1. Introduction This memorandum requests: 1. Approval to modify Clean Coal Power Initiative Cooperative Agreement DE-FC26-06NT42391 with Southern Company Services (Southern) to change the site from Orlando, Florida to Mississippi Power?s Kemper County, Mississippi site; and, 2. A Secretarial waiver of the repayment agreement associated with the Cooperative Agreement. Based on the continued programmatic need to demonstrate Southern?s gasi?cation at commercial scale and of Southern?s supporting material, believes approval of site relocation and repayment waiver are warranted. 2. Background Southern was selected in October 2004 under the second CCPI solicitation. CCPI is a government/industry partnership that implements the President?s National Energy Policy recommendation to increase investment in clean coal technology. This commitment to clean coal is in response to the Nation?s challenge of enhancing its electricity supply and availability brought on by the growing electricity demand. For the CCPI Round 2 Solicitation, priorities were technology advancements for gasification?based electricity production, advanced mercury control, and sequestration and sequestration- readiness. The CCPI Round 2 solicitation was seeking projects that (1) demonstrated advanced coal-based technologies that have progressed beyond the research and development stage to a point of readiness for operation at a scale that can be readily replicated into commercial practice within the electric power industry, and (2) accelerate the likelihood of deploying the demonstrated technologies for widespread commercial use within the electric power sector. The solicitation may be found at: ccpi/ biblio graphv/ pro gram/solicitat ions/ccpi 2 In January 2006, DOE awarded a cost?shared cooperative agreement to Southern for the full-scale demonstration of the Kellogg Brown and Root (KBR) Transport Reactor Integrated Gasiflcation (TRIGTM) technology at the Orlando Utility Commission (OUC) facility in Florida. The initial project cost estimate was $568 million with a DOE/Southern split of $23 5/$333 million. The agreement was amended in March 2007 to increase the cost estimate to $844 million with a DOE/Southern split of $293l$55 1. additional contribution was the maximum allowed by law for the CCPI program.1 Project work was proceeding well at Orlando. Preliminary design and NEPA activities were completed. Orders were placed for long-lead time items. Permitting was nearly 1 By statute, DOE may contribute not more than 25 percent of the original DOE share toward project cost increases. complete. A new administration took of?ce in Florida in 2007 which did not support coal-based power production without carbon capture and sequestration (CCS). Project economics and distance to C02 storage sites made CCS impossible for Orlando. Consequently, Southern and OUC could not ?nalize the permits and the TRIGTM demonstration at Orlando was cancelled. In December 2007, Southern requested that DOE consent to relocation of the demonstration to a Mississippi Power Company site in Kemper County, Mississippi. Mississippi Power Company is a subsidiary of Southern Company. In the past, DOE has consented to site changes for Clean Coal demonstrations if the project at the new site will accomplish the same objectives as the original project at no greater cost to DOE than the original project. NETL requested detailed technical, siting, and cost information for the purpose of evaluating Southern?s site relocation request. NETL also requested a detailed ?nancial model in order to evaluate project economics. The Kemper project utilizes the same technology as Orlando except that Kemper will be con?gured with two gasi?cation trains, two combustion turbines and one steam turbine contrasted with Orlando?s single train con?guration. Kemper will generate approximately twice the power output of Orlando. Southern currently estimates the cost at $1.6 billion not including Southern labor or ?nancing charges.2 Approximately $23 million of $293 million contribution was spent for Orlando leaving $270 million for Kemper. absolute contribution for Orlando and Kemper will not exceed $293 million while proportionate share will be reduced from 35% to 18% if the site change is approved. CCPI agreements include a repayment obligation on the part of the recipient. For the Orlando project, Southern and KBR agreed to repay DOE through a royalty on sales, licensing and use of the demonstration technology in commercial applications. Southern requested a Secretarial waiver of repayment for Orlando due to an unanticipated change in IRS policy which made the recipient subject to federal tax on DOE funds. If repayment were eliminated, DOE funds would be considered a non?taxable contribution to capital under Section 118 of the Internal Revenue Code. The Orlando waiver request was denied. Southern has again requested a repayment waiver to help offset the additional cost for carbon capture and sequestration (CCS) technology at Kemper. Without the waiver, the effective reduction in DOE funds from federal taxation will make it dif?cult for Mississippi Power to justify use of IGCC with CCS to the Mississippi Public Services Commission. Repayment is discussed in detail in Section 8 below. On November 30, 2006, the Internal Revenue Service accepted Mississippi Power?s application for a tax credit pursuant to Section 1307 of the Energy Policy Act (EPACT) of 2005. The value of the credit is $133 million. To maintain the credit, Section 1307 requires that, by December 2008, Mississippi Power must ?[have] received all Federal and State environmental reviews necessary to commence construction of the project? and 2 By not including Southern labor in the cost charged to DOE, Southern believes it can save money on DOE compliant accounting practices. Southern will still be required to report the labor charges to DOE so that DOE has a full understanding of the cost of the technology. ?entered into a binding contract for the purchase of the main steam turbine or turbines for the project.? The facility must be put into service no later than 5 years after receipt of the certi?cation from the Secretary of Treasury. Mississippi Power was also invited to submit a full application for a DOE guaranteed loan pursuant to EPACT Title XVII. Because Kemper, now a ?rst-of?a?kindNETL?s evaluation supports Southern?s premise that CCPI funds, an EPACT 1307 tax credit, a loan guarantee and tax free treatment of DOE funds are needed to justify inclusion of the Kemper project in Mississippi Power?s rate base as the least cost option. See Section 7 below. The Kemper project requires the preparation of an Enviromnental Impact Statement for both the loan guarantee application as well as the CCPI project. If site relocation is approved for the CCPI project, NETL will take the lead on a single EIS for both activities. 3. Project Merit The Mississippi project has been under development since 2006 with the intention of building a lignite-fueled 2x1 integrated gasifrcation combined cycle (IGCC) facility using the air?blown Transport Integrated Gasi?cation (TRIGTM) technology. Originally the commercial operating date (COD) for the Mississippi facility was to follow the Orlando site by three years. With the termination of the demonstration project at the Orlando site, the Mississippi site will now confront the ?rst?of?a~kind risks that the Orlando project was going to bear and help resolve. The Mississippi Project now becomes the ?rst full- scale demonstration of the Transport Integrated Gasi?cation (TRIGTM) technology with COD scheduled for June 2013. This is a still a very important project in portfolio. TRIGTM is well suited to gasify low?ranked coals which comprise approximately 50 percent of U.S. reserves. This project is the last foreseeable opportunity for DOE to support demonstration of the technology. Both CCPI Round 3 and FutureGen are exclusively focused on CCS technology. The technical con?guration of the Mississippi plant will be very similar to the con?guration that was planned for the Orlando site and therefore, all of the original project demonstration objectives will be met with the new site at no cost increase to DOE. The overall objective of the project is to design, construct, and operate a Transport Gasifier based advanced integrated gasification combine cycle power plant that uses U.S. coals to generate electricity. The sub-objectives of the project include: 1. To design, build, and operate a state?of-the-art IGCC facility utilizing KBR transport Gasitier technology. 