Southern Co. Kemper IGCC Delays, Cost Surges Are Under SEC Scrutiny

The U.S. Securities and Exchange Commission (SEC) is conducting a formal investigation concerning costs and delays plaguing Mississippi Power’s Kemper integrated gasification combined cycle (IGCC) plant.

Southern Co., Mississippi Power’s parent company, revealed the investigation in a recent 10-Q financial filing. The company said that while it is fully cooperating with the SEC, it believes the investigation is “focused primarily on periods subsequent to 2010 and on accounting matters, disclosure controls and procedures, and internal controls over financial reporting associated with the Kemper IGCC.” The “ultimate outcome” of the investigation “cannot be determined at this time; however, it is not expected to have a material impact on the financial statements of Southern Company,” it said.

According to the filing, Southern Co. estimates probable losses from the Kemper IGCC of $53 million in the first quarter of 2016 and $9 million for 2015 stemming from costs it expects to incur in excess of the $2.88 billioncost cap established by the Mississippi Public Service Commission. Material changes, including unforeseen engineering or design problems and issues concerning startup activities, at the first-of-its-kind plant may still continue to increase costs, the company noted.

Mississippi Power’s current total cost estimate for the project is about $6.58 billion, which includes about $5.35 billion of costs subject to the construction cost cap. Compared to the $2.2 billion originally estimated in 2004, total costs for the project—which uses Southern Co.’s proprietary TRIG coal gasification technology and is expected to capture about 65% of carbon dioxide emissions—have now trebled. “In the aggregate, Southern Company has incurred charges of $2.47 billion ($1.52 billion after tax) as a result of changes in the cost estimate above the cost cap for the Kemper IGCC through March 31, 2016,” the filing says.

Meanwhile, the utility is also being sued by a handful of local businesses, which allege that the company violated a Mississippi trade practices law by concealing and falsely representing important facts concerning the cost and schedule of the Kemper plant. This interfered with and destroyed business opportunities between the local businesses and current and prospective business associates, they allege.

Refractory “Rat Holes” Delay Operation

The 582-MW plant, under construction in Kemper County, Miss., is now more than two years behind schedule. The in-service date for the entire facility is now expected in the third quarter of 2016.

Delays are largely due to a revised schedule for Gasifer A, one of two gasifiers at the plant, Southern Co. President and CEO Thomas Fanning told investors, according to the transcript of an April 27 conference call. However, the project is making “good progress” on modifications and improvements to the refractory lining of both gasifiers, as well as on addressing issues identified during the initial fluidization and refractory cure-out on Gasifier A.

Fanning explained that while original fluidization tests “went beautifully,” the company found that a lack of seals between the refractory and a set of nozzles (used to blow air into the riser) allowed material to lodge between the refractory and the hard face and cause what are called “rat holes.” It forced the company to tear the refractory off and replace it. “What has taken a lot of time is it’s a confined space and has just been time intensive. And the more we’ve looked around the refractory, we found more of these rat holes, we had to tear more of it off and put more back on,” he said.

Workers are now in the process of “remediating issues with the lignite feed and drying systems as we approach testing of the gasifier using lignite.” In March, the company completed refractory cure-out of Gasifier B, reaching full operating temperatures while successfully operating the gasifier in pre-lignite feed mode. “Over the next couple of months, utilizing Gasifier B, we expect to achieve first syngas production, and later this summer, initial power production using syngas,” Fanning said.

A Plan for the First-of-its-Kind Facility

The company’s plan is to do the best construction job it can, and then essentially demonstrate a “reasonable history of reliable commercial operations,” before it files a rate case, he added. “I think one of the things that is distinguished by our operation at [the] Mississippi Kemper County plant, sometimes painfully, is that getting it done right the first time is really important to us. We’re not going to rush and try and slam this thing in.”

Fanning lauded workers at the site for demonstrating the plant’s ability to run on natural gas. “It provided, I don’t know, 40% of the energy to … the customers of Mississippi, and did so in an extremely economic way. So as you think about the ability for that plant to provide not only electricity from syngas, but in a dual fuel sort of way to provide a really high level of reliability by supplementing any outages or whatever with natural gas-fired electricity, it’s exceedingly attractive, and in my opinion, more than meets the obligations we’re setting forth when this plant was originally ordered.”

Sonal Patel, associate editor (@POWERmagazine, @sonalcpatel)