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Combined Management's Discussion and Analysis of Financial Condition and Results of Operations Overview II- 3 Results of Operations II- 7 Southern Company II- 7 Alabama Power II- 17 Georgia Power II- 21 Mississippi Power II- 25 Southern Power II- 29 Southern Company Gas II- 32 Future Earnings Potential II- 40 Accounting Policies II- 48 Financial Condition and Liquidity II- 56 This section generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Annual Report on Form 10-K can be found in Item 7 of each Registrant's Annual Report on Form 10-K for the year endedDecember 31, 2019 , which was filed with theSEC onFebruary 19, 2020 . The following Management's Discussion and Analysis of Financial Condition and Results of Operations is a combined presentation; however, information contained herein relating to any individual Registrant is filed by such Registrant on its own behalf and each Registrant makes no representation as to information related to the other Registrants. Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL CONDITION AND LIQUIDITY - "Market Price Risk" in Item 7 herein and Note 1 to the financial statements under "Financial Instruments" in Item 8 herein. Also see Notes 13 and 14 to the financial statements in Item 8 herein. II-2 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSISSouthern Company and Subsidiary Companies 2020 Annual Report OVERVIEW Business ActivitiesSouthern Company is a holding company that owns all of the common stock of three traditional electric operating companies, as well asSouthern Power andSouthern Company Gas , and owns other direct and indirect subsidiaries. The primary businesses ofthe Southern Company system are electricity sales by the traditional electric operating companies andSouthern Power and the distribution of natural gas bySouthern Company Gas .Southern Company's reportable segments are the sale of electricity by the traditional electric operating companies, the sale of electricity in the competitive wholesale market bySouthern Power , and the sale of natural gas and other complementary products and services bySouthern Company Gas . See Note 16 to the financial statements for additional information. •The traditional electric operating companies -Alabama Power ,Georgia Power , andMississippi Power - are vertically integrated utilities providing electric service to retail customers in three Southeastern states in addition to wholesale customers in the Southeast. •Southern Power develops, constructs, acquires, owns, and manages power generation assets, including renewable energy and battery energy storage projects, and sells electricity at market-based rates in the wholesale market.Southern Power continually seeks opportunities to execute its strategy to create value through various transactions including acquisitions, dispositions, and sales of partnership interests, development and construction of new generating facilities, and entry into PPAs primarily with investor-owned utilities, IPPs, municipalities, electric cooperatives, and other load-serving entities, as well as commercial and industrial customers. In general,Southern Power commits to the construction or acquisition of new generating capacity only after entering into or assuming long-term PPAs for the new facilities. •Southern Company Gas is an energy services holding company whose primary business is the distribution of natural gas.Southern Company Gas owns natural gas distribution utilities in four states -Illinois ,Georgia ,Virginia , andTennessee - and is also involved in several other complementary businesses.Southern Company Gas manages its business through four reportable segments - gas distribution operations, gas pipeline investments, wholesale gas services, which includes Sequent, a natural gas asset optimization company, and gas marketing services, which includes SouthStar, a Marketer and provider of energy-related products and services to natural gas markets - and one non-reportable segment, all other. See Notes 7 and 16 to the financial statements for additional information. Many factors affect the opportunities, challenges, and risks ofthe Southern Company system's electric service and natural gas businesses. These factors include the ability to maintain constructive regulatory environments, to maintain and grow sales and customers, and to effectively manage and secure timely recovery of prudently-incurred costs. These costs include those related to projected long-term demand growth; stringent environmental standards, including CCR rules; safety; system reliability and resilience; fuel; natural gas; restoration following major storms; and capital expenditures, including constructing new electric generating plants and expanding and improving the electric transmission and electric and natural gas distribution systems. The traditional electric operating companies and the natural gas distribution utilities have various regulatory mechanisms that address cost recovery. Effectively operating pursuant to these regulatory mechanisms and appropriately balancing required costs and capital expenditures with customer prices will continue to challengethe Southern Company system for the foreseeable future. See Note 2 to the financial statements for additional information.Southern Power's future earnings will depend upon the parameters of the wholesale