Southern Co., one of the nation’s largest investor-owned utilities, appears torn between enormous recent investments in advanced coal and nuclear technologies—the company’s successful strategy in the past—and a competing sense that natural gas and distributed energy might be the company’s ultimate future.
The Southern Company, based in Atlanta, Ga., is a regional utility behemoth, mostly operating in state-regulated markets (Georgia, Alabama, Mississippi, and Florida), that is anxious to update its successful heritage in 20th-century generating technologies—coal and nuclear. The company believes that developing new approaches to coal and nuclear will lead it into the future (see sidebar).
Southern Co.’s Generating Profile
Southern Co. has 46,549 MW of generating capacity, with 40% from coal, 40% from natural gas, 16% nuclear, and 2% hydro, according to the company’s website.
The holding company operates through four regional, state-regulated, vertically integrated utilities: Alabama Power, Georgia Power, Gulf Power (Florida), and Mississippi Power, Georgia Power being the largest. The company also includes Southern Nuclear, operator of six nuclear units at three sites: Georgia Power’s Plant Vogtle, with two operating units (for a combined 2,430 MW); two units at the Hatch site in Georgia (1,848 MW total capacity); and Alabama Power’s two Farley units (totaling 1,800 MW).
The nuclear units in Georgia are jointly owned with Oglethorpe Power Corp., Municipal Energy Agency of Georgia, and Dalton Utilities, although Georgia Power is the licensee and operator.
The company has one of the largest coal-fired generating fleets in the U.S., providing over 18,500 MW of capacity. The system’s largest coal-fired plant is the Scherer plant in Georgia, at about 3,600 MW. According to the U.S. Energy Information Administration, Scherer is the largest coal-fired plant in the U.S., followed by Southern’s 3,400-MW Plant Bowen. Scherer burns Powder River Basin coal and Bowen burns Central Appalachian and Illinois Basin coal.
Among Southern Co.’s approximately 18,500 MW of gas-fired capacity, Georgia Power’s McDonough-Atkinson plant is the largest, at 2,500 MW. The Southern system also features many gas units, both combustion turbines and combined cycle units, added to locations at existing coal-fired plants
“21st century coal and new nuclear” are a big part of the company’s vision for the future, CEO Tom Fanning told POWER in early June. The troubled Kemper County integrated gasification combined cycle project in Mississippi (Figure 1), which incorporates carbon capture and storage, should be fully operational around the end of September, he said. Fanning added that Kemper will demonstrate a future for coal in the U.S. and elsewhere because, “The issue of coal and carbon is worldwide.”
The two new nuclear units at the Vogtle station in Georgia have been “a tremendous success,” despite a two-year schedule delay and increased costs, according to Fanning. “When Vogtle was approved, we calculated it would result in a 12% price increase. The price increase will not be 12%, even with schedule changes and cost increases. Instead, it will be 6% to 6.5%.” Vogtle will prove to be “one of the great engineering successes” of all time, by Fanning’s reckoning.
But Southern is also taking steps to explore an alternative future, including a major foray into natural gas distribution and supply, a bit more modest flyer into energy efficiency and distributed energy as a business, and utility-scale solar generation.
Despite Fanning’s overall ebullience, Southern Co.’s financial results have been showing some strain. The impact of the company’s drive to adapt 20th-century generating technologies to the 21st century showed up in its first-quarter (Q1) 2016 earnings. The company reported $485 million in Q1 earnings (53¢/share) on $3.97 billion in revenues, compared to $508 million in earnings (56¢/share) on $4.18 billion in earnings for Q1 2015.
A Southern Co. press release noted, “Kilowatt-hour sales to retail customers in Southern Company’s four-state service area decreased 3.0 percent in the first quarter of 2016, compared with the first quarter of 2015. Residential energy sales decreased 7.2 percent, commercial energy sales decreased 0.7 percent and industrial energy sales decreased 0.8 percent.” Total energy sales, including the company’s wholesale business, decreased 1.7%. In the same press release, Fanning said, “Southern Co. performed superbly in executing its business plan in the first quarter of 2016.”
