like no company in the United States.”

He is comfortable with the chips he has on the table.

“Now look, I am not a skeptic of natural gas more than any other fuel. But you cannot plan to put all your eggs in that basket. That is imprudent,” he said. “What Mississippi is doing here is a big bet. But ultimately, long-term, it will serve well the interests of the families we serve here in Mississippi.”

___

Online: Mississippi Power on Kemper and Sierra Club on Kemper.

Comments
(6)
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Great :(
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January 08, 2013
How come this wasn't in the propaganda TV show "100 Years of Southern Company."

"The coming year will also include continued efforts to resolve lawsuits over rising costs, financing methods and opinions over when the reactors will be able to begin commercial operation.

Last year, the consortium building the units filed a $900 million lawsuit against Georgia Power and other Vogtle owners, seeking recovery of additional costs it contends resulted from licensing delays, design changes and complications with the backfilling during site preparation.

Georgia Power, whose share of those costs would be about $425 million, filed its own lawsuit asserting it is not responsible for those costs.

The new units were scheduled to go into service in 2016 and 2017, but contractors have said they could be delayed by a year or more. Williams said work is being done with contractors to finalize a date.

The plant's owners continue to evaluate the U.S. Energy Department's offer of more than $8 billion in loan guarantees to help finance the project.

Failure to come to terms on conditions of the financing has required extensions of the acceptance deadline -- the most recent of which was Dec. 31.

"We did request and receive a new extension," Williams said. "So June 30 of this year is now the deadline for completion.""

Stan Wise, are you going to make us pay upfront for Southern's litigation and constuction delay costs?
Eyes Opened
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January 07, 2013
Q: What does Plant Fanning burn?

A: Captive Ratepayer Money!

Stan Wise and others of the Commission, please don't sell us out to Southern Company anymore!!!
Analyst Ratepayer
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January 06, 2013
Southern company trades at a relatively expensive valuation with a Price to Book Value of 2x, which is 50% more expensive than the industry average.

The Price to Sales ratio of 2.3x is also higher than the industry average by 50%.

The Price to Earnings ratio of about 17 times is almost 15% more expensive than the S&P 500 which had close to at 15% return last year, versus Southern’s negative 1.6%.

SoCo has a 4.4% dividend yield, which is close to the industry average of 4.2%. Its low beta of 0.11 is also in line with the industry average. So as a previous commenter suggested there appears to be many low beta, high dividend yielding utility stocks that aren’t making risky “Big Bets” as is Fanning.



The “alpha” of SoCo management, as defined by the same commenter, is definitely negative. Southern stockholders are seemingly assuming that the company will be able to unfairly stick us ratepayers with additional costs for these Big Bets before the payout is known. With Stan Wise on the Commission, that not only presents the shareholders with an arbitrage opportunity (as earlier observed) but a seemingly “riskless arbitrage” opportunity.

Viewer2
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January 06, 2013
I just watched what appeared to be a news documentary on NBC titled "100 Years of Southern Company." The broadcast highly supported the new coal gasification and nuclear units mentioned in this MDJ article.

Given NBC's standards for journalism I thought it odd that the reporting was 100% favorable to the Southern Company, didn't contain any information on its business missteps, and went so far to blame Enron for the bankruptcy of its Mirant subsidiary. That is ludicrous.

When I watched the credits it became apparent what I was watching; self promoting propaganda produced and directed by Southern Company and broadcast on NBC in the guise of objective reporting. I also discovered that they've even written a book titled "Big Bets" that mirrors the TV propaganda.

Oh yeah, like the earlier commenter mentioned, Fanning likes to use the term “beta” and seems oblivious to the consensus opinion that these new “Big Bets” are clearly delivering negative “alpha.”

It appears that Southern is going all out in an effort to sway popular opinion in front of upcoming hearings on its Resource Plan and Rate Case in order to gain approval for additional charges to ratepayers for these new “Big Bets” before they come on line.

I hope the Georgia Public Service Commission doesn’t roll over this time and stick us with even more costs, but instead lets Southern shareholders bear their fair share of the economic burden from these projects. Shareholders can act, if necessary, to protect their economic interests. That’s the American Way that Southern promotes.

Concerned Ratepayer
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January 04, 2013
After reading this article as well as the interview with Fanning in the June 8th issue of the Wall Street Journal titled “Tom Fanning: The Natural Gas Skeptic” I’m now a very concerned GA Power ratepayer. In the WSJ article he throws around financial terms like [stock] beta as if he knows what he’s talking about regarding his contribution to Southern Company shareholders and ratepayers.

First of all, beta is only relevant to a portfolio of stocks that is diversified enough so as to eliminate the effect of “alpha” (or the CEO’s contribution to return) for the stocks in the portfolio. This CEO contribution to the individual stocks return is a far bigger component of a stock’s total return than is beta. That’s why CNBC has a show titled “Delivering Alpha” which focuses on management return to shareholders.

Southern Company’s stock beta as stated on Yahoo Finance is 0.11, which means nothing more than the company’s stock price has not correlated well with recent stock market returns. But nevertheless, using this measure promoted by Mr. Fanning at face value times the returns to the S&P 500 for the past 52 weeks of 14.2%, yields 1.56% (0.11*.142 = 0.0156). In other words, the expected return to SoCo shareholder for the same time period would be 1.56%. This expected return for Southern Company aligns nicely with the actual 52 week return for the S&P Utility Index of 1.59%. (So it seems that SoCo is not the only low beta utility stock out there, if that’s what you’re looking for in your search for alpha as well as dividend yield.)

Unfortunately, the actual 52 week return for SoCo shareholders is a negative 1.6%. So best case, the contribution to Southern shareholder’s of Mr. Fanning’s costly and risky coal gasification and nuke strategy (the “alpha) is a negative 3.2%.

I would argue that this measure underestimates the costs that should be borne by shareholders for the generation strategy. Thank goodness for Mr. Fanning the Public Service Commission in GA rolled over and allows him to bill us for the new Vogtle units, way before they are operating, or the stock performance would most likely be even worse. It’s nice that the shareholders have us ratepayers as a riskless “hedge.” That’s called arbitrage.

Economist2
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January 04, 2013
GA EMCs are running in droves away from the coal fired Plant Washington which at this point is expected to cost over $2.5 million per megawatt of installed capacity. What are the equivalent costs of Plant Ratcliffe and the new Vogtle units?

Fanning, with degrees in Industrial Management, seems to be all wet on power plant engineering and financial risk management. He doesn't even recognize that he can get a financial hedge on rising natural gas prices for twenty years or longer. He's taking a very risky position in these new plants instead of a safe bet on natural gas plants while arguing that he's being prudent.

As long as the Public Service Commissions let him get away with it, us ratepayers will be left holding the bag.
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