2. To design, construct, and operate an advanced cleanup system that includes a sulfur removal system, high temperature high pressure particulate filter (HTHP) system, selective catalytic reduction (SCR), and a mercury removal system. 3. To demonstrate high availability, high thermal ef?ciency, low cost, and low emissions of the TRIGTM electricity generating system in commercial operating mode. 4. To develop an effective commercialization strategy to accelerate the TRIGTM technology penetration in the US. and international markets. 5. Through reports and conference presentations, disseminate information on the development of the TRIGTM technology. The information reported will include plant ef?ciency, environmental status, and cost successes for ready replication into commercial practice. Differences between the two sites that are relevant to the TRIGTM technology are as follows: a The Mississippi IGCC is based on a 2x1 combined cycle with two gasi?cation trains instead of a 1x1 combined cycle with a single gasi?cation train. Each gasi?cation train fuels a GE combustion turbine, the same turbine planned for Orlando, so the gasi?cation trains are similar in size to the Orlando design. GE has completed combustion testing with the expected syngas and found that the same burner design can be utilized for the lignite and PRB derived syngas. - The Mississippi IGCC will use Mississippi lignite instead of PRB coal as its primary fuel. Mississippi lignite coal has been tested at the Power Systems Development Facility with good results. Southern Company plans to conduct a test with PRB coal in the Mississippi facility during the Demonstration Phase of the project, resulting in a wider range of fuel testing than the original Orlando site. 0 The sulfur removal and recovery system is different due to the higher sulfur content of the lignite coal. In both cases, selection of the sulfur removal and recovery system was based on commercially available technology and the best economics for each case. 0 The coal drying system has been modi?ed to include a commercially available ?uid bed dryer for ef?cient removal of the higher moisture content of the lignite coal. - Letters from the CEO of Mississippi Power, the COO of Southern Company and Governor Barbour of Mississippi were submitted to DOE describing their commitment to the project. Governor Barbour stated that ?the jobs and economic opportunity brought to East Mississippi by this generating plant can result in a much needed economic catalyst for this region?s development and prosperity. In addition to serving its citizens, Mississippi will gin a new reputation as a leader in advanced, ef?cient clean coal technology.? Southern and Mississippi Power have expressed a desire and willingness to incorporate CCS into the Kemper design with an initial target capture rate of 90 percent of the native in the Syngas. The term ?native? means the C02 produced by the gasi?cation process contrasted with that produced by the water-gas shift of CO in the syngas to C02. Ninety percent capture of the native C02 equates to approximately 25 percent of the carbon in the coal. Southern and Mississippi are considering adding a level of water-gas shift to increase the CCS rate to 50 percent. C02 would likely be exported to a nearby pipeline for enhanced oil recovery. The preliminary estimate for CCS addition is $250 million, not including lost?opportunity cost for parasitic power required to operate the CCS components. CCS will be done outside the scope of the II award. Southern may submit an application under a CCPI Round solicitation for partial support of the CCS components. 4. Project Structure The project was originally structured into three Budget Periods and four Phases. Budget Period 1 (Phase I?Project De?nition) activities that supported the Orlando site were completed. These activities included Front-End Engineering Design (FEED), environmental permitting, simulated syngas combustion tests, and NEPA activities which resulted in a NEPA Record of Decision. Budget Period 2 (Phase II-Detailed Design and Phase Construction) activities had commenced before the demonstration project was terminated at the Orlando site. The revised cooperative agreement for Kemper will maintain the 4?phase structure with DOE joining the project in Phase II. Due to need for a new EIS, DOE support for Kemper during the ?rst 18 months will be limited to NEPA activities. Southern will develop the FEED at its own expense. Assuming a NEPA Record of Decision supports the project at KEMPER, DOE support will then continue for detailed design, construction and operation. See Attachment 1? Proposed NEPA Schedule. The modi?ed Statement of Project Objectives (SOPO) and new Project Schedule submitted by Southern has been reviewed and accepted as reasonable by NETL. See Attachment 2. To segregate the costs and activities between the two sites for Phase II and Phase activities associated with the Orlando site will utilize a sub designation of and the Mississippi site activities will utilize a sub designation of 5. Site Suitability The plant site will be located near the unincorporated community of Liberty in Kemper County, Mississippi on or about latitude 32? 38? and longitude 88? 46? W. The site totaling approximately 1,650 acres is currently controlled by Mississippi Power Company via ownership or option to purchase agreements with current landowners. The land where the plant will be located is relatively ?at with slight rolling terrain. Current land use of the site and surrounding area is agriculture and timberland. Of the 1,650?acre site, less than 300 acres will be used in development of the plant. The plant footprint is expected to occupy 80 acres including the gasi?er, the combined cycle power block, and the lignite handling facilities. The major infrastructure available to the site includes transmission, water, gas, and lignite. The proposed site is located 20 miles north of Interstate 1?20/59 and adjacent to State Route 493. It is also 22 miles north of Meridian Regional Airport. All infrastructure requirements put forth in the of 2005 are available with some right- of-ways to construct. A new mine will be developed at the Kemper site to supply lignite to the project. 6. Host Site Commitment The host site is owned by Mississippi Power Company a subsidiary of Southern Company. Southern and Mississippi Power have executed a host~site agreement for the project consistent which has been reviewed by NETL. Mississippi Power requires new capacity by 2013. Kemper will be a rate-based plant. By late 2008, Mississippi Power must certify to the Public Services Commission that TRIG is the least cost option for new power generation. Mississippi Power has secured a mine mouth 15 year supply of lignite in collaboration with North American Coal Corporation. Negotiations are underway for additional supply. The State of Mississippi has also expressed a willingness to contribute approximately $50 million in incentives for the project. 7. Southern Financial Model and Financing Plan for Total Project Cost Kenqmr Cmnpam?ve An ?