Southern Is Facing Instability Due To Uncertainty Attached With Ongoing Projects

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Wall Street says it’s stockholders vs ratepayers for Southern’s Kemper project. “I think that its future earnings remain sensitive to a recovery of costs through rate base increases and allowed return on equity. Therefore, the company needs to present a strong case in front of PSC for cost recovery, as only expenditures deemed prudent will be allowed to be recovered.”

Southern Company (SO) has remained a popular stock for dividend-hunting investors, as it offers a yield of 4.9%. The company has large exposure to both regulated and competitive markets in the U.S. and is considered a premier utility stock. However, the construction of two ongoing projects, Kemper County IGCC and Vogtle Nuclear, have inflated the company’s risk profile. The ever-increasing costs and delays for Kemper IGCC have proved to be a drag on Southern’s earnings, and remain a concern for investors. Also, slowing capital spending (CAPEX) through 2016 does not augur well for the company’s future earnings. The risk attached with the two projects, especially Kemper, and slowing earnings growth (mainly due to decreasing CAPEX) are likely to put pressure on the stock valuation.

The Kemper County IGCC generational project in Mississippi continues to be a pain for investors and continues to weigh on earnings because of delays and cost overruns. In 2013, Southern registered an after-tax charge of $729 million, triggered by Kemper project delays and an increase in expected costs. Moving into 2014, the problems do not seem to be fading away, as the company took another $380 million charge (after-tax charge of $235 million or $0.27 per share) in the first quarter of 2014. The recent charge relates to lower labor productivity due to adverse weather, unexpected installation inefficiencies and labor turnover. Also, the company pushed the expected in-service date for the project to May 31, 2015; the fourth quarter of 2014 was the previous expected in-service date. The extension of the in-service date for Kemper is likely to result in a loss of $120-$150 million bonus depreciation. Also, any further delays beyond the new expected in-service date will cost $25 million per month.

The recovery of Kemper project’s costs, through rate base increases, remain limited to a $2.88 billion cap, whereas the recent increase in expected costs brings the total expected costs to $4.44 billion, excluding cost cap exceptions and net of federal grants.

SeekingAlpha.com | Jun. 3, 2014 12:24 AM ET  |  About: Southern Company (SO)

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