8-KRegulation FDOther Events

SOUTHERN CO 8-K Report, Regulation FD Disclosure (Jun 5, 2017)

Filed June 5, 2017For Securities:SOSOJESOJFSOJCSOJDSOMN

Summary

This 8-K filing from Southern Company (SO) on June 5, 2017, primarily provides an update on the Kemper County Integrated Coal Gasification Combined Cycle (IGCC) Project through Mississippi Power. The report details continued delays and cost increases associated with the project's completion, pushing the expected in-service date for the remainder of the facility to the end of June 2017. Significant issues include leaks in syngas coolers and the need for operational improvements, which are estimated to add approximately $186 million to the project costs subject to the $2.88 billion cost cap. Additionally, further cost increases of $25-35 million per month are anticipated for any extensions beyond June 30, 2017, excluding costs not subject to the cap like Allowance for Funds Used During Construction (AFUDC). In parallel, Mississippi Power has submitted a rate filing to the Mississippi Public Service Commission (PSC) to accelerate the amortization of certain regulatory assets related to the project, aiming to maintain current annual revenue requirements without immediate customer rate increases. The company is also developing a traditional rate case and mitigation plan for the remaining costs, with the ultimate outcome of rate recovery and potential further material charges remaining uncertain. Investors should monitor future regulatory decisions and project performance for potential financial impacts.

Key Highlights

  • 1The in-service date for the remainder of the Kemper IGCC project, including both gasifiers, has been extended to the end of June 2017 due to operational issues, primarily leaks in syngas coolers.
  • 2Additional costs of approximately $186 million are now expected for projects subject to the $2.88 billion cost cap, including $22 million for schedule extension and $164 million for post-in-service operational improvements.
  • 3Post-in-service improvement projects, such as redesigning syngas cooler superheaters, are estimated to take 18-24 months and may negatively impact the project's economic viability.
  • 4Any in-service date extension beyond June 30, 2017, is estimated to incur additional base costs of $25-35 million per month, plus AFUDC and other carrying costs.
  • 5Mississippi Power filed a rate proposal on June 5, 2017, to accelerate the amortization of regulatory assets, aiming to maintain current annual revenue requirements of approximately $126 million without changing customer rates.
  • 6The ultimate resolution of rate recovery for the approximately $3.4 billion in Kemper IGCC costs not currently in rates remains uncertain and could lead to further material charges.
  • 7The company is continuing to evaluate potential warranty claims related to equipment issues.

Frequently Asked Questions

The expected in-service date for the remainder of the Kemper IGCC project has been extended to the end of June 2017. The estimated costs subject to the $2.88 billion cap have increased by approximately $186 million, bringing the total closer to this cap, and further monthly costs of $25-35 million are expected for any delays beyond June 2017, excluding costs like AFUDC.

The primary operational issues cited are leaks in the syngas coolers on gasifier 'B', requiring an outage for repairs and modifications to both gasifiers, and a leak in a particulate control device for gasifier 'A'. Additionally, the need for post-in-service improvement projects, like redesigning syngas cooler superheaters, has been identified.

Mississippi Power filed a rate proposal on June 5, 2017, to accelerate the amortization of certain regulatory assets, which is intended to maintain the current annual revenue requirement of $126 million without increasing customer rates, pending Mississippi PSC approval. The company is also developing a traditional rate case for the remaining costs, but the timing and outcome are uncertain.

Potential financial risks include further cost overruns, additional delays beyond the current estimated in-service date, unfavorable regulatory decisions on rate recovery, and potential impairment charges if the project's economic viability is further compromised. The ultimate outcome of rate recovery for the substantial costs not yet in rates remains uncertain and could result in further material charges.