U. S. DEPARTMENT OF ENERGY NATIONAL ENERGY TECHNOLOGY LABORATORY FINANCIAL ASSISTANCE NEGOTIATION MEMORANDUM SECTION 1 - GENERAL 1. Recipient: Southern Company Services. Inc. Address: 800 North 18th Street, PO. Box 2641, Birmingham, AL 35291 Business Point of Contact: Charles Henderson - Phone: (205) 992-7313 E?mail address: cwhender@southernco.oom 3. Grant/Cooperative Agreement No: . Amendment No: 2. Requisition No: 09NT011635 Funding Opportunity Announcement No: DE-P828-04NT42081 Recipient CI is is not participating in the Federal Demonstration Partnership (FDP) Program. Project Title: "Demonstration of a Coal-based Transport Gasifier" 4. Type of Recommended Action: El New Award Renewal Continuation CI Revision .07 Project Period For this Award: From: 02/01/2008 Thru: 05/01/2018 6. Current Budget Period: From: 11/17/2008 Thru: 05/01/2018 7. Estimated Cost: TOTAL ESTIMATED PROJECT COST: $1,822,905,779 Budget Period 1 - - Phase Project Definition DOE Share 8 9,285,033 50% Recipient Share 3 9,285,033 50% $18,570,086 Budget Period 2a - Phase Detailed Design (Orlando, FL) and Phase lila Construction (Orlando, FL) DOE Share $14,248,983 45.0% Recipient Share $17,415,424 55.0% $31 ?54,407 Budget Period 2b - Phase ttb" Detailed Design (Kemper County, Phase llib Construction (Kemper County, and Phase IV Demonstration *Phase Ilb is a $0 phase (NEPA activities). DOE Share 270,215,984 17.2% Recipient Share $1,302,455,322 82.8% $1,572,671,306 Total Project Page 1 of 9 DOE Share $293,750,000 18.1% Recipient Share $1,329,155,779 81.9% $1,622,905,779 8. Carryover Amount: $50,000 9. Preaward Costs: 10. Capital Equipment Dollars: $30,119,018. Final amount to be determined once detailed budget is submitted and reviewed. it is noted that Clean Coal projects have special legislation that allows for Recipients to retain automatic title of equipment with no further obligation to DOE. The award document contains Clause 2.12, entitled Property Management and Disposition, which recognizes this authority. 11. Obligation Amount: $0 SECTION 2 - BACKGROUND A complete discussion of the selection data for the original award is contained within the pre-award file, A000. The original project was selected under the Clean Coal Power Initiative Round 2. The purpose of this amendment is to re?issue the original cooperative agreement to reflect all changes that have been made as a result of the approved site relocation from Orlando, FL to Kemper County, MS. Significant changes include the addition of.002 capture to the project, revised project costs, a revised Statement of Project Objectives, restructured budget periods and phases, a revised project period end date, and an amendment to the amended and restated repayment agreement. Furthermore, Southern Company is now authorized to proceed from Budget Period 2a (Orlando) to Budget Period 2b (Kemper County). Background for this amendment: In December 2007, Southern Company Services announced it was discontinuing the Orlando project due to Florida's new requirement for carbon capture and storage (008) technology on coat-based power plants. Addition of CCS at Orlando was not technically or economically practical; Southern requested and obtained DOE approval to relocate the project to Kemper County, Mississippi, on a site owned by Southern Power subsidiary Mississippi Power. The Kemper project utilizes the same technology as Orlando except that Kemper will be configured with two gasification 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. Additionally, COZ capture has been integrated into the Kemper project. Southern currently estimates the cost at $1.6 billion not including Southern labor (Kemper County only), financing charges, or the addition of 002 capture. 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 DOE's proportionate share will be reduced from 35% to 18% with the site change approval. The revised project costs represent a total increase of $778,638,458 over the Orlando project. Approval for the site change was granted in an April 29, 2008 memorandum for the Secretary. James A. Siutz, Acting Principal Deputy Assistant Secretary for the Office of Fossil Energy, stated, have approved the site change as reasonable and necessary to accomplish program objectives." Also of note Southern Company has requested the Secretary to waive repayment associated with this CCPI project. Without the waiver, DOE funds are subject to federal taxation resulting in a $121 million reduction (2013 dollars) in available project funds. Southern believes the additional private sector investment to offset the tax burden could jeopardize the Kemper project's ability to incorporate CCS technology and receive a certificate of public convenience from the Public Services Commission. Page 2 of 9 On May 22, 2008, the Secretary of Energy signed a conditional waiver of the repayment. There are certain conditions where repayment will be re-instated. These conditions are captured in Amendment 2 to