Add shareholder discontent to the list of problems facing Southern Co.
Investor pushback on Kemper and executive pay failed in May, but some shareholders are not giving up
The problems stemming Southern Co.’s troubled investments in its Kemper integrated gasification combined-cycle (IGCC) project in Mississippi and its Vogtle nuclear project in Georgia just continue to grow.
In addition to the Southern's recent decision to end work on the gasification units at Kemper and run the plant as a natural gas generator, Westinghouse Electric, the main contractor for the Vogtle project, filed for bankruptcy in March, throwing the future of the project into question.
Now, some shareholders are up in arms over Southern’s executive pay practices.
Despite sizeable losses, total compensation for Southern CEO Thomas Fanning rose nearly 34% to $15.8 million. The company’s executive vice president, Art Beattie, saw his compensation rise by 37% to $5.4 million.
In a Securities and Exchange Commission filing, Southern reported probable losses from Kemper of $428 million, $365 million, and $868 million in 2016, 2015, and 2014, respectively.
The losses reflect revisions of estimated costs incurred for the construction of the Kemper project in excess of the $2.88 billion cost cap established by the Mississippi PSC and net of $245 million of grants awarded from the Department of Energy.
The gap between performance and pay has attracted the attention of several large institutional shareholders, who in April filed a letter with the SEC in advance of Southern’s May annual shareholder meeting.
The letter, among other things, noted that the “driver for higher executive compensation” in both 2015 and 2016 was the result of Southern’s compensation committee’s shift from a total return to shareholders metric to an earnings per share metric that was “adjusted” to exclude the negative earnings impact of the Kemper project.
The letter, which was signed by executives from the California State Teachers’ Retirement System, the Local Authority Pension Fund Forum, The Nathan Cummings Foundation and the Seattle City Employees’ Retirement System, cited proxy statements that showed that in 2013 there was no adjustment made to a $1.14 billion pre-tax charge related to Kemper and compensation payouts were reduced significantly for that year.
In 2014, Southern took a pre-tax charge of $868 million related to Kemper, and the compensation committee adjusted earnings to eliminate the impact of the write-off for incentive pay purposes, but exercised its discretion to reduce pay for some executives responsible for decisions at Kemper by 10% to 30%.
In 2015 and 2016, however, the compensation committee used adjusted earnings per share metric for “all employees, including top executives, insulating them from Kemper’s negative impact on earnings.” The adjustments “meant the difference between executives not even achieving the threshold [earnings per share] level for payout and comfortably exceeding the target level.”
According to the letter, the adjustments resulted in “significantly higher bonus payouts to top executives.” Without the adjustment, Fanning would have received about $1.1 million and $947,000 less in bonuses in 2016 and 2015, respectively. And Beattie would have received $421,000 and $321,000 less in in 2016 and 2015, respectively.
"Our goal is to sustain long-term financial and operational success and to create long-term value for our stockholders by keeping customers first and providing them with outstanding customer service and clean, safe, reliable and affordable energy,” Southern spokesperson Schuyler Baehman said in an email. “Our compensation program is designed to be consistent with our business strategy. By linking pay and performance, we align our executive officers with both stockholder and customer interests.”
"Investors ... will be left holding the bag if ratepayers can't or don't absorb ballooning project costs.”
Executive Director, 50/50 Climate Project
Investors mounted a campaign at the May shareholders meeting seeking a “no” vote for members of Southern’s board who approved the pay program and that have oversight of the Kemper and Vogtle projects.
The campaign failed, but it did succeed in garnering 39% of the votes. And in January, a group of investors filed a class action lawsuit against Southern seeking to recover damages from the Kemper project.
It also seems the issue is not going to fade away in the wake of the annual meeting.
“Our intention is to try to engage” Southern on these issues, said Laura Campos, director of corporate and political accountability at The Nathan Cummings Foundation, one of the signatories of the letter filed with the SEC. She says she wants to hold Southern’s executives “accountable.”
It is a saga that is going to continue, “for investors, who will be left holding the bag if ratepayers can't or don't absorb ballooning project costs,” said Edward Kamonjoh, executive director of the 50/50 Climate Project, an investor-led organization aims to promote “efficient markets and sustainable economies world-wide.”
“Investors plan on continuing to engage Southern's board of directors vigorously with respect to their oversight of the Kemper and Vogtle projects,” he said, noting that the combined cost overruns at Kemper and Vogtle are approaching $10 billion, which is 1.5 times the company’s net income for 2014, 2015 and 2016 combined.
More broadly, Kamonjoh says “investors will be engaging Southern on whether its board is well equipped to effectively govern and steward the company” not just with respect to the Kemper and Vogtle projects, but in embracing a business model that is “more resilient and economically sustainable in the face of the range of material vulnerabilities that electric utilities are exposed to, including those associated with climate change.”
As Campos notes, Kemper and "clean coal" technology comprised a key Southern strategy to address climate change. “It has not been a success.”
Follow Peter Maloney on Twitter