(wig EPC Costs 1,33 All Values are 2013 Net Present Value of Costs in Mitlions of Dollars Natural Gas Conminetl Cycle (Values from here clown reflect delta from NGCC Case. Negative values reflect savings.) Kemper Transfer of Orlando CCPI Funds"E 25% Capture No EOR Revenue3 Loan Guarantee" Repayment Waivers EUR Revenues? Assumes waiver renders funds non-taxable Assumes $7.50 Iron CO2 Tradition; . - . n. Jebt applied to project casts; Debt cost Treasury Bill i 25 basis points; 311-: Retipient {Ccogentive Ageaaett DE-FCESOSYHJ 2) (easier; the 22.251131 familial herein {a cousin PREUM I MARY (MEG-anti?: Maine.? Mamie: which is to be ?itlitelai flan: dialogue 0'39}qu the (1.5. (Emmet: In the men: fem-ind; t3 1m. i . I Includes Assumes i"'ui'lucls ale taxable. Assumes cost increase and (DMW capacity deuease: capacity {sepia-zed with CT equivalent Explain Why CCPI funds and other incentives are need for KEMPER 8. Repayment Waiver Southern has requested the Secretary to waive repayment associated with the CCPI project. Without the waiver, DOE funds are subject to federal taxation resulting in a $121 million reduction (2013 dollars) in available project funds.3 Southern believes the additional private sector investment to offset the tax burden could jeopardize the project?s ability to incorporate CCS technology and receive a certi?cate of public convenience from the Public Services Commission. To understand the request, a recap of the taxation issue is required.4 During the Clean Coal Technology (CCT) Demonstration Program (the predecessor to CCPI), the IRS 3Mississippi Power will be taxed at rate of 38.5 percent on DOE payments 38.5% $1 12M). The amounts are adjusted to 2013 dollars which is the comparison basis used by Mississippi Power for its petition to the Public Services Commission. Taxation of CCPI funds is not related to the tax credit available to Mississippi Power pursuant to EPACT Section 1307. published a series of private revenue rulings which characterized DOE funds as a contingent loan and therefore not subject to federal taxation. Not long after award of the Orlando agreement, Southern learned that the IRS was reconsidering the tax treatment of DOE funds. Both-Southern and DOE tried to convince the IRS that taxation of funds was inconsistent with the statutory purpose for which the funds were appropriated, and that the logic behind the earlier revenue rulings was still valid. However, on March 10, 2007, the RS noti?ed Southern and DOE that it considered DOE funds to be taxable since the terms of repayment were too contingent to treat the agreement as a loan. The rejected the alternate argument that to the extent the DOE funds did not qualify as a contingent loan, then the funds should be considered a non~taxable contribution to capital. To qualify as a contribution to capital under Section 118 of the Internal Revenue Code (26 U.S.C. 118), the funds must be a permanent part of capital of the recipient. The IRS believes the repayment agreement precludes consideration of the funds as non~ taxable under this test since the contribution is not necessarily permanent. Therefore, if repayment is eliminated, DOE funds would qualify as a non-taxable contribution to capital under Section 1 18. b5 Authority to Grant Waiver Repayment has its roots in the CCT Program. For the ?rst three CCT solicitations, DOE incorporated repayment into the agreements without statutory direction. The third solicitation included a provision allowing for termination of repayment upon a determination by Secretary, or designee, that repayment places the recipient at a competitive disadvantage in domestic 01' international markets. The standard was developed to avoid a no-win scenario in which DOE insists on repayment only to frustrate commercialization of bene?cial technology. Appropriation language directing the fourth and fifth CCT solicitations required DOE to use the very prescriptive repayment approach from the third solicitation. Appropriation language directing the CCPI Program invoked the prior CCT legislation, except that DOE was provided ?exibility in structuring repayment agreements: That the Department may include provisions for repayment of Government contributions to individual projects in an amount up to the Government contribution to the project on terms and conditions that are acceptable to the Department including repayments from sale and licensing of technologies from both domestic and foreign transaction. (Public Law 108-108) Although the law permitted DOE to vary repayment terms and conditions, DOE continued to use the CCT waiver provision in CCPI agreements. Accordingly, to eliminate repayment for Southern and KBR, DOE must determine that repayment places the TRIG technology at a competitive disadvantage in the domestic or international markets.5 b5 Analysis of Waiver Reguest b5 9. Project Cost Analysis NEPA for Kemper may be more complex than for Orlando. A new surface mine, CCS, and a C02 pipeline will be evaluated in the 1318. Southern and Mississippi power have indicated that they require a Record of Decision no later than November 2009 so that they can begin commercial operations by 2013. Since FE has already prepared a very similar EIS for Orlando, it makes most sense for FE to manage the NEPA for Kemper in close coordination with the Loan Guarantee Program Of?ce. NETL has developed a preliminary NEPA schedule that will meet the date. See Attachment 10. Conclusion ATTACHMENTS U. S. Department of Energy Nationa! Energy YEc/mology Laboratory March 6, 2007 MEMORANDUM FOR JEFFREY D. JARRETT ASSISTANT SECRETARY, OFFICE OF FOSSIL ENERGY FROM: CARL O. BAUER DIRECTOR, NATIONAL ENERGY TECHNOLOGY LABORATORY SUBJECT: CCPI?Orlando Project Approval of Continuation Application and Cost Growth Request Pursuant to my delegated authority, I have determined that it is in the Government?s best interest to fund a cost-growth on the Orlando IGCC project with Southern Company Services (SCS) and approve the continuation application authorizing SCS to proceed with Budget Period 2 (BP 2) of the project. Accordingly, I request $229,623 ,279 in DOE funds be made available to NETL for share of BP 2 costs. SCS is securing commitments from its board and team members to fund the private sector share of the cost?growth. Because SCS has contracted to deliver power to the Orlando Utility Commission (OUC) by June 1, 2010, SCS must make a go/no go decision 011 the project in the very near future. Therefore, SCS has asked DOE to process the continuation application and cost-growth request by March 31, 2007, in parallel with their efforts to ?nalize private side cost-growth financing. We believe SCS will be successful in its ?nancing effort. Nevertheless, NETL will not obligate BP 2 funds until SCS documents firm commitments for the entire private sector share of the project cost. If the commitments are not obtained by March 31, NETL will not authorize BP 2. We may authorize a no?cost extension of BP 1 if it appears that SCS needs a few additional weeks to close on its financing. Background Effective February 1, 2006, SCS and DOE entered into a cooperative agreement with the goal to first demonstrate IGCC technology using the Kellogg, Brown and Root (KBR) Transport Reactor Integrated Gasi?cation (TRIGTM) system at facility near Orlando Florida. DOE funds support only the gasi?cation island portion of the project coal gasifler, gas cleanup systems, and supporting infrastructure). The gasi?cation system will be integrated with a privately funded gas turbine/steam turbine combined?cycle unit. Combined, the two turbines will generate 285 Megawatts of Electricity A successful demonstration will generate technical, environmental, and ?nancial data to confirm that the technology can be implemented at commercial scale. 626 Cochran's Mill Road, PO Box 10940, Pittsburgh, PA 152360940 car]. bauer@neti.doe.gov Voice (412)386-6122 Fax (412) 386-6127 0 twmnetl?oegov The facility will be one of the cleanest, most energy-efficient, coal?based power plants in the world. Approximately 40% of the energy in the fuel will be converted to electricity compared to about 33% (on average) for existing, conventional coal?fired power plants. The facility will substantially reduce emissions of sulfur dioxide (802), oxides of nitrogen and mercury, as compared to conventional coal-?red power plants. The project was one of four selected in October 2004, under the Clean Coal Power Initiative (CCPI). CCPI supports the National Energy Policy recommendation to increase investment in clean coal technology by accelerating commercial deployment of promising technologies to ensure that the nation has clean, reliable, and affordable electricity. Technologies emerging from CCPI further the objectives of the Clear Skies Initiative, Global Climate Change Initiative, Future Gen Initiative, Hydrogen Initiative, Clean Air Interstate Rule, and Clean Air Mercury Rule. The plant will use low-sulfur subbituminous coal from the Powder River Basin (PRB) in Wyoming. TRIGTM is well suited to handle low rank coals