the Amended and Restated Repayment Agreement SECTION 3 - ADVISORY REPORTS Technical Evaluation: The DOE Project Manager evaluated the qualitative aspects of the offeror?s site relocation application and prepared comments in the technical evaluation of budget memo dated October 31, 2008. in the memo, the Project Manager states, ?i have reviewed all the site relocation information and concur on the request to perform the demonstration project at the Kemper County, MS site. The technical configuration of the Kemper County site will be very similar to the configuration planned for the Orlando site and all of the original project demonstration objectives will be met with the new site.? The Project Manager has also updated the Statement of Project Objectives to distinguish between work at Orlando and work at Kemper. Additionally, the SOPO also incorporates the addition of 002 capture. Furthermore, because the site relocation/continuation is considered to be a ?significant event" as defined by the Federal Project Management Center's Project Management Guidelines, the Project Manager has completed a project risk assessment. The results of the risk assessment have been concurred upon by the Division Director and Contract Specialist. Further risk analysis, including a risk register, is not required. Cost/Price Analysis Report: A cost/price report was not obtained for this action since the federal dollar value being authorized at this time is Per the conditions placed on the award in the ?Conditions on Awar clause, the Recipient agrees to absorb all costs expended in Phase lib. DOE agrees to share costs in Phase Iiib and IV upon Recipient's submission and approval of an updated detailed cost breakdown for those phases. The costs are expected to be submitted to DOE mid-2009. A Report will be obtained before DOE issues approval to proceed into Phases Iiib and IV. - Other Advisory Reports: Because project costs have increased $778,638,458, all at Southern?s expense, the DOE requires assurance that Southern Company has the financial capability to cover those costs. Consequently, Langhammer and Company, LLC, a financial consultant for NETL, has reviewed Southern?s audited financial statements, including the balance sheets, income statements, and cash flow statements for Southern Company and for its subsidiary Mississippi Power Company for the year ended December 31, 2007. They have also reviewed current financial analyses of Southern Company and Mississippi Power Company prepared separately by the three principal credit rating agencies: Standard 8 Poor's, Moody?s, and Fitch Ratings. in a memo dated April 10, 2008, Frank Langhammer, President .. Langhammer and Company LLC, stated ?in our opinion, Southern Company and Mississippi Power Company have the capacity to provide the non-Federal cost share portion of the overall project costs." His memo is contained within a separate folder entitled Site Relocation and Conditional Repayment Memos. Financial ratings and credit opinions from Fitch, Standards 8 Poor and Moody?s Investor Services are available and contained in the amendment file under Tab 18. SECTION 4 - RECIPIENT RESPONSIBILITYIELIGIBILITY Debarred List Check: The General Services Administration (GSA) "List of Parties Excluded from Federal Procurement and Nonprocurement Programs" was checked via the internet at http:/leplsarnetgov/ on December 1, 2008 and neither the Recipient nor the Recipient's Principal Investigator/Business Officer or any identified key personnel were listed. Financial Management System: The recipient has the ability to provide reliable cost information, and its financial management system is in compliance with the prescribed standards in 10 CFR 600.311 and is adequate to protect the Government's interests. The Recipient has demonstrated that they have an acceptable financial management system and management capability, including an adequate accounting system and financial controls for accumulating and recording costs under financial assistance awards. This determination is based on prior DOE experience under this cooperative agreement. Additionally, Standards and Poor, a credit rating agency, has given Southern Company a Corporate Credit Rating of "Stable" and noted in their research that "Southern's financial statements are in accordance with US. GAAP and are Page 3 of 9 audited by Deloitte Touche, which has issued unqualified opinions on the company's financial statements and internal controls for 2006.? Performance Review: in accordance with the Guide to Financial Assistance, the Recipient's performance was assessed to determine whether the Recipient has adequately performed under, and complied with, reporting requirements under this award. Southern Company has an excellent performance history under this award. The company is diligent in submitting reports on time and keeping the DOE informed of important issues that arise during the project. Responsibility Determination: