* Utility outlines milestones to complete coal plant
* Kemper construction costlier than nuclear on kilowatt basis
* Nuclear loan talks with Energy Department see new momentum
By Eileen O'Grady
HOUSTON, July 31 (Reuters) - A second costly increase in the budget for Southern Co's Kemper County coal-gasification plant in Mississippi will keep the project on schedule for completion in May 2014, Southern Co Chairman Tom Fanning told investors on Wednesday.
A day earlier, Southern's smallest utility unit, Mississippi Power, disclosed that an additional $450 million will be needed to finish the 582-megawatt integrated gasification combined-cycle (IGCC) plant by mid-2014, pushing the total project cost to nearly $5 billion.
Atlanta-based Southern Co is building the advanced coal plant to showcase its gasification technology and is one of two U.S. power companies building new nuclear reactors.
Southern's Georgia Power unit's share of the 2,200-MW expansion at the Vogtle nuclear plant will cost nearly $7 billion, a price now exceeded by Kemper on a per-kilowatt basis.
Southern Co recorded a $278 million charge in the quarter ended June 30 as Kemper's price tag rose for a second time this year. Southern took a first-quarter charge of $333 million due to cost overruns of $540 million for the project.
Fanning said the additional $450 million is needed to maintain key project milestones including $100 million for contingencies while the earlier cost increase was tied to material needs, such as more piping.
Fanning would not rule out additional cost overruns at Kemper, but said the recent financial review was "very, very thorough."
An executive review committee of senior Southern officials visited the site and met with two newly named Mississippi Power executives. "We've really torn those numbers apart," Fanning said. "It is our best estimate."
Mississippi Power expects to begin test-firing Kemper's combustion turbine in late August, align the steam turbine to the electric grid in October and heat up the first gasifier by the end of the year, Fanning said.
Despite the nearly $1 billion cost overrun which Mississippi Power will not be able to recover, Fanning said the project remained "attractive" for the utility's 185,000 customers, but not for Southern Co shareholders.
"It has the economics of a nuclear plant with relatively high capital costs (and) very cheap energy," Fanning said. "Is it attractive to Southern's shareholders? No. We are taking a hit here. We understand that."
Fanning said it was unlikely the same problem of late cost increases will occur at the Vogtle nuclear site.
He said the Mississippi utility agreed to a $2.88 billion cost cap mandated by the Mississippi Public Service Commission in 2010 at a point when engineering work for Kemper was just 15 percent complete.
"We only knew we had the problem once the engineering became complete and we saw the implications" on construction, he said.
"That is completely the opposite of what we have seen at Vogtle," Fanning said, due to the two-phase federal nuclear regulatory licensing process which calls for a majority of engineering work to be completed in advance of construction.
Fanning cited "positive momentum" on its negotiation for an $8.3 billion loan guarantee for Vogtle following the confirmation of Ernest Moniz as secretary of energy.
Terms of the loan were expected to be finalized last year. The Energy Department recently extended the negotiating deadline to Sept. 30.
"Our view is that we've had a renewed sense of urgency," Fanning said, declining to predict whether or not the talks will be successful.
Fanning has said the utility will only pursue the loan guarantee if it benefits Georgia Power customers.