SO Southern Co

By Russell Gold 

Southern Co. said it has nearly completed a first-of-its-kind "clean coal" power plant, though a new analysis suggests it might not make sense to burn coal in it.

After taking nearly seven years and $7.1 billion to build, the Kemper County, Miss., facility, which can burn coal and capture much of the carbon-dioxide output, should be fully operational by the middle of next month, the company said.

But a required economic analysis of the project, the most expensive fossil-fuel power plant ever built in the U.S., found that lower natural gas prices and higher-than-expected operating costs "negatively impact the economic viability" of the facility.

The company analysis, disclosed this week, concludes that only if natural gas prices are high would the economics of the clean-coal plant compare favorably to a gas-burning plant. The Kemper facility was initially forecast to cost $3 billion in 2010.

Southern updated the status of the troubled plant as it posted a sharp decline in profit in the final quarter of 2016 to $197 million, or 20 cents a share, down from $271 million, or 30 cents, a year prior. It said its earnings were helped by retail revenue at its traditional electric operating companies and weather-related revenue impacts, but offset by higher operations and maintenance costs, increased share issuances and lower customer usage.

The company declined to specify the gas price assumptions it used in its scenario for the Kemper plant's viability, but said on a conference call with investors Wednesday that the scenario included a price above $5 per million British thermal units in 2020 and trending upward.

By comparison, the U.S. Energy Information Administration's forecast doesn't anticipate gas prices to top $5 until 2030.

Southern Chief Executive Thomas Fanning said that in 2010, it had promised to build a plant that would be a hedge against rising gas prices.

"I cannot imagine the company is going to be held accountable for a changing gas-price forecast," he said.

The project looks to be a very expensive hedge. If Southern had built a natural gas power plant of comparable size, it would have cost about $700 million -- one-tenth of the facility's overall cost, according to widely used capital construction cost estimates.

Southern is now headed toward a showdown over who should pay for the plant's extra costs.

It plans to ask state officials to approve passing on $4.2 billion in costs to ratepayers of Mississippi Power. But the company has critics who contend the plant was ill conceived and poorly executed, and are expected to ask regulators to approve only a portion of those costs.

In recent weeks, Chevron Corp., which owns and operates a large refinery in southeastern Mississippi, has made several filings questioning the plant's price tag, which has more than doubled since 2010. Chevron would be among the ratepayers who could be asked to bear the costs of the facility.

Southern already faces a lawsuit over the plant and an investigation by the Securities and Exchange Commission.

Charles Grayson, a retired chemical industry executive in Brandon, Miss., and a critic of the plant, says he thinks Southern's estimates about operations remain overly optimistic.

"For the plant to have a chance to be economical, you need natural gas prices to go way higher than anyone is anticipating and you have to have very high reliability year in and year out," he said.

The Kemper plant was proposed as a showcase of clean-coal technology. It can turn locally mined coal into a synthetic gas, capturing the majority of the carbon dioxide. It plans to sell the carbon dioxide to oil companies that will inject it into older oil fields to extract more hydrocarbons.

At the time the facility was conceived, few predicted the impact that added natural gas supplies would have on the economics of U.S. electricity production. Government and business officials were also eager to test technology to burn inexpensive coal while limiting the carbon dioxide emissions.

Mr. Fanning said Wednesday that he was glad the Kemper facility was close to finished.

"It has been a painful process. Getting to this point we certainly have taken our lumps," he said.

--Anne Steele contributed to this article.

Write to Russell Gold at russell.gold@wsj.com

(END) Dow Jones Newswires

February 22, 2017 17:11 ET (22:11 GMT)

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