including lignites and PRB coal. These coals make up half of the proven reserves in the United States. TRIGTM is capable of both air-- and oxygen-blown operations allowing for the use of TRIGTM in other applications including chemical production. It also makes TRIGTM a good candidate for carbon management. Continuation Application Evaluation An oversight team (the Technology Team) consisting of NETL technical, legal and ?nancial personnel, and HQ program representation, reviewed the SCS continuation application along with analysis and documentation prepared by the NETL Project Team. The Technology Team found that SCS and its team made significant progress in Budget Period 1 consistent with the objectives of the project. Site Certi?cation and Prevention of Signi?cant Deterioration permits were issued in December 2006 by the Florida Department of Environmental Protection. A ?Need for Power? petition was approved in May 2006 by the Florida Public Service Commission. Front End Engineering Design activities were completed and the corresponding specifications formed the basis for a revised bottom?up project costs. The process design and the overall system designs were reviewed and validated by a group of IGCC experts and no deficiencies were identi?ed. An extensive technical risk assessment of the technology was conducted and no significant technology weaknesses were identi?ed. NEPA review is nearly complete. A Record of Decision will soon be published for the project. The project activities are on schedule and the commercial operating date-target remains at June 1, 2010. The Technology Team recommended approval of the continuation application and cost-growth request subject only to SCS documentation of firm financial commitments for the full private sector cost~share, including share of the cost-growth. Cost-Growth Request continuation application requests $58.75 million in DOE cost~growth funding against a total project cost?growth of $275 million. Initial project costs were estimated by SCS in mid-2004 using a 2.5% escalation rate. In the intervening period, unanticipated demand for power plants and other new construction has resulted in substantial escalation in plant costs worldwide. Recent power plant market updates report that some new coal?based plants are experiencing 40% to 100% higher costs. Key factors causing cost?growth at Orlando include: 0 Equipment and construction metal prices have increased 200% to 300% over the last three years. The escalation rates are expected to continue in the near future. 0 World?wide demand for Architect Engineering talent has tightened the supply. 0 Demand for fabrication facilities has increased lead times and prices. 0 Fuel prices have risen. The project uses natural gas and PRB coal during startup and mostly PRB coal during demonstration. According to EIA, natural gas price increased from $5.50/MBtu in 2003 to $8/MBtu in early 2007, temporarily reaching as high as $12/MBtu in late 2005. PRB coal prices have increased from $5 per ton in December 2004 to $10 per ton in December 2006, temporarily reaching as high as $20 per ton in January 2006. The total project cost increased from $568.8 million to $844.2 million with $169 million in growth occurring in BP2 (detailed design, construction and start?up) and $106 million in BP3 (demonstration). cost contribution increased from $333.8 million to $550.5 million and the requested DOE contribution increased from $235 million to $293.75 million. As a percentage, cost-share decreases from 41.3% to 34.8%. The additional DOE funding requested is for BP 2. There will be no additional DOE funding for BP 3. In accordance with 42 U.S.C. 5903d, which was made applicable to the CCPI Solicitation by Public Law 108?108, DOE may provide cost-growth funding up to 25 percent of the DOE share of original agreement in a proportion not in excess of the proportion of costs borne by the Government in the original agreement. SCS has requested 25 percent of the DOE share. Furthermore, percentage share of total project costs is reduced. Accordingly, approval of the request is within statutory authority. Consequences of Not Funding Cost-Growth The likely consequences of DOE not supporting the cost-growth request are as follows: a SCS has stated it will withdraw from the project. At 285 the plant economies are on the margin. Without contribution, SCS is unlikely to recover its investment even without considering possible losses from operation maintenance risks associated with a ?rst-of?a?kind demonstration. 0 Not demonstrating at Orlando would be a major setback for the DOE gasi?cation program. Successful demonstration at Orlando is crucial to commercialization of TRIGTM technology a mainstay of gasi?cation portfolio. The Orlando project is a natural next step in TRIGTM development building on extensive DOE and private investment at the Power Systems Development Facility in Wilsonville, Alabama over the past 16 years. A planned commercial RIGTM facility would be jeopardized. Mississippi Power, a subsidiary of the Southern Company, plans to build a 600 RIGTM plant in Kemper County, Mississippi. Kemper is dependent on the progress at Orlando. 0 Power production from low-ranked coals will suffer a set back. Once demonstrated, TRIGTM provides an economically viable and environmentally sound approach for power production from abundant U.S. low ranked coals. I A future TRIGTM demonstration will likely be more costly for both the private sector and DOE. facility is an ideal location for the project since the site is already developed and permitted for power generation. Demonstration of TRIGTM at other locations could be signi?cantly more expensive. Summary The same factors causing the cost increase on the Orlando Project have impacted the entire power sector. Consequently, the cost-growth experienced in this project will not detrimentally impact the future commercialization of TRIG technology vis a' vis other advanced coal technologies. Weighing the significant bene?ts of the project and the dif?culty ?nding suitable host-sites against the added cost to the government from the cost-growth, the balance favors DOE support for the cost-growth and approval of the continuation application. BALCH BINGHAM LLP Alabama - Georgia - Mississippi - Washington. D.C. ME AN UM ATTORN COMMUNICATION . CONFIDENTIAL TO: Kim Flowers Vice President SPO Mississippi Power Company FROM: Grady Moore Steven Bums Leslie G. Allen DATE: February 7, 2008 RE: DOE Authority to Amend or Modify Cooperative Agreement to Transfer Site of CCPI Demonstration Project b5 CONFIDENTIAL Kim Flowers February 7, 2008 b5 Page 2 Kim Flowers COMMUNICATION February 7, 2008 Page 3 CONFIDENTIAL b5 Kim Flowers February 7, 2008 CONFIDENTIAL Page 4 5 Appendix 4 Site Change Precedence 21mm Pew rem-m DE-Ftll?Sl Ilsa-2:354 DE-FCH swam: charm?smear?? EE-FC T252 Deanery-emu Kim-9P1: was) 00E SITECHANOE FRECEOENCE Virti Era": Harm Coma??cm Prinz Riv-tan Um: Ham Lair-Sui (53 Dam?d-txn ijtd Clan 0:3 Dis! Flu Ga 2'01 {1.7631 Dem-aim Praia: ?Stan U'vt '3 Devmw'm Palm: Illa-m, Pn?w ?as: Page: Cer- ten I'm-yr? Chin! RM): 01 Prajra Eudora of Hard $3va MOI Cut-?3! ?u Cece! Edam aw Rage 3 ten-#151453! Dem'mHaze? Pratt! C?s-re: al of he mm 502?): Email Flu: Cl! a?u: nge? Puget: Susana-:1 Cat r27?: In Gen A5 Par-1:9: cu Return 9c: N3: (cw Orv-lama 1'31? We 11' El: 01 ?wasLau. LP. Ct} of uh: 11d. F??fa umx?q Firm Ewe"?! cm; ?raga-e103. 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Iran Tlh'uusu FL M932 lemma, 3 mm! ?I?ah'aus: FL61 531 Vat PA In?: El?z?. FD 1995 saw-MN was we: cry. [mm mm". 5.139%; mum-a ?le-93M. DR 155-1 mibu Emu-e, H1 hJu?; Haves} awn, v.1 Laureate-mt ink-dad Page, Hill-13.0.? 12125.24?: mat-mi th?nn EV: Pains" ??mih??ri?r?i Creme am. PA 1951 Nut Mum, mm - - 602 Sequestration Geoiogy I L-aAiI-i'zlrid 1- (n?r?e?i Plum??5 [kid-Hana] {but Wave- fh?rf??hgrl {335 Gaming beep L?j'?difr? Firn'?in??s - Deep Emma Basalt ecllme m; Unnaraimble Q0411 ?reams Lair . {mm-m a. {nah-11?, ?mu 50m timid? . Appendix 6 . SECARB Deep Saline Formations a; Appendix 7 MS Project Sequestration Potential - Rhys- 5 way?, 33W {gm 9' 53; {Km Kemper County GeO'Ogy dolostone; Carboniferous shale and sandstone Cretaceous sandstone and shale Path Forward for Kem per Cou nty 21589 uestrat-I . Preliminary geology evaluation suggest the targets exist but process anaiysis' Is needed-t Step 3? Drill test stratigraphic geology; and and cap rock integrity Appendix 8 Current 09; Sources and Pipelines Eastern. Gulf 'G.Oast- UHS 002 0" Production . . ?423:533; award Approximately. 