With the region’s economy growing and its job market still drawing transplants, giant utility Southern Co. should be enjoying fair weather.
A recent decision by Georgia regulators to let subsidiary Georgia Power pass on to customers most overrun costs at its Plant Vogtle nuclear project was an added boost financially.
Yet clouds keep lingering – and in some cases building — over Atlanta-based Southern.
The deal on overruns with the Georgia Public Service Commission solved only one problem dogging a couple of big, high-risk projects Southern has launched over the past decade. And now a new worry has popped up, topping the list of issues:
* Financial troubles at Toshiba Corp., which owns the firms building the Vogtle plant, could cause more headaches for Georgia Power and Southern. The Japanese firm is expected to report on Tuesday that it lost up to $6 billion on its construction contracts for Vogtle and another nuclear project in South Carolina. It plans to quit building new nuclear plants. While Toshiba has said it will finish its U.S. projects, it’s unclear whether it will be able to live up to those commitments if losses worsen.
* Mississippi Power, another Southern subsidiary, still hasn’t been able to get its “clean coal” Kemper plant — the first of its kind — to run properly. The project’s costs have nearly tripled to $7 billion, including $2.7 billion out of Southern’s pocket, and it’s more than two years behind schedule.
* Meanwhile, Southern faces slowing growth at its traditional electric utilities due to growing use of solar power and more efficient lights and appliances.
To be sure, Southern is still a highly profitable behemoth utility. It reported a nearly $2.4 billion profit last year and is in no danger of a financial crisis. But its slowing profit growth and small stock gains haven’t exactly been wowing investors, either.
An investment in Southern’s stock, including dividends, has gained roughly 30 percent over the last five years — less than a third of the S&P 500 index’s 92 percent return, and well under the Dow Jones Utilities Average rise of almost 50 percent.
Southern revenue and profits generally have been flat since 2010, partly because of the financial hit from cost overruns at the Kemper plant.
‘Execution risk’
Southern’s slowing growth has spurred the company to do some big, costly acquisitions.
“The growth outlook at (Southern’s) four electric utilities has slowed considerably (with no material catalysts in sight) so management was forced to look elsewhere,” said Wells Fargo analyst Neil Kalton in a recent report.
Southern has spent billions expanding into wind and solar energy and natural gas distribution. Thanks to the U.S. petroleum boom from “fracking,” or hydraulic fracturing and advanced drilling techniques, natural gas has become a cheaper, cleaner fuel than coal, which still provides a third of Southern’s power.
Southern completed an $8 billion buyout last year of Atlanta gas utility AGL Resources and spent another $1.5 billion on a 50-50 joint venture with pipeline company Kinder Morgan.
Southern expects most of its near-term growth to come from these non-regulated businesses. Indeed, the gas business added $518 million to Southern’s third-quarter revenue, or 60 cents of every new dollar of sales.
But the strategy still faces “execution risk,” Kalton said.
Among the risks: more potential problems with the Kemper and Vogtle projects; a possible slowdown in the wind and solar business because federal tax incentives are ending; or snags in future gas pipeline projects, which can generate controversy. (Witness the Keystone XL pipeline project, and the pipeline protest at Standing Rock Indian Reservation in North Dakota.)
Southern’s top executives argue that its new strategy will boost the company’s growth and lower its risk, but “we are not yet convinced,” said Kalton.
Southern said its strategy has allowed it to become the nation’s second-largest energy company, with 9 million customers and an unbroken record of steady or rising dividend payments to investors since 1948.
“Southern Co. has a long track record of being fiscally sound and responsible – for customers and shareholders,” Southern spokeswoman Lauren Claffey said. She noted that Southern was able to raise $20 billion on Wall Street last year while maintaining strong ratings for bonds it issues.
Southern reports full-year 2016 results on Feb. 22.
Bad news from Tokyo
Southern made a huge bet on a new push for nuclear power when it decided in 2008 to add two reactors at Plant Vogtle — the nation’s first new reactor project in three decades.
The project soon busted the original budget and schedule. Now, the latest potential headache comes from across the Pacific.
Citing the cost overruns at Vogtle and SCANA's South Carolina plant, Toshiba is expected to report huge losses that could require a government bailout, according to press reports in Japan.
Shares of Toshiba, a conglomerate that makes everything from TVs and laptops to nuclear reactors, have plunged more than 40 percent since December. Standard & Poor’s cut its rating last month on Toshiba bonds — already in junk territory — citing the potential huge losses on U.S. nuclear contracts.
The Tokyo company owns Westinghouse, the supplier that designed reactors for the Vogtle expansion and SCANA’s project.
In 2015, to loosen a logjam of lawsuits on the Vogtle projects’ cost overruns, Westinghouse bought a construction firm building the plant. A subsequent settlement of disputes among Georgia Power and contractors shifted much of the Vogtle project’s risks onto the new Toshiba subsidiary.
Claffey said Southern “continue(s) to monitor the financial position of Toshiba, which is the guarantor for … our (Vogtle construction) agreement.” She said Westinghouse also provided some financial insulation to the Vogtle project — $920 million in letters of credit.