Wall Street didn’t buy Fanning’s positive spin, as the company’s shares declined sharply following the Q1 report. Zacks Investment Research put a “sell” rating on the company’s stock, noting, “About a third of Southern Company’s retail sales come from industrial customers. The company, therefore, is much more affected by a sluggish economy than other utilities that are less dependent on the industrial component. Moreover, the challenging economic environment and delays associated with existing construction projects may hamper Southern Company’s results in the next few quarters. Also, Southern needs to shell out hefty amounts to comply with environmental controls and regulations.”
Moody’s Investors Service followed the earnings report with a credit downgrade to Baa2 from Baa1 for long-term senior secured debt—a junk bond rating—affecting about $4 billion in company debt. Moody’s based the downgrade on the company’s $12 billion purchase of Atlanta-based AGL Resources, a large natural gas distribution company based in Atlanta, and continued woes at the Kemper County project. Fitch Ratings also dinged Southern with a one-notch downgrade to below-investment-grade.
Mississippi Power has seen the Kemper County project turn into what the Wall Street Journal called “a costly mess.” Southern now faces a Securities and Exchange Commission (SEC) investigation related to Kemper and a project price tag that has ballooned to nearly $7 billion, more than double the original cost estimate. Rebecca Smith, the Wall Street Journal’s long-time utility beat reporter, wrote, “The SEC is looking into Southern’s financial controls and disclosures for the Kemper County Energy Facility in Mississippi, the company disclosed in a regulatory filing this month, amid claims by a former project manager that it misled the public about how long construction would last.”
The company in 2010 forecast that the project to gasify local lignite for power generation and capture the carbon dioxide emissions for use in enhanced oil recovery would cost $3 billion. Since then, Kemper has seen costs escalate dramatically as the project consistently missed construction milestones. Smith reported, “To date, Southern has paid back $368 million in federal tax credits for missing deadlines, but believes it will be able to keep $407 million in grants from the Energy Department.”
On April 26, the day before Southern Co.’s Q1 earnings announcement, Mississippi Power revealed another $61 million Kemper cost overrun. The Jackson, Miss., Clarion-Ledger said, “Although the unit of Atlanta-based Southern Co. will absorb about $35 million of the cost, customers could pay for $26 million in interest if the Mississippi Public Service Commission eventually approves. The utility is absorbing $2.7 billion in overruns so far, and Southern Co. will write off $53 million before taxes from its quarterly earnings.”
“We have had bumps in the road in Kemper,” Fanning told POWER. He added that at the time of the original cost estimate, only “about 10%” of the engineering design for the project had been completed. That’s not unusual for advanced technologies. “This technology does not exist anywhere else in the world,” he said.
The Kemper plant is currently running on natural gas, generating considerable power for the grid, but has had difficulty with the lignite gasification. Fanning said that successful lignite fluidization and gasification was just a matter of weeks away at the time of our June interview.
Nuclear Delays and Overruns
Southern’s other large conventional investment is the addition of two new 1,000-MW Westinghouse pressurized water reactors at the existing, two-unit Vogtle station (Figure 2). That project has also seen major cost overruns and project delays. Vogtle Units 3 and 4 are the product of the much-hyped but little-realized “nuclear renaissance” the nuclear industry envisioned late in the administration of President George W. Bush. It was cut short by the major recession of 2008, along with falling natural gas prices as a result of the success of hydraulic fracturing.
The Vogtle project got an $8 billion federal loan guarantee under the terms of 2007 energy legislation. It won Nuclear Regulatory Commission approval for a combined construction and operating license in 2012.
At the time, Southern said the two units would be commercial in 2016 and 2017, at a cost to the company of $6 billion. Today, the best estimate is that the two units could be commercial around 2020 at a cost of nearly $10 billion. Those figures are from the company—other assessments put Southern’s share of the project at around $14 billion.
The Georgia Public Service Commission (PSC) in May began hearings on whether the investments in Vogtle were “prudent,” a term of utility law that allows the company to recover its investments from customers, even as they have escalated. It’s unlikely that state regulators will rule against the utility. Commissioner Stan Wise indicated at a Platts nuclear conference earlier this year (see “The Global Nuclear Power Industry Faces Localized Outlooks” in the April 2016 issue) that he believes the cost overruns and schedule delays have been prudent.