250,000 CO, Source: Natural Appendix 9 002 Projects, Denbury Resources, Inc #hh 41 A .. LOUISIANA . has. 77 86 0 a ?3 its 31" ?Skirt? ?5 i9ngsArea tract but not owned ~rW Appendix 10 cog Pipeline Eminent Domain Attorneys and Counselors I i310 Twenty Fifth Avenue Gulfport, MS 3950] (228) 864-9900 BALCH BINGHAM LLP (228)864-8221Fax Alabama - Georgia Mississippi - washington. D.C. Ben H. Stone (888) (direct fax) (228) 2 4_0402 bstonc@balch.com MEMORANDUM ATTORNEY WORK PRODUCT BY HAND DELIVERY TO: Kimberly D. Flowers Mississippi Power Company b5 FROM: Ben H. Stone DATE: February 6, 2008 RE: Authority Under Mississippi Law of Mississippi Power Company to Condemn Property for Pipeline for Transmission of Carbon Dioxide ATTORNEY WORK PRODUCT Kimberly D. Flowers February 6, 2008 Page 2. I b5 90037.6 . I in (TO BE IN DUPLICATE) OF INCORPORATION OF POWER COMPANY . We, the undersigned natural persons'Of the see of twenty?one years Or more, acting as incorporators of a2 corporation Under the-Mississippi Business Corporation Rot, adopt the.following Articles of Incorporation for such corporation: I Li, _The_name of the corporation is POWER a SECOND: The period of its duration is Ninetywnine (99) years. - The Specific purpose or purposes for which the corporation is organized stated in general terms are: To acquire, buy, hold, own, sell, lease, exchange, dispose of, finance, deal in, construct, build, equip, improve,? use, operate, maintain and work upon: -eny and all kinds of plants and systems tor the. manufacture, generation, storage, utilization, supply or disposition of electricity, gas or water, steam, or electric?power produced thereby; and . batman? 3 Fm. 00m. .33me US Coal Regions Powder River ?Iw?h? Basin North Dakota Lignite Northwest 47?? Northern Appalachia Centrai A paiachia '5 - Southern MAppat-achia WW II: Siam in may; Gulf east Lignite 55min i: Batman? AN .roommo: :3 ?Mug-w} 7 . ?Pr M91: 40' 22.3%? 5) 9; f, 53%; - a 7 h; "my? . Haw? an rem-w? . . 14 A x5812; - gays? WK 1 3&3} a . kw-f 5731:! - - .ngj??vf-Yw away v55E?m? ??zzy? WAN m- . :ygiiv buumaamx Am am 23:3 Emu. New JERSEY ."i?rfw - WEST VIRGINIA - KENTUCKY - MISSOURI - TENNESSEE ?m ARKANSAS (5 a MISSISSIPPI LOUISIANA Hire- LEGEND mum nun?m mums-v ?mmmu? Rimm? - unmatk 03:91. MIMI 09 g! r- ?can In . Appendix 14 CCPI Repayment Agreement ?superstar ENT REPAWENT AGREEMENT In consideration of the United States Department of Energy (DOE) support for a clean coal technology Project under the Clean Coal Power Initiative, for which Southern Company Services, Inc. (SCS) and Kellogg, Brown 8: Root, inc. (KER), both being defined herein as an ?0biigor,? acknowledge that they will receive substantial bene?t. The Obligors hereby agree to repay the Department of Energy in accordance with .the terms and conditiOns set forth below. Article I. general Obiectjve The purpose of this Repayment Agreement is to set forth the conditions under which the Obligors shall repay to DOE an amount up to, but not "to exceed, the DOE share paid under Cooperative Agreement Number Did-F026. 42391, 311611 obligation being the direct responsibility of each Obligor and being for the direct bene?t as accomplished via the commercialization arrangement betwaen both SCS and KBR and upon the terms set forth herein. Article?. 1291mm White?sh; .. her. .r misunderstand: Share" means the portion of the total project costs paid by DOE under the Cooperative Agreement. ?Obiigor? means the organizations that are respOnsible for repayment under this Repayment Agreement, SCS and KER, as stated above. "0biigor? includes these organizations? successors and assigns.- ?fRepaynnent Period" means the period of time during which a transaction becomes subject to repayment under this Repayment Agreement. "-I?otal i?rojeet Costs" means the total amount of allowable direct and indirect costs incurred and paid, in part. by DOE under Cooperative Agreement. ?Demonstration Technology" shall mean the transport reactor-based gasi?cation/iGCC technology which is proposed for demonstration under the Cooperative Agreement, including all past, Current, and future information and intellectual property developed by, on behalf of, or together by, SCS or KER1 as Obligors. and their respective af?liates, present and future, that enhances or improves the performance of'the'transport reactor in its application as a coal gasi?er for the production of raw gas which subsequently may be further processed to produce electricity (andfor steam). chemicals. orfueis. Project" shall mean the Integrated Gasi?eation Combined Cycle (IGCC) power plant project being undertaken by SCS and DOE under the Cooperative Agreement Number . ?Southern Company Services Af?iates? shall mean any subsidiary of, and under common control of, their single parent, The Southern Company. .whethera fusttier subsidiaryofThe Southern..Company.or. anxiower tier. . subsidiary of the first tier subsidiary. Article Repayment Period I 56 INSIDE 1:50.41 PM 4532_00l.pdl 2 Thc?Repaymen'l Period shall begin on the date of the ?rst sale of the Demonstration Tcelmoiogy or on the date speci?ed in the Cooperative Agreement for the end of the Demonstration Period, whichever occurs ?rst. However, if SCS withdrawn or terminates its participation under the Cooperative Agreement, or if the project is terminated in accordance with Paragraph 2.34 ('l?emrination) of the Cooperative Agreement or terminated due to disapproval of a continuation application in accordance with Paragraph 2.11 (Continuation Application) of the Cooperative Agreement,: this Repayment Period shall begin on the date the Cooperative Agreement is terminated. The Repayment. Period shall expire 20 years after the date the Repayment Period begins. .Obligors' obligation to repay DOE expires on the date the entire DOE share has been repaid, or the date on which repayments for all transactions entered into timing the Repayment Period have been made, whichever occurs ?rst. This Agreement may be terminated upon a determination_by the Secretary of Buggy, or designee, that repayrnenLLlaces an Obligor at a competitive disadvantage in domestic or international mnrkets. Article N. Went Though collection of payment to DOE by the Obligors shall be cumulative and consolidated into single payments submitted by $68 to DOE. each Obligor is individually responsible to DOE for amounts due to DOE from the Obligor. DOB shall have a direct claim againstan Obligor for breach of the terms of this Repayment Agreement by the Obligor. The obligations of either Obligor under this Repayment Agreement shall survive the capitation, termination, transfer, assignment, novation, sale, merger, consolidation, or other change in control of, an Obligor until the expiration of the repayment obligation to DOE. The annual amount of repayment to DOE by the Obligors is to be comprised of the cumulative effect of the provisions in?Article and KBR shall pay to SCS, for transfer by SCS to DOE, an amount equal to 12.5% of the license fees anchor royalties actually retained by KER from licensing of the Demonstration Technology to third-party users for the productiOn of electricity (and/or steam), chemicals, or fuels. alter satisfying guaranty or warranty responsibilities. Distributions nude by KER to SCS are considered to be included in the amount actually retained by KER. in the event that KER does not charge a license fee to a third party for any installation of the?Demoustration Technology. KER will be deemed to have incurred a license fee in an amount equivalent to the license fee on the most recent prior project of substantially similar scope-utilizing the Demonstration Technology and in the pro rata amount of the size of such installation. If no prior license has been granted, the amount due to DOE shall be calculated at $4.00 per kilowatt electric (or equivalent) of installed capacity. KER shall not be responsible fur such fee and KBR have mutually determined