Summary
Southern Company (SO) and its subsidiary Mississippi Power have filed an 8-K to report significant updates regarding the Kemper County Integrated Coal Gasification Combined Cycle (IGCC) project. The most critical information for investors is the substantial increase in the estimated completion cost and a projected delay in the project's in-service date. Mississippi Power has revised its cost estimate for the Kemper IGCC to approximately $4.44 billion, a significant increase from previous projections and exceeding the Mississippi Public Service Commission's (PSC) $2.88 billion cost cap (net of DOE Grants and excluding certain exceptions). This cost overrun has led the company to record a pre-tax charge of $380 million ($235 million after-tax) in the first quarter of 2014, adding to $1.2 billion in charges recognized through the end of 2013. Furthermore, the expected in-service date for the combined cycle and common facilities has been pushed to summer 2014, with the remainder of the IGCC project, including the gasification system, now anticipated to be operational in the first half of 2015, a delay from the previously scheduled fourth quarter 2014. The company also highlights that it will not seek rate recovery or joint owner contributions for costs exceeding the $2.88 billion cap. The delay beyond 2014 also jeopardizes certain tax benefits, specifically bonus depreciation, valued at an estimated $120 million to $150 million for retail customers, which could necessitate further adjustments to the rate recovery plan.
Key Highlights
- 1Kemper IGCC project cost estimate revised to approximately $4.44 billion, significantly exceeding the $2.88 billion cost cap set by the Mississippi PSC.
- 2A pre-tax charge of $380 million ($235 million after-tax) was recorded in Q1 2014 for probable losses on the Kemper IGCC project.
- 3The in-service date for the combined cycle and common facilities is now expected in summer 2014, while the full IGCC project completion is delayed to the first half of 2015.
- 4Mississippi Power will not seek rate recovery for costs exceeding the $2.88 billion cost cap.
- 5The delay of the in-service date beyond 2014 risks the loss of approximately $120 million to $150 million in bonus depreciation tax benefits for customers.
- 6Construction issues cited include decreased labor productivity due to weather, high labor turnover, and installation inefficiencies.
- 7The company acknowledges risks of further cost increases and schedule extensions due to various factors, including technology, labor, and material issues.