But veteran energy journalist Dennis Wamsted, writing for The Energy Collective, recently argued that the state regulators have been asleep at the wheel on Vogtle. He wrote, “The real question though isn’t whether George Power has spent customers’ money (and believe you me it is customers, not the utility, that are paying for this long-delayed, much over-budget project) prudently, but where in the hell the adults were when the decision was made to go ahead with construction in the first place.”
Perusing Georgia Power’s prudence filing with the PSC, Wamsted noted “red flags aplenty when someone, anyone in the decision making process would have been justified in standing up and saying, ‘Hey, wait a minute, what are we thinking?’” The company had basically the same experience with the first two Vogtle units in the mid-1980s, as the cost escalated to $9 billion and the construction schedule consistently slipped.
But Georgia Power CEO Paul Bowers insisted, according to press accounts, “Every dollar, and every day, that has been invested has been necessary to complete these new units safely and correctly. Our reports will establish that the new units could not have been built for less money or in less time than it has taken.”
So far, the problems at Vogtle have not cost Georgia Power shareholders money. State law provides for “construction work in progress” financing, which means that customers pay the costs of the ongoing project while it is being built, presumably yielding lower rates once the project comes online. But that all depends on the PSC concluding that the utility’s spending has been prudent. If not, the company eats the costs.
A Long History
Southern Co.’s roots reach back into the late 19th century. Thomas Edison’s Pearl Street station in Manhattan, the nation’s first central station generation unit, started in 1882 (the same year that POWER was launched). In 1883 in Atlanta, the Georgia Electric Light Co. organized and began building its first generating station. At the same time, Savannah, Ga., and Montgomery, Ala., installed street lights.
Four years later, Pensacola Electric Co. in Florida, predecessor to Gulf Power, was born and began building its first generating station. 1894 marked the incorporation of Biloxi Electric Light Co., the first in a series of business events that would form Mississippi Power. 1902 saw the formation of Savannah Electric Co., as a decade-and-a-half of consolidations of small electric companies began.
The U.S. entered World War I in 1917, and the War Department selected Muscle Shoals in Alabama—with its plentiful hydro capacity—as the site for factories making nitrates used in explosives. Muscle Shoals would become a legendary legal and legislative battle over the coming three decades, waged between Southern Co. and the federal government’s Tennessee Valley Authority (TVA).
The modern Southern Co. began to come together in 1924, with Alabama Power, Mississippi Power, and Gulf Electric becoming subsidiaries of Southeastern Power & Light (SP&L). Two years later, SP&L would buy Georgia Power. In 1929, Georgia Power spun off Atlanta Gas Light, which 76 years later it would reacquire as AGL Resources.
1930 saw the creation of giant utility conglomerate Commonwealth & Southern (C&S), including six southern electric utilities and five northern companies. In 1932, Eugene Yates became head of the southern utility group, and later would be a major figure in the politically explosive Dixon-Yates territorial dispute with TVA in the 1950s over who would build new capacity to serve the Atomic Energy Commission’s atomic bomb-related facilities in Tennessee.
A dynamic 41-year-old New York attorney named Wendell Willkie became C&S chief in 1933 (he would later become the Republican nominee to challenge President Franklin D. Roosevelt in the 1940 presidential election—losing, and dying, in 1944). In 1935, Congress passed the Public Utility Holding Company Act, resulting in the breakup of many large electric utilities, including C&S. The company’s southern utilities were reorganized under a holding company, and the modern Southern Co. was born.
Following the 1980s trend toward non-utility generating companies in the wake of the 1978 Public Utility Regulatory Policies Act, Southern in 1981 formed an unregulated subsidiary and, a year later, spun it off as Mirant Corp. Mirant eventually went bankrupt and was acquired by NRG.
Challenges and Transitions
In addition to dealing with its challenges at the Kemper County project and the Vogtle expansion, Southern faces a serious transition if the Obama administration’s Clean Power Plan passes federal court review. Given its position as one of the nation’s largest users of coal, Southern already faces competition from low-priced natural gas. The company views the Obama regulatory plan using the Clean Air Act to reduce CO2 emissions as draconian.
