Just finish it!

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SO’s investors don’t like the Kemper project. Why? The company can’t finish Kemper’s chemical plant. It is supposed to turn worthless lignite (low grade coal) into an inexpensive substitute for cheap natural gas. It’s a failed Frankenstein experiment.

By Kelley Williams | Bigger Pie Forum, Chair | www.biggerpieforum.org | December 5, 2014

Ain’t gonna be no rematch,” Apollo Creed.  “Don’t want one,” Rocky Balboa.   These lines and characters are from the movie “Rocky.”  Its brutal iconic fight is a metaphor for Mississippi Power’s Kemper County Lignite Plant mess.

Atlanta’s Southern Company (SO) is the parent of Mississippi Power Company and Kemper’s decision maker.  SO is a darling of institutional investors.  Pension funds, endowments, and other institutions own 50% or about $21 billion of its stock.  They like the generous dividend and predictable earnings from its regulated electric utilities in four southern states.  These monopolies have captive customers, no competition, guaranteed prices, attractive investment returns, “fulsome” relationships with regulators, and so on.  They are sure things.  What’s not to like?

SO’s investors don’t like the Kemper project.  Why?  The company can’t finish Kemper’s chemical plant.  It is supposed to turn worthless lignite (low grade coal) into an inexpensive substitute for cheap natural gas.  It’s a failed Frankenstein experiment.

The mad scientists can’t put the body parts together and bring Frankenstein to life.  It has cost over $5.2 billion.  That is six times the cost of Kemper’s simple generating plant already operating on natural gas at a fraction of the cost of Frankenstein’s syn gas – if it ever produces any.  So what’s the point now of Frankenstein even if it lurches to life?

Good question.  The point originally was it would be good for investors (not customers) because it cost a lot more.  The more regulated monopolies spend, the more they make if regulators approve the extra cost.  But it’s looking less and less likely that Mississippi’s Public Service Commission will approve Frankenstein’s extra cost.  Here’s why.

The plant is a over year late and won’t start up for two more years.  The company has lost credibility.  The earlier “fulsome” relationship with regulators is no longer fulsome.  Customers are paying more for Frankenstein which isn’t running.  They aren’t happy about it.  Regulators are feeling pressure.

The PSC now says it won’t decide how much of the cost is “prudent” until Frankenstein runs.  Only “prudent” cost gets the the usual guaranteed 15% return.  One PSC commissioner who supported Kemper has resigned.  Another supporter may be gone too by the time “prudent” cost is determined.  There is a PSC election next year.  It could be a wave.

SO’s big investors are nervous.  They are the guys with hard eyes making book on a fight their guy is losing.   They are figuring the odds.  Their questions at the quarterly investor conference calls are getting sharper.   Nothing personal.  It’s just business.  They don’t like Kemper’s endless write offs and mistakes.

During the last call one hard eye asked about Kemper’s 18% rate increase imposed when the political environment was friendly.  He wanted to know how much was due to Frankenstein.  And would it stick?   And when will write offs end?  The answer was most of the rate increase was to cover $2 billion of Frankenstein’s cost.  The other answers were hedged and subject to disclaimers about forward looking statements: i.e., “Don’t rely on anything management says.”  Not reassuring for the hard eye.  Or anyone else.

Professional investors want results, not excuses.  They are like Apollo Creed’s trainer who snarled at his showboating fighter: “Stop shucking and jiving and lets finish this.”   Apollo couldn’t finish it.  The fight went fifteen bloody rounds.  No winner.  Just mangled survivors.    Both agreed ain’t gonna be no rematch.

Probably ain’t gonna be another Kemper either.   In fact, may not even be a first one because it may never run.  If it were a fight, Kemper would have been stopped already out of embarrassment and to prevent injury.  The PSC could stop it now to prevent further injury to customers.  Investors could stop it now to prevent further injury to shareholders.

If it drags on two more years, there are three possible outcomes.  None good.  One, it’s still not finished.  Two, it runs and its syn gas is over three times the cost of natural gas.  Three, it’s a disaster because it is too complex to be safe and reliable.

Engineers reported they found and fixed one way that Frankenstein could explode catastrophically.   They didn’t say it was the only way, and they haven’t tested the fix.  If there are other ways yet unknown, there could be crippling injuries and deaths.   What justifies this risk?  The PR could be devastating.  The monetary cost could be far greater than the cost to kill and bury Frankenstein.  Its funeral is unlikely to draw many mourners.

So, how to finish it?  Kemper is the biggest boondoggle in Mississippi history.  But it’s just a speed bump for SO unless it’s a disaster.   The company has written off some $2 billion of Frankenstein’s cost.  The remaining $3.2 billion is less than 8% of SO’s $43 billion market value.  SO could write the rest off now and finish it.  Cuts losses.  Ends write offs.  Eliminates explosion risk.  Could boost stock price.  The hard eyes could like all that.  Why wait?

If SO wrote off everything except the $900 million generating plant already operating on natural gas, customers could get a 15% rate reduction and a refund of prepayments for Frankenstein of $235 million as of December 2014 (increases $13 million per month).

Customers would love it.  South east Mississippi’s economy would too.  SO would get out of a mess and maybe get some good will to boot.  Politicians stuck to Kemper could breath a sigh of relief and start bragging about job growth since Kemper’s high electric rates would no longer be a drag.

Choices.  Big investors have choices.  They can persuade management to do what’s good for shareholders (customers too incidentally).  Or sell their stock.  Management has choices.  It can stop shucking and jiving and do what’s good for customers (shareholders too incidentally).   Or wait for the PSC to order it to.  Customers have choices. They can move.  Or vote in next year’s PSC elections.

Photo Credit: www.hqwallbase.com # 100854

To read more: http://www.biggerpieforum.org/

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