and explicitly documented that the market for that projechvill not bear this license fee. SCS agrees that it shall not accept any compensation in lieu of royalties due from KER under the SCSIKBR commercialization agreement. in the event that SCS sells directly to third parties,-SCS shall pay directly to DOE 12.5% of the license 'fees andfor royalties actually retained by SCS from licensing of the Demonstration Technology to third-party users for the production of electricity (and/or steam), chemicals, or fuels, after satisfying guarantee or warranty In the event dint SCS does not charge a license fee to a third party for any installation of the Demonstration Technology, 808 will be deemed to have incurred a license fee in the amount equivalent to the license fee on the most recent 'priorprojcct of substantially similar scape and in the pro rata amountof the size of the installation. if no prior license has been granted, the amount due to DOE shall be calculated at 54.00 per kilowatt electric (or equivalent) of installed capacity. A transaction shall be subject to repaymntunde?r this provision if an Obligor enters into a license or contract for sale during the Repayment Period notwithstanding that repayment may occur after the Repayment Period. Repayment shall accrue after satisfying guaranty or warranty responsibilities: (ii) For any commercial application of the Demonstration Technology by SCS, or SCS af?liates. for the fee of $4.00 per kilowatt of initial, actual tested performance for each commercial application. Such payment to DOE shall be prorated by or SCS af?liates', initial percentage of ownership of such facility. An installation shall?he subject to repayment under this provision if SCS, or SCS affiliates, breaks ground for the installation during the Repayment Period1 notwithstanding that repayment may occur after the Repayment Period. Repayment shall accrue upon the declaration of commercial Operation. 57 production (andlor steam), excluding this Demonstration Project,.SCS.agrees.to 2113;08 1:50:42 PM restrooms! 3 For any commercial application of the Demonstration Technology by SCS, or SCSaf?liates, for the production of chemicals and fuels, this Demonstration Project, 308 agrees to pay DOE a one time fee of $5,100 per one million (1,000,000) standard cubic feett?day of oxygen blown .syngas design capacity for each . commercial application. Such payment to DOE shall be prorated by or SCSaftiliatesf, initial percentage ovmership of such facility. An installation shall be subjectto repayment under this provision if SCS, or SCS af?liates, breaks ground for the installation during the Repayment Period, notwithstanding that repayment may occur alter the Repayment Period. Repayment shall accrue upon the declaration-of commercial Operation. Article V. ?ch?ple for Repayment Payments to DOE by SCS of the cumulative amounts required for the period shall be due within 60 days after each one-year period following the start of the Repayment Period for Repayment Agreement Checks shall be made out to the US Department of Energy and be mailed to the Financial Management Division, USDOE, NETL, Post Office Box 10940, 626 Cooluans Mill Road. Pittsburgh, 15236-0940. Article VI. Reporting and Record Retention Reguircment; (A) Annual 35139;: to 1398 Within 60 days alter the end of the of each one year period, the Obligors shall prepare a consolidated report and SCS shall submit such report to DOE which, for the one year period just elapsed, provides the applicable data described below: (1) The total dollar amount of repayment accruing to DOE. (2) A description of each transaction from which the repayment obligation accrued. (3) The total amount paid to DOE for all years and the amount-of the DOE share remaining to be paid in succeeding years under this Repayment Agreement. Notwithstanding that SCS will submit the Annual Report to DOE, the responsibility for submittal of information to prepare the report, and the responsibility of preparation of the report, falls equally on the Obligors. DOE shall have a direct claim against either Obligor for failure to comply with the requirements of this clause. mecmmwaw For a period of ?ve (5) years after completion of the the Obligors shalt be equally responsible for submitting a Commercialization Report describing the Obligors' progress and success in commercializing the technology used during the project as well as technology derived from that used during the project. The purpose of the Conunercialization Report is to assist DOE to determine the bene?ts obtained from Government support of technology development. The Commercialization Report is independent from the Annual Report required by the Repayment Agreement and is not limited to the sale 0r licensing of "Demonstration Technology" as that term is de?ned in this Repayment ?greement. The Conunercinlization Report shall include a discussion of the Obligors' efforts to commercialize the technology. The Commercialization Report shall also include descriptions and locations (or proposed locations) of all signi?cant technology embodied in the Demonstration Project, or derived from technology embodied in the Demonstration Project, that was sold or licensed during the preceding year (Whether or not such transactions were subject to repayment under the terms of the Repayment Agreement). The Commercialization Report shall also include a discussion of any impediments to the cornmercialization of the technology. It is understood and agreed by DOE that the Comercialization Report shall be in a level of detail that is not .reQuired to- contain Limited Rights Data or Frotected Data as de?ned in the Cooperative Agreement, recognizing that the commercialization efforts involve proprietary and con?dential business information which will necessarily be accorded secrecy treatment. The Commercialization Report shall be due on December 3! of each year. DOE shall look to each Obligor forcompliance with its applicable portion of the requirements of this clause and obtain performance directly ?om the responsible Obligor. Period .. With respect to each annual report to DOB. the Obligors shall retain, for the period of time prescribed in this paragraph, all related financial records, supporting documents. statistical records, and any other records the Obligors 58 2.31303 1:50:42 PM I 4 reasonably consider to be pertinent to this Repayment Agreement. The period of required retention shall be from the date each such record is created or received by an Obligor until three years after one of the following dates, whichever is earlier: the date the related annual report is received by DOE, the date this Repayment Agreement expires, or the date ?nal payment to DOE is received. If any claim, litigation, negotiation, investigation, audit, or other action involving the records starts before the expiration of the three-year retention period, the Obligors shall retain the records until such action is completed and all related issues are resolved, or until the end of the three-year retention period, whichever is later. The Obligors shall not be required to retain any records, which have been transmitted to DOE by an Obligor. (D) ?nthorized Copies Cepies made by micro?lm, photocopying, or similar methods may be substituted for original records. Records originally created by cernputer may be retained on an electronic medium, provided such medium is ?read only" or is protected in such a manner that the electronic record can be authenticated as an original record. (E) Ages; to Records DOB and the Comptroller General of the United States. or any at their authorized representatives, shall have the right of access to any books, documents, papers, or other records (including these an electronic media] which are pertinent to this Repayment Agreement. The purpose of such access is limited to the making of audits, examinations, excerpts, and transcripts. The right of access described in this paragraph shall last as long as an Obligor retains records, which are pertinent to this Repayment Agreement. (F) Restrictions on Public Disclosure The Federal Freedom of Information Act (5 U.S.C. Section 552) does not apply to recordsan Obligor is required to retain by the terms of this Repayment