8-KRegulation FDOther Events

SOUTHERN CO 8-K Report, Regulation FD Disclosure (Sep 29, 2015)

Filed September 29, 2015For Securities:SOSOJESOJFSOJCSOJDSOMN

Summary

This 8-K filing from Southern Company (SO), specifically through its subsidiary Mississippi Power Company, provides an update on the Kemper County Integrated Coal Gasification Combined Cycle (Kemper IGCC) project. The primary focus is on the project's delayed in-service date and its potential financial implications. Mississippi Power anticipates the in-service date will be after April 19, 2016, which will necessitate the recapture of approximately $234 million in investment tax credits. This recapture is expected to be reclassified as a current liability on the balance sheet with no immediate impact to net income, though cash funding for the repayment will be provided by Southern Company. The filing also highlights that extensions beyond March 31, 2016, could result in additional base costs of $25 million to $30 million per month for start-up and operational readiness. Furthermore, costs related to "Cost Cap Exceptions," such as AFUDC and other operational expenses, are not subject to the $2.88 billion cost cap and will also increase with delays. The company continues to evaluate the construction, commissioning, and start-up schedule, acknowledging that further cost increases and schedule extensions are possible due to various operational, technical, and external factors. Investors should monitor future filings for specific cost updates and the ultimate impact on earnings.

Key Highlights

  • 1Kemper IGCC project in-service date expected after April 19, 2016, later than previously anticipated.
  • 2Recapture of approximately $234 million in investment tax credits (Phase II credits) is likely due to the delayed in-service date beyond April 19, 2016.
  • 3Recaptured tax credits will be reclassified as a current liability with no immediate net income impact; Southern Company will provide cash funding for repayment.
  • 4Monthly costs of $25 million to $30 million are estimated for delays beyond March 31, 2016, covering labor, materials, and operational resources.
  • 5Costs related to 'Cost Cap Exceptions' (e.g., AFUDC, consulting fees) are not subject to the $2.88 billion cap and will increase with further delays.
  • 6The Mississippi PSC's $2.88 billion cost cap is net of $245 million in DOE grants and excludes certain costs like the lignite mine, CO2 pipeline, AFUDC, and other exceptions.
  • 7Numerous factors, including technical challenges, labor, weather, and supplier issues, could lead to further cost increases and schedule extensions.

Frequently Asked Questions

This filing provides an update on the Kemper County Integrated Coal Gasification Combined Cycle (Kemper IGCC) project, specifically addressing delays in its expected in-service date and the associated financial implications, including the potential recapture of investment tax credits.

A key financial impact is the likely recapture of approximately $234 million in investment tax credits if the project goes into service after April 19, 2016. While this will be recorded as a liability without an immediate impact on net income, Southern Company will provide the necessary cash for repayment. Additionally, monthly costs of $25-$30 million are expected for delays beyond March 31, 2016, plus other 'Cost Cap Exception' costs not subject to the $2.88 billion cap.

The company lists numerous risks, including challenges in start-up and commissioning, operational readiness, unforeseen engineering or design problems, equipment failures, integration issues, labor costs and productivity, adverse weather, supplier delays, and potential regulatory actions. These factors could lead to further cost increases and extensions of the in-service date.

The $2.88 billion cost cap, set by the Mississippi PSC, is net of $245 million in DOE grants. It specifically excludes the costs of the lignite mine and equipment, carbon dioxide pipeline facilities, Allowance for Funds Used During Construction (AFUDC), and certain other exceptions such as 'beneficial capital' and 'change of law'.