Costs rise for Southern Co's coal gasification plant

HOUSTON, July 1 Mon Jul 1, 2013 7:50pm EDT

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HOUSTON, July 1 (Reuters) - The cost to finish building Southern Co's controversial coal-gasification power plant in Kemper County, Mississippi, may increase by at least $160 million to $4.5 billion or more, or more than double initial cost estimates, the company said in a filing with regulators.

Separately, the utility last week filed a petition asking state regulators to hold a "prudency review" to approve all money spent on the Kemper project through the end of March.

In April, Southern Co said it needed to spend an additional $540 million for higher quality pipe and more workers to complete the 582-megawatt, integrated gasification combined-cycle (IGCC) plant by May 2014, and recorded a $333 million charge to first-quarter earnings.

The utility sees additional cost pressure from ongoing construction activity, inventory and start-up energy costs. The company is reviewing the potential cost increases, a spokeswoman said.

Two top executives at Southern's Mississippi Power unit were replaced after questions were raised about whether Mississippi Power withheld information about Kemper's rising costs from members of the Mississippi Public Service Commission (PSC).

In a monthly report to the PSC, Mississippi Power, Southern's smallest unit, said it has spent $3.14 billion so far on the Kemper project, one of only two recent IGCC projects in the country.

IGCC technology was touted as a way for utilities to continue to take advantage of the nation's abundant coal supplies despite rising concerns about carbon pollution and global warming, but dozens of projects were scrapped due to high costs and other factors.

The Kemper report estimated the total cost will exceed $4.5 billion, including a $250 million grant from the U.S. Department of Energy.

The PSC put a cap on the Kemper project, saying the utility can recover no more than $2.88 billion from customers for the IGCC plant. The company can also recover costs for the lignite mine and a pipeline to move captured carbon dioxide emissions.

Under a state law, the utility can recover up to $1 billion in costs that exceed the PSC cap by selling securitized bonds.

Customer rates went up 12 percent in April to help cover certain Kemper-related costs.

In May, Moody's Investor Service put Mississippi Power's ratings on review for possible downgrade, calling the Kemper project "one of the most expensive generating plants being built in the country today."

Kemper is designed to showcase gasification technology using low quality lignite coal developed by another unit of Southern Co and KBR Inc. The companies are working to sell the technology around the world.

Duke Energy completed another IGCC plant last month in Indiana, about one year late. The 618-MW Edwardsport plant, which was not built to capture carbon emissions, cost $3.5 billion, up 75 percent from early estimates. (Reporting by Eileen O'Grady in Houston; Editing by Bob Burgdorfer)

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