SO Southern Co

Kemper facility in Mississippi faces SEC investigation on top of skyrocketing costs

By Rebecca Smith 

A Mississippi power plant intended as a showcase for clean-coal technology has turned into a costly mess for utility Southern Co., which is now facing an investigation by the Securities and Exchange Commission, a lawsuit from unhappy customers and a price tag that has more than doubled to $6.6 billion.

On Friday, Southern's credit rating also was downgraded one notch by Fitch Ratings and Moody's Investors Service, mostly because of its purchase of a gas utility, and because of cost overruns for the Mississippi project and new nuclear reactors it is building in Georgia.

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 Atlanta-based company also faces a lawsuit from Mississippi businesses concerned they will be saddled with high costs to pay for the Kemper plant, which is generating power but remains unfinished.

"The people of south Mississippi are struggling," said Michael Avenatti, the lawyer representing the ratepayers. "They can least afford to be saddled with this boondoggle."

The power plant, financed in part with federal subsidies, aims to take locally mined coal, convert it into a flammable gas and use it to make electricity. Most of the carbon dioxide will be captured and used for enhanced oil recovery, reducing the environmental impact.

Conceived as a first-of-a-kind plant, it currently looks to be the last of its kind in the U.S., though China and other nations have expressed interest in the technology. Kemper costs have swelled to $6.6 billion, far above the $3 billion forecast in 2010.

Southern spokesman Tim Leljedal said the company remains convinced that the Kemper plant "is the right project for Mississippi."

The SEC declined to confirm or deny its investigation. Southern said it believes the probe is focused on "accounting matters, disclosure controls and procedures, and internal controls over financial reporting." The company said it is fully cooperating with the inquiry.

A former Kemper project manager said he was let go after complaining to top company officials that public estimates for the project's completion were unrealistic and misleading.

Brett Wingo, who was a project manager for the gasification portion of the plant, said he thinks the company put a positive spin on construction so it wouldn't have to acknowledge to investors it was likely to lose federal subsidies due to delays.

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.

"I think they fired me because I wouldn't quit raising ethics issues," said Mr. Wingo, who was put on paid administrative leave in August 2014 and was let go this past February.

Southern's Mr. Leljedal said the company wouldn't comment on Mr. Wingo's termination. But he said the company has fully investigated and concluded "his concerns were unsubstantiated and not otherwise supported by the facts."

The state lawsuit by ratepayers, including a casino resort operator and a shrimp processor, contends that customers and investors weren't told important information about the project's problems and are being harmed by rate increases to pay for the plant. It seeks unspecified damages.

The utility said it believes the lawsuit is without merit.

Southern has recorded charges that have reduced earnings in 13 of the past 14 quarters that total $2.5 billion pretax ($1.52 billion after-tax) amid rising costs for the project. The charges were required because Southern's Mississippi Power Co., the subsidiary building the plant, agreed to cap costs billed to its customers.

Company executives have said early cost estimates were low because Mississippi Power started construction before engineering drawings were completed.

Kemper has been producing electricity since 2014, but by burning natural gas instead of coal while work continues on the plant's two coal gasifiers. Southern is aiming to complete the project in September, though an independent monitor recently told state regulators it might take longer, as it tackles problems including cracking in insulating material in the gasifiers.

Southern said this week it has completed repairs to refractory material in one gasifier and is making progress on another.

Write to Rebecca Smith at Rebecca.Smith@wsj.com

(END) Dow Jones Newswires

May 16, 2016 02:48 ET (06:48 GMT)

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