By signing this document, the Contracting Officer'has made an affirmative determination of responsibility. This determination includes the financial management system assessment above and review of activities under this award, specifically performance of reporting deliverabies. A Dun and Bradstreet Report was obtained for the Recipient. This report indicates that the Recipient has a "limited? credit appraisal. However, the report also indicates that the company has a clear history and secured financing." Because of the "limited" rating, the Contract Specialist reviewed other credit opinions and found that three credit rating agencies, Fitch, Moody?s, and Standards and Poor, have given Southern Company a ?Stable? credit rating and outlook. Moody?s investor Services provides the following narrative regarding Southern Company?s rating outlook: ?The rating outlook is stable, reflecting ?nancial and cash ?ow coverage metrics that are expected to remain adequate for its current rating category, despite declining trends exhibited over the last several years. It is Moody's. expectation that the core regulated utility business will continue to remain the primary source of consolidated earnings and cash flow and that Southern Power's growth strategy will not diverge from its historical, contracted focus. The stable outlook also incorporates the expectation that the core utility subsidiaries will continue to benefit from constructive, above average regulation and continue to receive timely recovery of costs through rate adjustments.? Fitch Ratings has affirmed, ratings are supported by the low-risk, contracted business strategy, membership in the Southern power pool and current internal funding of capital needs. The cancellation of the Orlando IGCC project evidenced management's aversion to risk. Risks include debt refinancing risk in 2012, re-marketing risk at the expiry of current long-dated contracts, and regulatory risks.? Given the above information, it can be reasonably determined that Southern Company is a responsible Recipient with a good performance history and stable financial condition to warrant cost sharing over $18 on this project. SECTION 5 - OTHER ITEMS OR CONSIDERATIONS National Environmental Policy Act (NEPA) Compliance: A Categorical Exclusion (CX) signed by the NEPA Compliance Officer is contained in the award file or filed in the Procurement Policy Division. NEPA Compliance Review via an Environmental Evaluation Form has been coordinated with the NEPA Compliance Of?cer and the results are contained in the ?le. (X The NEPA Compliance Review is in process, and the NEPA special term and condition is included in the cooperative agreement. Limited Rights Computer Software: The re-issued cooperative agreement, effective this amendment, has addressed changes to both Limited Rights Data and Restricted Computer Software. The changes are necessary due to a revised technical approach on the Kemper County project as opposed to the Orlando project. All changes have been reviewed and approved by Southern Company and are incorporated into the Intellectual Property Provisions of the re-issued Cooperative Agreement. Method of Payment: The Recipient's current method of payment is ASAP Reimbursement. However, the Recipient submits an with supporting documentation directly to the DOE Contract Specialist and Project Manager for review and approval prior to drawing down the funds in ASAP. This method of payment will not change on this amendment. Because Southern Company is not authorized to bill DOE for any work Page 4 of 9 beyond Budget Period 2a, the Recipient?s ASAP account has been capped at $23,534,016, which is the amount of DOE funds through Phase llb. Thus, Southern Company may only draw down funds up to this amount. Once DOE approval is given to bill for Phases and IV of Budget Period 2b, the capped amount in ASAP will be amended pursuant to the DOE cost share listed in the "Budget Periods and Estimated Project Costs" clause and, for Phase IV, the Withholding of Funds clause. Cost Sharing: The total Recipient cost share has increased from $550,517,321 to $1,329,155,779 which exceeds the mandatory cost share requirement of 50% for the Clean Coal Program. Fee Determination: Fee to Southern Company is unallowable under this project. However, certain subcontractors (ie: equipment vendors, construction contractors, etc.) may charge fee under the project if the subcontractors are not team members whose technology is being demonstrated or who otherwise have a financial interest in the outcome of the project. Subcontractors or vendors who are providing commercially available goods or services may be paid fee or profit. Laboratory Participation: None. Deviations to Regulations and Required Approvali The Recipient did not propose any deviations to the regulations and the Government did not anticipate any deviations to the regulations. Exceptions Taken by the Recipient: None. Special Award Conditions: No special award conditions are necessary as prescribed in 10 CFR 600.304. Other Issues to be Discussed: . This project is divided into major categories of work project definition, design, construction, demonstration, etc.) called phases for project management planning and control. Additionally, as of this amendment, sub-phases have been established to distinguish between work completed at the Orlando site and work proposed for the Kemper County site. The designation of signifies Orlando worklcosts while is associated with the Kemper County effort/budget. The phases and Sub- phases are aligned to specific budget periods and correspond to specific tasks in the Statement of Project Objectives. 