(NYSE: SO) Southern Company sees more problems with its clean-coal movement
Regional utility giant Southern Company (NYSE:SO) has been on the verge of a major breakthrough in clean coal technology for at least the last five to ten years. Southern is in the process of building the massive Kemper plant, which has the potential to revolutionize the way coal is burned to produce electricity in the United States. Kemper uses a one-of-a-kind technology that burns coal more efficiently making it “cleaner” and more economical than ever before.
However, the project has suffered numerous cost over-runs and completion delays that have threatened the very viability of the clean coal movement as a whole. This is causing Southern and its investors a great deal of concern and uncertainty.
In the figure below see the decline in Southern’s share price from a high of $52 in January, down nearly 10 percent.
The Kemper Project and Clean-Coal Technology
The Kemper project is a revolutionary concept in electricity generation because of a new technology called Transport Integrated Gasification, or TRIG, which was developed by Southern along with KBR, Inc. (NYSE:KBR)
The Kemper facility is a 582-megawatt electric power plant. It features TRIG, a high-efficiency technology capable of utilizing lignite, which accounts for more than half of the world's coal reserves. The Kemper facility will employ two KBR TRIG gasifiers, operating in air-blown mode, to produce clean coal energy. This technology converts lignite to gas at a much lower temperature than traditional coal conversion, resulting in significantly lower costs than what's possible with existing gasification technologies.
There are many potential benefits of the new TRIG technology. This is a revolutionary plan for Southern that will allow for greater power production at a lower capital cost. In addition, the facility is more environmentally friendly than existing coal burning technologies, since it involves fewer emissions of both sulfur dioxide (SO2) and carbon dioxide (CO2), a greenhouse gas.
As a result, a wide range of Southern’s stakeholders, including its investors, customers, and the local environment, stand to benefit from this technology. Unfortunately, as the Kemper project suffers repeated cost-overruns and start-up delays, it clouds the outlook for the clean coal movement. Previously, many in the utility industry had held out hope for clean coal as a means to continue usage of coal, an abundant and cheap source of power generation. At the same time, the technological advances employed at the Kemper project had potential for utilizing coal in a much cleaner, more environmentally sound manner. However, those hopes are fading.
The Impact for Investors
Southern has taken several charges and impairments against quarterly earnings, which have suppressed the company’s profits over the past few years. In 2014, Southern Company's profits were weighed down by $729 million, or $0.83 per share, of increased cost estimates for construction of the Kemper project, in addition to $536 million in extra costs related to construction of Kemper’s integrated gasification combined cycle (IGCC) project. This is quickly becoming a recurring problem for Southern, as the bloated costs and delays have spilled over into 2015.
Through the first half of this year, Southern has once again taken charges due to the IGCC project, in the amount of $20 million. And, Southern again absorbed increased construction costs totaling $235 million over the first six months of 2015. Not only that, but Southern announced in its second-quarter earnings report that the Kemper start-up date was postponed again. Southern management now expects that the Kemper project will not be placed into service until after April of 2016.
This will result in $15 million in additional total costs. Moreover, the company expects to incur $25 million-$30 million in additional costs each month for deferring the start-up beyond March, and another $20 million per month in financing and operating costs. If that weren't bad enough, because the project will be delayed beyond Apr. 19, Southern would be required to return $234 million to the IRS, which is what the company had received in prior tax credits for the project.
Investors have not responded favorably to this news. In the aftermath of the most recent announcement, Southern reiterated that its customers would not foot the bill for the excess charges. That leaves the company’s bottom line, and therefore its shareholders, as the ones who will be absorbing the financial impacts.
Companies to Watch
* Southern Company (NYSE:SO) has suffered a tough year, due primarily to the repeated setbacks at Kemper. The stock has declined by more than 8 percent year-to-date, which has underperformed the S&P 500 by about six percentage points so far this year, and considering the financial impacts going forward, there could be further downside in store.
* Another company to watch is KBR (NYSE:KBR), which co-developed the twin TRIG gasifiers employed at the Kemper plant. KBR stock has risen 13 percent this year, as the potential of its ground-breaking technology has instilled confidence in its investors. However, due to the ongoing scrutiny of the Kemper plant, the future of KBR’s technology is now in question. For both Southern’s and KBR’s investors, it is important to pay close attention to the status of the Kemper plant in the months ahead.
Bob Ciura is an independent equity analyst. Since 2012, his work has focused on fundamental investment analysis of publicly-traded companies in the energy, technology, and consumer goods industries. Bob has a Bachelor's degree in Finance and an MBA in Finance.