Agreement. Unless otherwise required by law or a court of competent jurisdiction, an Obligor shall not be required to disclose such records to the public. (G) Flow Down of Records. Retention. and Access Requirements Obligors shall include clauses substantially similar to the record retention and access requirements set forth in sections (C) and (E) of this Article H1 all agreements when necessary to ful?ll the Obligors' obligations under this Repayment Agreement. Article VII. Default if either Obligor 1s respomible for the failure of SCS to make payment within the time speci?ed in Article V, or is responsible for SCS failure to submit the annual report within the time specif? ed In Article VI, the Obligor which is in default of its own obligations under this Repayment Agreement and fails to cure the default within 30 days after receipt of written notice of the default from DOE, notwithstanding any provision of the Cooperative Agreement, its ?ow dovm provisions, or this Repayment Agreement to the contrary, that Obligor shall pay to DOE the amount of 5 100.00 per day for every business day that the payment or report is delayed due to the fault of that Obligor. Obligors and DOE agree that such amount represenm DOE's reasonable costs and acknowledge that the liquidated damages set forth herein are an adequate remedy for default and shall not be considered a penalty. Nothing contained herein shall preclude DOE from pursuing any other remedy against an obligor which may be available for the payment of moneys due including interest thereon in accordance with applicable statutes and regulations. Article Qisputgs Disputes arising under this Repayment Agreement shall be subject to the procedures set forth in 10 CFR 600.22 Disputes and Appeals. 59 ZIISMB l:50.42 PM w-W WW 4531002.de 5 UNITED STATES DEPARTMENT OF ENERGY Signature. (R WKPW ?o 3?69??th Date I a Contracting Of?cer: OBLIGOR Signature. a1. A4 03165? Title(Kellogg, Brown 8: Root. Inc.) Signannegfm/ Name: WW Title: UP "F'S?Wawy Date: mm. .34. ZIIBIOB 1:50:42 PM Justification for Waiver of Repayment Southern Company Services (SCS) has submitted a request to the Department of Energy (DOE) to change the site associated with Cooperative Agreement 4239]. That request is currently under review by DOE. A condition associated with these funds is that they would be repaid out of future licensing fees for the TRIGTM technology. However, the repayment agreement included a stipulation that the repayment agreement could be terminated by the Secretary of Energy. SCS and Mississippi Power Company (MPC) have requested the Secretaly to waive the repayment provisions based on the discussion below. 1. Because of the repayment provision, the CCPI funds would have to be treated by MPC as taxable income. The result is that of the CCPI funds to be applied to the Mississippi IGCC, would have to be paid in taxes. 2. The Orlando site did not include any provision for carbon capture. MPC desires to enhance the project scope to include the capture of the C02 inherent in the syngas stream. Adding C02 capture increases the capital cost of the project by an estimated and would decrease the projects output capability by an estimated 40MW. A 25% to 30% reduction million TPY) in the CO2 emissions from the project would be realized. 3. Since there are currently no legislative or regulatory mandates to capture carbon, MPC likely will not be able to pass the additional costs of carbon capture to its ratepayers. 4. The base case in the table below shows the net present value (NPV) of the revenue requirements for a natural gas combined cycle plant. The NPV for each IGCC case is the difference between the IGCC revenue requirement and the revenue requirement for the natural gas combined cycle case. IGCC is preferred when the difference in revenue requirements is negative. When the uncertainty associated with climate change legislation is considered, the additional economic bene?ts associated with the tax savings that result from waiver of the repayment agreement are required for the project to be the best choice for ratepayers. The risks to the project economics associated with CO2 regulation were determined by evaluating the effects of C02 tax rates of $10 and $20/ ton. The values in the table below show that the additional repayment waiver bene?ts are required to help mitigate the risks associated with C02. The $0/ton case is based on the project view prior to increased risks associated with CO2 regulation. Since the project was initiated, the probability of CO2 regulation has increased signi?cantly and the risks associated with CO2 must be considered in the economic evaluation. Several coal based projects, including the Orlando project, have been canceled due to the risks associated with CO2. All Values are 2013 NPV of Costs in 002 Legislatioanegulation Millions of Dollars Esc 5% E30 5% Natural Gas Combined Cycle (NGCC) I (Values from here down reflect change from NGCC Case. Negative values reflect savings.) Kemper Transfer of Orlando CCPI FundsZ 25% Capture No EOR Revenue3 Loan Guarantee4 .RepaymentWaiive'rS .3 f- EOR Revenues? Includes 1. Assumes CCPI Funds are taxable. 2. Assumes . :ost increase and 4OMW capacity decrease; capacity replaced with CT equivalent 3. Traditional ebt applied to project costs; Debt cost Treasury Bill 25 basis points; 4. Assumes waiver renders CCPI funds non-taxable 5. Assumes $7.50 {Ton 002 Randall Rush Southern Company Generation Gestala? Manager 42 limerness Center {tramway Gaettieation Technology Bin 8228 tiiu'tt?tingham, AL 35242 Tel 205.992.63i8 Far 205.992.6005 eggs}? la? 'a February 12, 2 008 Energy to Serve Your World National Energy Technology Laboratory Atm: Diane R. Madden, 922-342C 626 Cochrans Mill Road P. 0. Box 10940 Pittsburgh, PA 15236-0940 Dear Ms. Madden: Subject: Site Change Request for DE-FC26-06NT42391 Southern Company Services, Inc. (SCS) is pleased to submit the attached documents in support of our request to change the site for the project under Cooperative Agreement from Orlando, FL to Kemper County, MS. The relocated plant will be owned by Mississippi Power Company (MP0), a subsidiary of Southern Company. Originally the commercial operating date (COD) for the Mississippi facility was to follow the COD for the Orlando site by three years. With the termination of the Orlando site, the Mississippi site will new host the ?rst full-scale demonstration of the Transport Integrated Gasi?cation technology with COD scheduled for June, 2013. The technical con?guration of the Mississippi plant will be very similar to the con?guration that was planned for the Orlando site and, therefore, all of the original project demonstration objectives will be met with the new site at no cost increase to DOE. Di?'erences between the two sites that are relevant to the technology are as follows. - The Mississippi IGCC is based on a 2x1 combined cycle with two gasi?cation trains instead of a 1x1 combined cycle with a single gasi?cation train. Each gasi?cation train fuels a GE combustion turbine, the same turbine planned for Orlando, so the gasi?cation trains are similar in size to the Orlando design. GE has completed combustion testing with the expected syngas and found that the same burner design can be utilized for the lignite and PRB derived syngas. The Mississippi IGCC will use Mississippi lignite instead of PRB coal as its primary fuel. Mississippi ligm'te coal has been tested at the Power Systems Development Facility with good results. Southern Company plans to conduct a test with PRB coal in the Mississippi facility during the DOE supported Demonstration Phase of the project, resulting in a wider range of fuel testing than the original Orlando site. - The sulfur removal and recovery system is di?brent due to the higher sulfur content of the liguitc coal. In both cases, selection of the sulfur removal and recovery system was based on commercially available technology and the best economics for each case. 1119.99.31. drying system has been modi?ed to include a commercially available ?uid bed dryer for ef?cient removal of the higher moisture content of the lignite coal. I'he Recipient consxders the material furnished herein to contain con?dential business information which is to