Southern Company Bets Big
Southern Co., one of the nation’s largest investor-owned utilities, appears torn between enormous recent investments in advanced coal and nuclear technologies—the company’s successful strategy in the past—and a competing sense that natural gas and distributed energy might be the company’s ultimate future.
The Southern Company, based in Atlanta, Ga., is a regional utility behemoth, mostly operating in state-regulated markets (Georgia, Alabama, Mississippi, and Florida), that is anxious to update its successful heritage in 20th-century generating technologies—coal and nuclear. The company believes that developing new approaches to coal and nuclear will lead it into the future
Southern Co.’s Generating Profile
Southern Co. has 46,549 MW of generating capacity, with 40% from coal, 40% from natural gas, 16% nuclear, and 2% hydro, according to the company’s website.
The holding company operates through four regional, state-regulated, vertically integrated utilities: Alabama Power, Georgia Power, Gulf Power (Florida), and Mississippi Power, Georgia Power being the largest. The company also includes Southern Nuclear, operator of six nuclear units at three sites: Georgia Power’s Plant Vogtle, with two operating units (for a combined 2,430 MW); two units at the Hatch site in Georgia (1,848 MW total capacity); and Alabama Power’s two Farley units (totaling 1,800 MW).
The nuclear units in Georgia are jointly owned with Oglethorpe Power Corp., Municipal Energy Agency of Georgia, and Dalton Utilities, although Georgia Power is the licensee and operator.
The company has one of the largest coal-fired generating fleets in the U.S., providing over 18,500 MW of capacity. The system’s largest coal-fired plant is the Scherer plant in Georgia, at about 3,600 MW. According to the U.S. Energy Information Administration, Scherer is the largest coal-fired plant in the U.S., followed by Southern’s 3,400-MW Plant Bowen. Scherer burns Powder River Basin coal and Bowen burns Central Appalachian and Illinois Basin coal.
Among Southern Co.’s approximately 18,500 MW of gas-fired capacity, Georgia Power’s McDonough-Atkinson plant is the largest, at 2,500 MW. The Southern system also features many gas units, both combustion turbines and combined cycle units, added to locations at existing coal-fired plants
“21st century coal and new nuclear” are a big part of the company’s vision for the future, CEO Tom Fanning told POWER in early June. The troubled Kemper County integrated gasification combined cycle project in Mississippi (Figure 1), which incorporates carbon capture and storage, should be fully operational around the end of September, he said. Fanning added that Kemper will demonstrate a future for coal in the U.S. and elsewhere because, “The issue of coal and carbon is worldwide.”
The two new nuclear units at the Vogtle station in Georgia have been “a tremendous success,” despite a two-year schedule delay and increased costs, according to Fanning. “When Vogtle was approved, we calculated it would result in a 12% price increase. The price increase will not be 12%, even with schedule changes and cost increases. Instead, it will be 6% to 6.5%.” Vogtle will prove to be “one of the great engineering successes” of all time, by Fanning’s reckoning.
But Southern is also taking steps to explore an alternative future, including a major foray into natural gas distribution and supply, a bit more modest flyer into energy efficiency and distributed energy as a business, and utility-scale solar generation.
Despite Fanning’s overall ebullience, Southern Co.’s financial results have been showing some strain. The impact of the company’s drive to adapt 20th-century generating technologies to the 21st century showed up in its first-quarter (Q1) 2016 earnings. The company reported $485 million in Q1 earnings (53¢/share) on $3.97 billion in revenues, compared to $508 million in earnings (56¢/share) on $4.18 billion in earnings for Q1 2015.
A Southern Co. press release noted, “Kilowatt-hour sales to retail customers in Southern Company’s four-state service area decreased 3.0 percent in the first quarter of 2016, compared with the first quarter of 2015. Residential energy sales decreased 7.2 percent, commercial energy sales decreased 0.7 percent and industrial energy sales decreased 0.8 percent.” Total energy sales, including the company’s wholesale business, decreased 1.7%. In the same press release, Fanning said, “Southern Co. performed superbly in executing its business plan in the first quarter of 2016.”
Wall Street didn’t buy Fanning’s positive spin, as the company’s shares declined sharply following the Q1 report. Zacks Investment Research put a “sell” rating on the company’s stock, noting, “About a third of Southern Company’s retail sales come from industrial customers. The company, therefore, is much more affected by a sluggish economy than other utilities that are less dependent on the industrial component. Moreover, the challenging economic environment and delays associated with existing construction projects may hamper Southern Company’s results in the next few quarters. Also, Southern needs to shell out hefty amounts to comply with environmental controls and regulations.”
Moody’s Investors Service followed the earnings report with a credit downgrade to Baa2 from Baa1 for long-term senior secured debt—a junk bond rating—affecting about $4 billion in company debt. Moody’s based the downgrade on the company’s $12 billion purchase of Atlanta-based AGL Resources, a large natural gas distribution company based in Atlanta, and continued woes at the Kemper County project. Fitch Ratings also dinged Southern with a one-notch downgrade to below-investment-grade.
Mississippi Power has seen the Kemper County project turn into what the Wall Street Journal called “a costly mess.” Southern now faces a Securities and Exchange Commission (SEC) investigation related to Kemper and a project price tag that has ballooned to nearly $7 billion, more than double the original cost estimate. Rebecca Smith, the Wall Street Journal’s long-time utility beat reporter, wrote, “The SEC is looking into Southern’s financial controls and disclosures for the Kemper County Energy Facility in Mississippi, the company disclosed in a regulatory filing this month, amid claims by a former project manager that it misled the public about how long construction would last.”
The company in 2010 forecast that the project to gasify local lignite for power generation and capture the carbon dioxide emissions for use in enhanced oil recovery would cost $3 billion. Since then, Kemper has seen costs escalate dramatically as the project consistently missed construction milestones. Smith reported, “To date, Southern has paid back $368 million in federal tax credits for missing deadlines, but believes it will be able to keep $407 million in grants from the Energy Department.”
On April 26, the day before Southern Co.’s Q1 earnings announcement, Mississippi Power revealed another $61 million Kemper cost overrun. The Jackson, Miss., Clarion-Ledger said, “Although the unit of Atlanta-based Southern Co. will absorb about $35 million of the cost, customers could pay for $26 million in interest if the Mississippi Public Service Commission eventually approves. The utility is absorbing $2.7 billion in overruns so far, and Southern Co. will write off $53 million before taxes from its quarterly earnings.”
“We have had bumps in the road in Kemper,” Fanning told POWER. He added that at the time of the original cost estimate, only “about 10%” of the engineering design for the project had been completed. That’s not unusual for advanced technologies. “This technology does not exist anywhere else in the world,” he said.