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Southern Co.’s Synthetic Gas Plant Suffering With Lower For Longer NatGas Prices

Continuously low prices for natural gas will have a major effect on Southern Company's operations, particularly itsclean coal synthetic gas generation project in Kemper County, MS, CEO Tom Fanning said during an earnings conference call on Wednesday.

"When we had this [Mississippi Power Co.] plant certificated, we all thought that gas prices would be double-digits, and way higher than where we are now," Fanning said in response to an analyst's question on a call reporting lower quarterly and a little better than flat annual 2016 profits. "Going back to 2008 when this plant was first proposed, it was structured as a gas price hedge."

These are different times for gas prices, and it is changing the current assessments of the experimental plant's economic viability at a time when it still has not obtained rate recovery from state regulators, Fanning acknowledged. But he said the project "remains a gas price hedge; there are still indicators on the 'green box' analysis that would indicate that under certain scenarios this is a very economic thing to do."

Last summer the plant began producing syngas using coal gasifiers and locally available lignite, proving that Kemper’s technology can provide a way forward for coal. The recent outlook for coal has been negative as cheap gas and environmental regulations havedriven down coal's share of the power stack.

"Originally, we saw volatile and high gas prices, and nobody thought prices would fall this low, and at the time Mississippi was looking at close to 70% gas-fired generation and 30% coal," Fanning said, adding that Mississippi Power was anticipating exposure of one-third natural gas prices, a third from Kemper and a third from coal prices.

"Getting to this point, we have certainly taken our lumps on this project, but we have delivered what was originally certificated in 2008," Fanning said in response to a question about whether it would be better to just operate the plant as a gas-fired facility.

In regard to Southern's recently acquired50% interest in Southern Natural Gas Pipeline, Fanning said Southern maintains about a $300 million fund to use for other similar gas acquisition that may materialize. The Kinder Morgan Inc. (KMI) purchase back in August is part of the $300 million investment fund, Fanning said. "We're looking jointly with Kinder Morgan on opportunities just like this."

Offering more detail on the gas price forecasts involved, Fanning said they call for $5/MMBtu gas in 2020, but he said looking at the value proposition on the experimental plant is probably more instructive. "What is the energy value of the plant to Mississippi customers?

"In the past I have used a $2.75-3/MMBtu range, but that didn't include all of the value of the byproduct at the plant and it used higher operations/maintenance costs, so we ran it through our dispatch people. We now believe this plant will dispatch out at about $1.75/MMBtu," Fanning said. "So from a used-and-useful standpoint, this plant has tremendous energy value."

He acknowledged that the plant has a "rather large" fixed operations and maintenance cost component, so he poses the question of whether it is better to run the plant as it was designed and get the benefit of the energy, or run it solely as a gas-fired plant? "That is sort of the question you get to," Fanning said, adding that these are some of the issues the utility will discuss with Mississippi regulators when the company files for rate recovery on the project.

"This does not include the issue of the value of the plant as a gas hedge, so there is absolute value there."

For 4Q2016, Southern reported net income of $235 million (24 cents/share), compared to $403 million (44 cents) for the same quarter the prior year. For all of 2016, net income was $2.7 billion ($2.89), compared to $2.6 billion ($2.89) for all of 2015.

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