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Is MPSC Verdict a Respite for Southern Company's Kemper?

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The Mississippi Public Service Commission (“MPSC”) and the electric utility firm finally reached a settlement regarding the rate issue over The Southern Company’s (SO - Free Report) controversial Kemper project. MPSC has finally decided to lower the amount needed to recover from customers.

Looking Back

Mississippi Power, subsidiary of Southern Company and in charge of the Kemper Project, has spent years for the construction of the project, which is based on clean coal gasification technology. The Kemper plant had been central to ex-President Obama’s Climate Plan and was designed to lower up to 65% of carbon dioxide emission. Notably, the project also received the support of President Trump.

However, the project has been facing continuous criticism owing to its poor execution, cost overruns and multiple delays. The plant is already three years behind schedule and is over $4 billion beyond the stipulated budget. The overall cost of the plant was estimated to be around $3 billion in 2010. However, with several delays adding to the project’s cost, the current price tag of the plant has ballooned over $7.5 billion.

The project found it difficult to get its two gasifiers to operate consistently. Thus in June 2017, MPSC issued an ultimatum ordering Southern Company to redesign plans and run the Kemper project solely on natural gas in a bid to eliminate ratepayers risk for the gasifiers’ assets. Thereafter, the company suspended all coal gasification operations at its Kemper plant.

The company intended to retrieve the project’s massive costs by passing it to ratepayers. The company had once warned of rate increase of more than 40%. However, Mississippi regulators, who did not wish ratepayers to incur additional costs, ordered the company not to increase the rates for Mississippi Power customers. Since then, a cloud of uncertainty has been hovering over the project, leaving the management in a dilemma in regard to its investment costs retrievement.

Recent Update

To date, the company has written off about $6.4 billion in losses relating to the project. Per the recent agreement, Southern Company will not be able to retrieve any of these losses from the ratepayers in the future. Notably, the agreement will reduce the customers’ bill by 2.4% and they will end up paying less than $3 per month than what they are currently paying. Taking into account the recent changes in tax law, the company will finally collect $99 million from the ratepayers this year compared with the previously agreed payment of $113 million.

Per the agreement, the plant will continue functioning as a natural gas facility and the company will no longer be entitled to operate the gasification unit of the plant. Additionally, the company will also vend a land adjacent to the plant (valued at $18 million), the proceeds of which will be rebated to customers.

Kemper’s Fate Still Uncertain

While the recent update brings an end to the controversies surrounding the project regarding the rate issue, the commercial viability of the project still remains uncertainty as the utility has to absorb $6.4 billion losses associated with the project. Also, it will be difficult for the company to make the project economically viable amid volatile natural gas prices.

Southern Company is reeling under high debt which restricts its financial flexibility and ability to tap growth opportunities. The utility's long-term debt at the end of the third quarter totaled more $44 billion, which represents a debt-to-capitalization ratio of more than 60%. Moreover, the company’s another major construction project — the Vogtle Plant — is also suffering from ballooning costs, poor productivity rates and is bankrolled with more than $8 billion in federal loans and loan guarantees.

As such, amid the financials losses suffered by the company, whether the recent decision really gives a breather to the company is still a wait and watch story.

Zacks Rank and Other Stocks to Consider

Georgia-based Southern Company carries a Zacks Rank #4 (Sell).

A few better-ranked players in the same industry are Pampa Energia (PAM - Free Report) , National Grid Transco (NGG - Free Report) and Algonquin Power (AQN - Free Report) .  Pampa Energia and National Grid sport Zacks Rank #1 (Strong Buy) and a Zacks Rank #2 (Buy), respectively. Algonquin Power carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Pampa Energia delivered a positive earnings surprise of 585.7% in the last quarter.

National Grid’s 2018 earnings are expected to increase of 7.2% year over year.

Algonquin Power delivered average positive earnings surprise of 33.17% in the trailing four quarters.

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