be withheld from disclosure outside the US. Government to the extent permitted by law. Thomas A Fanning Southern Company Chief Operating 30 Even Aiien. Jr. Bard, NW Bin 801505 Atlanta, GA 30308 eas- 't'et40126060600 an a -, a, 5 ill-I Fax 4045050394 a?a??g?i if ?5 li\.i i, Energy to Serve Yam Work! February 11, 2008 Mr. Carl Bauer Director, National Energy Technology Laboratory U. S. Department of Energy/NEH, 626 Cochrans Mill Road Pittsburgh, 15236 Dear Mr. Bauer: Southern Company is prepared to demonstrate the advanced coal gasi?cation technology, previously proposed in Orlando, Florida, developed in partnership with the Department of Energy, in Kemper County, Mississippi. Southern believes that the continuation of this project in Mississippi will be a clear and dramatic response to the Department?s goals of clean, secure, domestic energy for America. The relocated plant will be owned by Mississippi Power Company, a subsidiary of Southern Company. The Mississippi project has been under development for over a year and with its 2013 commercial operation date, will confront the ?rst-of-a-kind risks that the Orlando project was going to bear and help resolve. The Mississippi Project now becomes the ?rst commercial demonstration of TRIGW, and requires the Department?s approval of the site change from Orlando to Kemper County in order to proceed. All of the original project demonstration objectives will be met with the new site at no cost increase to the Department. In fact, the objectives will be exceeded with the new site, since it will allow not only PRB coal to be tested, but also lignite. Demonstrating the use of lignite will open up the opportunity to use this largely underutilized resource which runs from Texas to Alabama to meet our nation?s energy requirements. Southern is strongly committed to moving the project forward and believes the Mississippi site provides the opportunity for achievement of the Department?s goals for America. In addition, the Governor and State of Mississippi are committed to the project because of its economic impact in a depressed region of Mississippi, the use of the indigenous lignite and for the opportunity to participate in technology development. Southern Company looks forward to continuing to work with the Department in advancing the TRIGTM technology. Sincerely, ?lhe Recipient considers the mate?al furnished herein to contain con?dential business information which is to be withheld from disclosure outside the US. Government to the extent permitted by law. Anthony J. Topazi 2992 West Beach President and Post Of?ce Box 4079 Chief Executive Of?cer Gulfport. Mississippi 39502-4079 Tel 228-865-5320 A February 1 i, 2008 Mr. Carl Bauer Director, National Energy Technology Laboratory US Department of Energy/NETL 626 Cochrans Mill Road Pittsburgh, 15236 Dear Mr. Bauer: Mississippi Power Company (MPC) began working on a project in 2006 to build a lignite- fueled 2x1 integrated gasi?cation combined cycle (IGCC) facility using the air-blown Transport Integrated Gasification (TRIGTM) technology. In addition to utilizing lignite in an affordable, ef?cient and environmentally friendly mamler, MPC believes this project will help address key strategic objectives for MPC of increased fuel diversity, geographical diversity of generation and enhanced reliability while providing an economic and reliable resource to meet customer needs. As President and CEO of Mississippi Power Company, I want to express our commitment to the execution of the proposed project. With the Department?s approval for changing the site to Kemper County under Southern Company Services? CCPI Round 2 project, and the project continuing to be the best economic option for the customers of MPC, we will move forward with obtaining regulatory approval in the form of a certification of need and necessity, and upon regulatory approval, full execution of the project. MPC is enthusiastic about the opportunity to further the commercialization of the TRIOTM technology using Mississippi lignite coal and believes that this technology supports the Department?s goal to ensure that the United States has and maintains secure, clean, reliable and affordable electric power. MPC appreciates the consideration of this site change request and looks forward to working with the Department. Sincerely, The Recipient considers the miterial Furnished herein to contain con?dential business information which is to be withheld from disclosure outside the US. Goremment to the extent permitted by law. 14:26 POWER SYSTEM DEVELOPMENT P.002 W. Bowers ocuioem Company Generation i?rosrtlent 600 North 18th StreetltoN?S?lm Post Giftco Box 2641 8;rm:ngruun. Alabama 35291 Tel 2052515355 Fart SGUTHERNA QOMPANY Energy to Serve March 2007 Mr. Samuel W. Bod man Seeretury of Energy US. Department of Energy 1000 Independence Avenue. SW. Washington. DC . 20585 Dear Secretary Bodrnan: The purpose of this letter is to advise you of a serious problem that has arisen on the Orlando transport gasilicntion demonstration project. We were advised last week that the Internal Revenue Service (1R3) has determined that the Department of Energy (DOE) funds being provided to the projecr are now deemed to be taxable. and therefore will he treated as income. creating an additional expense for the project lam sure that your staff can apprise you of the details behind the view on mobility and on the unexpected nature of this determination. We are nearing completion of Phase I Project Definition of the project and have submitted a Continuation Application to DOE to begin Phase 11 Dosign and Construction. The Phase I work was completed during an unprecedented period of in?ation in the cost of materials and labor that has increased the cost of all nwjor ener gy and infrastrucmre projects world-wide. Working cooperatively with our partners and the Department of Energy (DOE) we had devised a plan that we believe can allow the project to go forward in spite of a 60% capital cost increase. However, the effect of this decision by the IRS when added to these unprecedented capital cost increases makes it unlikely that Southern can continue with the project. Southern and KER have an aggressive program to commercialize Ilansport Integrated ?asi?cation (I?Rle). but a mid-2010 commercial operating date for the Orlando project is a critical aspecr of this program .. A key aspect of is its ability to process high ash. high moisture and low rank coals such as sub-bituminous and lignite more cost-effhotive?ty than other gasi?catlon technology. These coals make up half the coal supply in both the U. S- and the world. Without a timely. commercial demonstration of options for future coal-based power will decrease turd cost will increase. The Orlando project is the cornerstone of Southern Company's. and our partner KBR's ability to deliver the technology to both the power and the coal-to-liquids markets. At least two key customers have expressed a clear requirement that the Orlando unit must become operational for them to consider use of at their facilities. The inability to execute the Orlando project will require us to seriously rethink our ability to continue in the gasi?cation technology supply market. Therefore. in an effort to keep the project moving forward towards demonstration of this important new glorification technology. I request that the you or your designer: waive the repayment plan related to DOE funding on the Orlando project to avoid creating a competitive disadvantage for in domestic and international markets. We expect that this will allow DOE project funding to be treated as a ?contribution to capital? and render these funds non? as income. If the DOE funds are later determined to be non-taxable without the waiver Southern and KBR agree to reinstatement of the repayment agreement as originally negotiated. NAIF 13-2007 14 26 POWER SYSTEM DEVELOPMENT . 003 I thank you in advance for your consideration of this requesn The world had 1y new?. new methods of using our abundant coal reserves. Southern and KER are moving aggressively to provide TRIGTM as one such improved method Please do not hesitate to contact me. if I can a! for clari?cation 0r answer any questions you may have. Sincerely, (Bow Paul Bowers