0 As a result of the demonstration site relocation from Orlando, FL to Kemper County, MS, total project costs have increased $778,638,458. Since DOE previously reached its maximum participation in support of cost overruns on Amendment A003, all additional project costs will be fully borne by Southern Company. Notwithstanding the increased project costs, the phase for which Southern is being allowed to proceed into, Phase lib, is a $0 phase; therefore no cost review and budget approval is being done at this time. Phase lib includes detailed design engineering, continuing environmental permitting activities and completion of a NEPA Record of Decision for the Kemper County site. Assuming a NEPA Record of Decision supports the project at Kemper, DOE will then share costs for the remainder of the project: Phase - Construction and Phase lV - Operation/Demonstration. Under the Orlando project, DOE paid for for the Mississippi project, 808 is paying for all NEPA-related costs. . At this time, DOE is authorizing continuation from Budget Period 23 (Orlando) to Budget Period 2b (Kemper County), which includes Phases lib, and IV. it is anticipated that Budget Period 2b will be fully funded in the first or second quarter of FY2009 when NETL receives funding through the financial plan. The Recipient may not bill DOE for work associated with Phases llb, or IV until Southern has submitted and DOE has approved the costs for those phases. To convey this requirement, the clause entitled ?Conditions on Award" is included in the re-issued cooperative agreement. . While the previous host site for the Orlando project was Orlando Utilities Commission, Mississippi Power Company is the new host site for the Kemper County demonstration project. An executed host site agreement between Mississippi Power Company and Southern Company Services has Page 5 of 9 been reviewed by NETL Legal Counsel and found to be adequate. A copy of this agreement is contained in a separate contract file entitled Miscellaneous Correspondence. 0 As a result of the site relocation, the key personnel clause has been modified to remove one KBR individual (Nicola Salazar) and add one Mississippi'Power individual (Tommy Anderson). The Project Manager has reviewed the change and approves. The Contract Specialist ensured that alt key personnel are not debarred. . Letters from the CEO of Mississippi Power Company, the COO of Southern Company, and Governor Barbour of Mississippi describing their commitment to the project are contained within the site relocation application. . To ensure unobiigated funding for Phase IV of the project does not get taken away in future years, the decision was made to combine Budget Periods 2b and 3. Combining the Construction and Operations phases into one budget period is not uncommon in Clean Coal projects. The remaining amount of funds to be obligated, $50,363,889, wiil likely be obligated in the first or second quarter of FY 2009. 0 Because the-DOE cost share to the project is relatively small in the last phase of the project, a ?Withholding of Funds? clause has been added to the cooperative agreement. The inclusion of this clause allows DOE to defer $25,000,000 for payment during Phase IV of Budget Period 2b. 0 The project period end date is hereby being extended from Nov. 28, 2014 to May 1, 2018 thus making the total project period over twelve years. In accordance with the Department of Energy's Financial Assistance Guide, Chapter 3, Article 3.3 ?Budget and Project Periods,? the Head of the Contracting Activity (HCA) must approve a determination and finding to extend a project performance period beyond five years. HCA approval of this time extension will be sought through a 08F concurrent with Independent Review of this amendment. 0 HQ Business Clearance waived review of this amendment in an email dated 04/15/2008. 