A Brookings Institution analysis of 2014 utility comments on the Obama plan said Southern Co.’s “strongly worded condemnation of the Clean Power Plan is striking and unusual even compared to other critical voices. Southern asserts that the Plan ‘extends beyond EPA’s authority under the Clean Air Act, is unworkable and would increase electricity prices to customers while jeopardizing reliability.’ This will result, Southern says, in a ‘complete deconstruction of the nation’s electric sector and negatively impact America’s energy security.’ Implementing the Plan, according to Southern, could cost $1 trillion.”
As it contemplates the possibility of a new regulatory regime to control CO2 emissions, the company is moving toward ways to reduce the regulatory impact. One of those is to get deeper into natural gas, although Southern has already moved considerable generation into gas. A year ago, Southern made a successful bid for AGL Resources, its next-door neighbor in Atlanta and a major gas distribution company. Southern paid $12 billion for AGL, including assumption of $4 billion in debt.
The New York Times commented that the AGL deal “represents an important step for Southern as it moved from coal to natural gas. Once combined, the company will be the second-largest United States utility, with about nine million customers.” The largest is Chicago-based Exelon.
The AGL deal has encountered little resistance from the myriad state and federal agencies that had a piece of the regulation action. It is expected to close this summer. Nasdaq observed, “Once merged, the companies would operate close to 200,000 miles of electric transmission and distribution lines and would also integrate more than 80,000 miles of gas pipelines.”
Yet there could be a few dark clouds on the horizon, beyond the inevitable problems of merging two large companies into an even larger, coordinated entity (about half of mergers of publicly traded companies turn out to be failures, according to government statistics).
Southern tried to get into gas distribution in 2002, according to the company’s website, launching “Southern Company GAS” with 200,000 retail customers. That didn’t work, and three years later, the company sold the gas distribution business to Cobb EMC, a rural electric cooperative based in Marietta, Ga. Cobb formed an Atlanta-based subsidiary, Gas South, to run the gas distribution business serving some 280,000 retail customers. Gas South is currently doing well.
Publicly traded AGL, however, is not performing up to estimates. Zacks reported in May that the company “reported weak first-quarter 2016 results as warmer-than-normal weather dampened its gas distribution business,” not much different than the direction of Southern Co.’s Q1 earnings.
AGL, noted Zacks, “Announced adjusted earnings per share of $1.30. The bottom line missed the Zacks Consensus Estimate of $1.64 and also deteriorated from the year-ago adjusted profit of $1.34. Total operating revenues, at $1,334 million were also below the year-ago figure of $1,721 million.”
Southern in May also closed on a $425 million deal to buy PowerSecure, a North Carolina firm that focuses on distributed generation, energy efficiency products, and utility infrastructure. Southern agreed to pay an 88% premium over PowerSecure’s publicly traded share price when the deal went down in February. ElectricityPolicy.com commented that PowerSecure, “with activities in energy efficiency and distributed infrastructure technologies, has had strong growth in recent years,” and the deal with Southern “would expand its ability to provide customized energy products and services to customers.”
Southern has also been getting into utility-scale solar. At the end of April, Southern subsidiary Mississippi Power broke ground on a $100 million, 50-MW photovoltaic installation in Hattiesburg in Forrest County. Mississippi Power CEO Anthony Wilson said, “This is the second of three major solar projects that have been approved by the Public Service Commission, demonstrating Mississippi Power’s continuing commitment to cost-effective solar development.”
While Southern Co. has major challenges, including the Kemper County and Vogtle projects, along with declining demand and an aging population of consumers, the company still wins the support of many securities analysts. In mid-May, Horizon Investments said that Southern’s “long-term growth prospects stay healthy despite short-term challenges.”
Horizon said, “The company has a robust planned capital expenditure profile, which is expected to fuel its long-term earnings growth.” The analysis noted the company’s “solid dividend yield of 4.3%.” On the negative side, Horizon said that “cost overruns and delays in the current construction projects will negatively affect investors’ confidence and the stock’s valuation in the short run.”■
— Kennedy Maize is a long-time energy journalist and frequent POWER contributor.