Summary
Southern Company's (SO) 8-K filing on April 2, 2014, primarily addresses cost pressures and potential schedule impacts for its Kemper County Integrated Coal Gasification Combined Cycle (IGCC) project in Mississippi. Mississippi Power Company, a subsidiary, has identified a minimum of approximately $177 million in likely cost increases, including $152 million in construction costs and $25 million in start-up costs, due to decreased construction labor productivity. Factors contributing to this include adverse weather, high craft labor turnover, and installation inefficiencies. The company is also reviewing the impact on the overall construction schedule and contingency. Investors should note that Mississippi Power does not intend to seek rate recovery or joint owner contributions for costs exceeding the $2.88 billion construction cost cap, excluding certain items. However, significant risks remain, including potential further cost increases and schedule extensions related to "first-of-a-kind" technology, labor, materials, and equipment issues. The ultimate outcome remains uncertain, and any further changes to estimated costs to complete the project, if subject to the cost cap, could be material to Southern Company's financial statements.
Key Highlights
- 1Mississippi Power identifies at least $177 million in likely cost increases for the Kemper IGCC project, comprising $152 million in construction costs and $25 million in start-up costs.
- 2Causes for increased costs include decreased construction labor productivity, adverse weather, high craft labor turnover, and installation inefficiencies.
- 3The company is reviewing potential impacts on the construction schedule and contingency for the Kemper IGCC project.
- 4Mississippi Power will not seek rate recovery or joint owner contributions for costs exceeding the $2.88 billion cost cap, excluding specific items and exceptions.
- 5The filing highlights risks of further cost increases and schedule extensions due to the project's "first-of-a-kind" technology, labor, materials, equipment, and operational challenges.
- 6There is a risk of losing tax benefits related to bonus depreciation if the project is not placed in service in 2014.
- 7The ultimate outcome of the Kemper IGCC project's costs and schedule is uncertain and could materially impact Southern Company's financial statements.