Southern Company Suspends Kemper Project Coal Operations

Electric utility firm The Southern CompanySO suspended all coal gasification operations at its Kemper plant on Jun 28. The news came as a major blow to investors. Kemper Project is touted to be a cutting edge power plant which uses 'clean coal' technology. Mississippi Power, subsidiary of Southern Company and in charge of the Kemper Project, will now run the plant solely as a natural gas facility.

The Kemper plant had been central to ex-President Obama's Climate Plan and was designed to reduce up to 65% of carbon dioxide emissions. Notably, the project had also received the support of President Trump

Looking Back

The Kemper Project has been facing continuous criticism owing to its poor execution, cost overruns and multiple delays.

The plant is already three years behind schedule and is over $4 billion beyond the stipulated budget. The overall cost of the plant was estimated to total to around $3 billion in 2010. However, with several delays adding to the project's cost, the current price tag of the plant has ballooned over $7.3 billion. In the past 18 months, the company has announced 10 delays due to project management problems. The project found it difficult to get its two gasifiers to operate consistently.

Earlier this month, the company revealed plans to redesign and replace a key component in its plant - syngas cooler super heater system - in order to establish long-term sustained operations. These operations will also require relocation of ash loading process together and other minor improvements. Further, the company also intends to undertake additional improvement projects over the next few years to fix leaks and other issues relating to the plant's performance, safety and operations. These measures are likely to hike the overall cost of the plant by $186 million. The plant which has run periodically on syngas for about 200 days has not been able to integrate the coal gasification process fully over extended periods of time.

Last week, Mississippi Public Service Commission issued an ultimatum ordering Southern Company to redesign plans and run the Kemper Project solely on natural gas. They wanted to eliminate rate-payers risk for the gasifiers' assets and not to keep the rates for Mississippi Power customers unchanged.

What Lies Ahead?

Mississippi Public Commission instructed lawyers to draft the formal order which it plans to issue on Jul 6. The company will be participating in the proposed settlement docket to be established by the commission on Jul 6. It will then decide the future course of action based on the outcome of the meeting.

Now since the company won't be able to retrieve the project's massive costs by passing it to ratepayers, management believes that the current decision will enable it to save additional costs which would have been required for the further development and improvement of its gasification units. The company still hopes to recover costs through settlement negotiations and other alternatives. However, if it fails to reach a satisfactory outcome, shareholders will have to suffer losses up to $3.4 billion.

Southern Company - one of the largest generators of electricity in the nation along with the likes of Exelon Corp. EXC , RWE AG RWEOY and Duke Energy Corp. DUK - has spent years in the construction of the project based on clean coal gasification technology. The company will have to scrap off the costly gasification project if it is unable to reach a satisfactory agreement with customers.

Zacks Rank

Southern Company is one of the largest and best-managed electric utility holding companies in the U.S. The firm dominates the power business across the southeastern region.

The utility currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Southern Company's shares declined 2% over the last six months, underperforming the Zacks categorized Utility- Electric Power industry's gain of around 6%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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