8-KEarnings & ResultsRegulation FDOther Events

SOUTHERN CO 8-K Report, Financial Results (Oct 27, 2015)

Filed October 27, 2015For Securities:SOSOJESOJFSOJCSOJDSOMN

Summary

Southern Company (SO) filed an 8-K on October 27, 2015, primarily addressing updates regarding the Kemper County Integrated Coal Gasification Combined Cycle (IGCC) Project. The most significant development is the revised cost estimate, which indicates further cost overruns beyond the previously established $2.88 billion cost cap (net of DOE grants and excluding certain exceptions). Mississippi Power reported an additional $110 million increase in costs subject to the cap for September 2015, bringing the total estimated cost subject to the cap to approximately $5.11 billion. Consequently, Southern Company and Mississippi Power recorded pre-tax charges of approximately $150 million in the third quarter of 2015 to account for estimated probable losses on the project. Furthermore, the filing notes that the projected in-service date for the Kemper IGCC remains within the first half of 2016, but the company anticipates this date will likely fall after April 19, 2016, the deadline to retain significant Phase II investment tax credits. This potential loss of credits requires reclassification to a current liability, with Southern Company expected to provide funding for any repayment to the IRS. Investors should monitor potential further cost increases and delays, as well as the implications for regulatory recovery and the future operational and financial performance of this critical project.

Key Highlights

  • 1Kemper IGCC project faces further cost increases, with an additional $110 million increase in costs subject to the $2.88 billion cost cap reported for September 2015.
  • 2Total estimated cost of the Kemper IGCC project subject to the cost cap has risen to approximately $5.11 billion (net of DOE Grants and excluding Cost Cap Exceptions).
  • 3Southern Company and Mississippi Power recorded $150 million in pre-tax charges ($93 million after-tax) in Q3 2015 due to estimated probable losses on the Kemper IGCC project.
  • 4The expected in-service date remains the first half of 2016, but there's a high probability it will be after April 19, 2016, jeopardizing approximately $235 million in Phase II investment tax credits.
  • 5Mississippi Power will reclassify the Phase II investment tax credits to a current liability, and Southern Company expects to fund any required repayment to the IRS.
  • 6The company does not intend to seek rate recovery for costs exceeding the $2.88 billion cost cap (net of DOE Grants and excluding Cost Cap Exceptions).

Frequently Asked Questions

As of September 30, 2015, the total estimated cost for the Kemper IGCC project subject to the $2.88 billion cost cap (net of DOE Grants and excluding certain exceptions) was approximately $5.11 billion. The company does not plan to seek rate recovery for costs exceeding this cap.

Southern Company and Mississippi Power recorded pre-tax charges of approximately $150 million ($93 million after-tax) during the third quarter of 2015 to reflect estimated probable losses related to the revised cost estimate for the Kemper IGCC project.

Mississippi Power had utilized approximately $235 million of the Phase II investment tax credits as of September 30, 2015. However, the project's anticipated in-service date is likely to be after April 19, 2016, the deadline to retain these credits. Consequently, the credits will be reclassified to a current liability, and any repayment to the IRS is expected to be funded by Southern Company.

Yes, the company acknowledges that further cost increases and extensions to the in-service date are possible due to various factors, including challenges in start-up and commissioning, labor costs, equipment issues, unforeseen engineering problems, and operational performance. Each month of delay beyond June 30, 2016, is estimated to add $25 million to $30 million in base costs, plus additional costs for Cost Cap Exceptions like AFUDC.