“While we cannot speculate on what may happen in the future with Toshiba or Westinghouse and their overall business, we will always hold them, as the contractor, accountable for their responsibilities under our agreement,” said Claffey.
But some fear Toshiba’s problems could upend Westinghouse’s settlement with Georgia Power and bring more costly delays.
“This is really a huge development that is extremely problematic. There is a long way for this (Vogtle) project to go,” said Sara Barczak, a longtime Vogtle critic with the Southern Alliance for Clean Energy.
If Toshiba’s financial troubles cause more delays and overruns, “then (Georgia Power) customers are going to get stuck footing the bill,” Barczak said.
That outcome would conflict with the PSC’s recent settlement, which requires Georgia Power to complete both of Vogtle’s new nuclear reactors by the end of 2020 or face significant financial penalties. If it misses the deadline, its profit margin on the project would automatically be cut from 10 percent to 7 percent — a potential hit of hundreds of millions of dollars.
But if Toshiba’s problems cause additional delays, former PSC Commissioner Bobby Baker thinks Georgia Power would claim the delays and cost overruns were beyond its control, and that the PSC would agree.
“Based on (the PSC’s) past history, if there are extra costs, they will be passed on to ratepayers,” said Baker, a lawyer who represents the Southern Alliance for Clean Energy.
A spokesman for the PSC said the agency is aware of Toshiba’s problems but hasn’t heard anything from Georgia Power about how it may affect the Vogtle project.
“Obviously we’re aware of the news about Toshiba,” said spokesman Bill Edge. “We have to wait and see what they bring to the commission.”
‘Pipeline to nowhere’
When Southern’s Mississippi Power subsidiary launched the Kemper “clean coal” project a decade ago, the first-of-its-kind power plant was supposed to convert cheap-but-dirty lignite coal into a gas that was as clean to burn as natural gas.
Mississippi Power has spent more than $7 billion on the coal “gasification” units, a power plant, a lignite mine, CO2 pipelines and related investments.
The plant has been running on natural gas since 2014. But the high-tech coal gasification units are still being tweaked, and aren’t yet running full-time.
The project is more than $4 billion over budget and over two years behind schedule. It has produced a $2.7 billion hit to Southern’s profits, at least three lawsuits alleging fraud, mismanagement or deception, and an investigation by the U.S. Securities and Exchange Commission.
In Gwinnett County State Court last year, a Mississippi oil services company filed a lawsuit alleging that it lost $100 million building a CO2 “pipeline to nowhere.” It “never would have been built,” the lawsuit said, if Southern and Mississippi Power hadn’t concealed the project’s delays. The company, Treetop Midstream Services, had planned to use the carbon dioxide, a waste product of the Kemper plant, to boost production at oil wells. But Southern last year canceled the contract to supply CO2, the lawsuit said.
Another lawsuit last month in federal district court in Atlanta alleges that Southern deceived shareholders about delays and cost overruns at the Kemper plant in 2012 and 2013, artificially inflating Southern’s stock price. The third lawsuit, by a group of businesses in Mississippi, accuses Southern and Mississippi Power of “fleecing the public” through costly fraud and mismanagement at Kemper.
Said Claffey, the Southern spokeswoman: “Southern Company does not believe these lawsuits have any merit, and we intend to defend ourselves vigorously through the remainder of the process.”
Last year, Southern disclosed that the SEC also is investigating how it handled its disclosures and accounting of costs and delays at the Kemper plant.
Claffey said the company doesn’t know how the SEC probe will turn out, but doesn’t expect a “material impact” on its financial results.
“As with any new technology, there have been delays” at the Kemper project, she said.
In a filing two weeks ago, Southern said it fired up the plant using the coal gasification units and produced electricity. But it then shut down the unit for repairs and modifications aimed at “improv(ing) the plant’s ability to achieve sustained operations.” Cost of another month’s delay: $51 million out of Southern shareholders’ pockets.
Southern also disclosed that it will study whether it still makes sense to run the plant using lignite coal, given the plant’s $7 billion price tag. Southern, now also a major natural gas utility thanks to its AGL Resources acquisition, said the economic case for “clean coal” is now less compelling because it projects long-term natural gas prices will be lower than expected.
“The ultimate outcome of this matter cannot be determined at this time,” Southern said in its filing.
ABOUT SOUTHERN
Headquarters: Atlanta
Employees: 26,700
Electric utilities: Georgia Power, Alabama Power, Mississippi Power, Gulf Power
Other Atlanta-based subsidiaries include Atlanta Gas Light, AGL Resources (now Southern Co. Gas), SouthernLINC wireless
PROFITS
Southern Co.’s profits have been largely flat in recent years, partly due to losses at its troubled Kemper plant in Mississippi, though a healthy rise is expected for 2016.
2016, $2.82 billion*
2015, $2.37 billion
2014, $1.96 billion
2013, $1.64 billion
2012, $2.35 billion
2011, $2.20 billion
2010, $1.98 billion
* Estimate
Source: S&P Capital IQ
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