0 The project objectives for Kemper have been modi?ed to include a requirement for at least 25% carbon capture and compression at no additional DOE cost contribution. The Recipient will transport and sequester the captured carbon for enhanced oil recovery off?line of the DOE budget. There are no outstanding subcontracts that will require DOE approval prior to execution. Consequently, clause 2.36 entitled "Subcontracts and Other Agreements" has been deleted and identified as "Reserved". . The listing of Protected Data identified in the Cooperative Agreement under Part Intellectual Property Provisions has been amended consistent with the addition of C02 capture to the scope. - Southern Company signed a contract for a steam turbine (for Budget Period 2b) on 11/17/2008. In order that those costs are allowable and recognizable to the budget period, the start date for Budget Period 2b is being established at 11/17/2008. SECTION 6 - NEGOTIATIONS Government Negotiators: Recipient Negotiators: Negotiation Dates: December 2007 December 2008 Page 6 of 9 Negotiated Changes to the Applicant's Application Which Have Not Been Submitted in Writing by the Recipient are Identified as Follows and are included in the Award: None Budget Review/Cost Analysis: Upon receipt of a detailed budget for Phase Illb and Phase of Budget Period 2b, the costs will be reviewed for reasonableness allowability and allocability of costs. Negotiation Summary of SF 424A Budget: Object/Class Orlando Project Adjustments due Kemper County Project Categories Costs to 5Ite relocation Costs 66,518,215 (60,037,637) 6,480,578 Personnel Fringe Benefits 0 0 0 3,607,395 (3,374,213) 233,182 Travel . 92,303,008 (64,111,518) 28,191,490 Equrpment Supplies 0 0 676,389,052 911,018,780 1,587,407,832 Contractual Construction 0 0 0 Other 5,449,652 (4,856,956) 592,696 Total Direct Charges 844,267,321 778,638,456 1,622,905,779 indirect Charges 0 . 0 0 Total Direct and 844,267,321 778,638,456 1,622,905,779 indirect Costs Recipient?s Cost 550,517,321 778,638,456 1,329,155,779 Participation DOE Share 293,750,000 0 293,750,000 The Recipient will not be counting Southern Company labor or travel costs as project costs under the Kemper County?project because it is too expensive to bill and account for those costs in accordance with government cost principles. The only labor ($6,480,578) and travel ($233,182) costs that are included in the Kemper County budget above are the actual costs associated with the Orlando project in Budget Periods 1 and 28. Cost Sharing The Recipient proposed $1 ,329,155,779 in cost share. The $1,329,155.779 cost share is 81.9% of the total project costs which exceeds both the previous and mandatory cost share requirement for this award. A determination regarding whether the cost share meets all of the following 10 CFR 600.313 requirements, will be made upon receipt of the detailed costs for subsequent phases, . Source (Compiete name of Amount of NaturelDescription of Reference Notes Organization below) Cost Share Cost Share Recipient: Southern Company $1 ,329,1 55,779 Cash (1) Cost is shared on a Page 7 of 9 dollar for dollar invoice basis. Third Party" None Total Recipient Cost Share $1 ,329,155,779 Third Party?a non-federal legal entity other than the recipient sub-recipient, participant) Budget Period Summary: This project is anticipated to be completed in three budget periods summarized as followsTotal (Orlando) (Kemper County) DOE Share? $9,285,033 $14,248,983 $270,215,984 $293,750,000 Recipient Share $9,285,033 $17,415,424 $1 ,302,455,322 $1,329,155.779 ln?Kind $0 $0 $0 $0 Contributions Total $18,570,066 $31,664,407 $1,572,671,306 $1,622,905,779 Budget Period 15 18.5 113.5 147 Duration in Months The table below reflects the period of performance for each phase. Phases marked with an asterisk re?ect estimated dates. BP1 (Orlando) BP 2b (Kemper County) Phase I Project Definition 02/01/2006 04/30/2007 Phase Ita Detailed Design (Orlando) 05/02/2007 1 1/14/2007 Phase Illa Construction (Orlando) 05/02/2007 11/14/2007 Phase I b* Detailed Design (Kemper County) 11/17/2008 12/31/2009 Phase Illb* - Construction (Kemper County) 01/01/2010 - 11/06/2013 Phase Demonstration] Operations 11/07/2013 - 05/01/2018 Note: The time between the end of Phase Illa and start of Phase Ilb lags by about a year because the project was on hold pending DOE approval of the site relocation and signature of the Cooperative Agreement amendment. SECTION 7 - RECOMMENDATION AND APPROVALS Based on the information provided above and appropriate conditions placed on the award, it is recommended that modified project costs of $1,622,905.779 be authorized and the Recipient be allowed to Page 8 of 9 proceed into Budget Period 2b (Kemper County). The DOE share is estimated at $293,750,000 and the Recipient?s share is estimated at $1,329,155,779. - Upon review of the documents submitted by Southern Company with concurrence from the Secretary of Energy and Assistant Secretary for Fossil Energy, approval to increase the project costs, authorize a site relocation, provide for conditional waiver of repayment, and extend the project is considered to be reasonableWr?/ ?fir is eat-063? ROBBINS i? DATE Contract specialist Base upon the above findings I consider the amendment to be in the best interest of the government. 6? lL/S/og .J RICHARD D. ROGUS DATE. Contracting Officer Page 9 of 9