market and the efficient operation of its wholesale generating assets, as well asSouthern Power's ability to execute its growth strategy and to develop and construct generating facilities. In addition,Southern Power's future earnings will depend upon the availability of federal and state ITCs and PTCs on its renewable energy projects, which could be impacted by future tax legislation. See FUTURE EARNINGS POTENTIAL - "Income Tax Matters" herein and Notes 10 and 15 to the financial statements for additional information.Southern Company's other business activities include providing energy solutions to electric utilities and their customers in the areas of distributed generation, energy storage and renewables, and energy efficiency. Other business activities also include investments in telecommunications, leveraged lease projects, and gas storage facilities. Management continues to evaluate the contribution of each of these activities to total shareholder return and may pursue acquisitions, dispositions, and other strategic ventures or investments accordingly. II-3 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)Southern Company and Subsidiary Companies 2020 Annual Report Recent Developments COVID-19 DuringMarch 2020 , COVID-19 was declared a pandemic by theWorld Health Organization and theCenters for Disease Control and Prevention and has spread globally, including throughoutthe United States .The Southern Company system provides an essential service to its customers; therefore, it is critical thatSouthern Company system employees are able to continue to perform their essential duties safely and effectively.The Southern Company system has implemented applicable business continuity plans, including teleworking, canceling non-essential business travel, increasing cleaning frequency at business locations, implementing applicable safety and health guidelines issued by federal and state officials, and establishing protocols for required work on customer premises. To date, these procedures have been effective in maintainingthe Southern Company system's critical operations. As a result of the COVID-19 pandemic, there have been economic disruptions in the Registrants' operating territories. The traditional electric operating companies and the natural gas distribution utilities temporarily suspended disconnections for non-payment by customers and waived late fees for certain periods. See Note 2 to the financial statements for information regarding deferral of certain incremental COVID-19-related costs, including bad debt, to a regulatory asset by certain of the traditional electric operating companies and the natural gas distribution utilities. In addition, the COVID-19 pandemic has impacted productivity and the pace of activity completion at Plant Vogtle Units 3 and 4, as discussed further herein. Additional information regarding the COVID-19 pandemic and its past and potential future impacts on the Registrants is provided throughout Management's Discussion and Analysis of Financial Condition and Results of Operations and in Item 1A herein. Alabama Power OnAugust 14, 2020 , the Alabama PSC issued an order grantingAlabama Power a CCN to procure additional capacity, and, onAugust 31, 2020 ,Alabama Power completed its acquisition of theCentral Alabama Generating Station . InOctober 2020 ,Alabama Power reduced its over-collected fuel balance by$94.3 million in accordance with anAugust 7, 2020 Alabama PSC order authorizingAlabama Power to reduce its over-collected fuel balance by$100 million and return that amount to customers in the form of bill credits, with any undistributed amount remaining in the regulatory liability for the benefit of customers. For the year endedDecember 31, 2020 ,Alabama Power's weighted common equity return exceeded 6.15%, resulting inAlabama Power establishing a current regulatory liability of$50 million for Rate RSE refunds, which will be refunded to customers through bill credits inApril 2021 . During 2020,Alabama Power recorded$51 million and$67 million against the NDR for damages incurred to its transmission and distribution facilities from Hurricane Sally and Hurricane Zeta, respectively.Alabama Power made an additional accrual of$100 million to the NDR inDecember 2020 . Effective for the billing month ofJanuary 2021 ,Alabama Power's Rate RSE increased 4.09%, or approximately$228 million annually, andAlabama Power's Rate ECR decreased 1.84%, or approximately$103 million annually, as approved by the Alabama PSC. See Notes 2 and 15 to the financial statements under "Alabama Power " for additional information. Georgia Power Rate Plans OnDecember 15, 2020 , in accordance with the terms of the 2019 ARP, theGeorgia PSC approved tariff adjustments effectiveJanuary 1, 2021 as follows: (i) increased traditional base tariffs by approximately$120 million ; (ii) increased the Environmental Compliance Cost Recovery (ECCR) tariff by approximately$2 million ; (iii) decreased Demand-Side Management tariffs by approximately$15 million ; and (iv) increased Municipal Franchise Fee tariffs by approximately$4 million , for a total net increase in annual base revenues of approximately$111 million .Georgia Power expects to submit a compliance filing in the third quarter 2021 to request tariff adjustments approved pursuant to the 2019 ARP effectiveJanuary 1, 2022 . The amounts requested in the 2019 ARP were as follows: (i) increase traditional base tariffs by approximately$192 million ; (ii) increase the ECCR tariff by approximately$184 million ; (iii) increase Demand-Side Management tariffs by approximately$1 million ; and (iv) increase Municipal Franchise Fee tariffs by approximately$9 million , for a total increase in annual base revenues of approximately$386 million . The ultimate outcome of this matter cannot be determined at this time. See Note 2 to the financial statements under "Georgia Power - Rate Plans - 2019 ARP" for additional information. II-4 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)Southern Company and Subsidiary Companies 2020 Annual Report Plant Vogtle Units 3 and 4Status Construction continues on Plant Vogtle Units 3 and 4 (with electric generating capacity of approximately 1,100 MWs each), in whichGeorgia Power holds a 45.7% ownership interest.Georgia Power's share of the total project capital cost forecast is$8.7 billion , with expected in-service dates ofNovember 2021 for Unit 3 andNovember 2022 for Unit 4. As ofJune 30, 2020 , assignments of contingency to the base capital cost forecast exceeded the remaining balance of the construction contingency originally established in the second quarter 2018 andGeorgia Power established$115 million of additional construction contingency. During the third and fourth quarters 2020, this construction contingency, plus an additional$5 million , was fully assigned to the base capital cost forecast. Assignment of contingency during 2020 addressed cost risks related to construction productivity, including theApril 2020 reduction in workforce designed to mitigate impacts of the COVID-19 pandemic described below; other COVID-19 impacts; craft labor incentives; additional resources for supervision, field support, project management, initial test program, start-up, engineering support, and operations and maintenance support; subcontracts; and procurement, among other factors. These factors continue to represent further potential cost risk to the project; therefore,Georgia Power established$171 million of additional contingency as ofDecember 31, 2020 . After considering the significant level of uncertainty that exists regarding the future recoverability of these costs since the ultimate outcome of these matters is subject to the outcome of future assessments by management, as well as Georgia PSC decisions in future regulatory proceedings,Georgia Power recorded total pre-tax charges to income of$149 million ($111 million after tax) and$176 million ($131 million after tax) for the increases in the total project capital cost forecast as ofJune 30, 2020 andDecember 31, 2020 , respectively. As and when these amounts are spent,Georgia Power may request the Georgia PSC to evaluate those expenditures for rate recovery. Inmid-March 2020 , Southern Nuclear began implementing policies and procedures designed to mitigate the risk of transmission of COVID-19 at the construction site. InApril 2020 ,Georgia Power , acting for itself and as agent for the other Vogtle Owners, announced a reduction in workforce at Plant Vogtle Units 3 and 4 and began reducing the then-existing site workforce by approximately 20%. This workforce reduction lowered absenteeism, providing an improvement in operational efficiency and allowing for increased social distancing. SinceApril 2020 , the number of active cases at the site has fluctuated and has continued to impact productivity levels and pace of activity completion. FromNovember 2020 throughJanuary 2021 , the number of active COVID-19 cases at the site increased significantly, consistent with a national rise in cases, and the project continued to face challenges. As a result, overall production levels were not achieved at the levels anticipated, contributing to theDecember 31, 2020 allocation of construction contingency and increase in total project capital cost forecast. Also, after considering these factors, Southern Nuclear has further extended certain milestone dates, including the start of hot functional testing and fuel load for Unit 3, from those established inOctober 2020 . These updated milestone dates are expected to support the regulatory-approved in-service dates ofNovember 2021 andNovember 2022 for Units 3 and 4, respectively. With minimal schedule margin remaining, the Unit 3 schedule is challenged, and any further extension of the hot functional testing or fuel load milestones, or other delays from the challenges described in Note 2 to the financial statements under "Georgia Power -Nuclear Construction ," could impact the ability to achieve theNovember 2021 in-service date. The continuing effects of the COVID-19 pandemic could further disrupt or delay construction and testing activities at Plant Vogtle Units 3 and 4.Georgia Power's proportionate share of the estimated incremental cost associated with COVID-19 mitigation actions and impacts on construction productivity is currently estimated to be between$150 million and$190 million and is included in the total project capital cost. The ultimate impact of the COVID-19 pandemic and other factors on the construction schedule and budget for Plant Vogtle Units 3 and 4 cannot be determined at this time. See Note 2 to the financial statements under "Georgia Power -Nuclear Construction " for additional information.Mississippi Power OnMarch 17, 2020 , the Mississippi PSC approved a settlement agreement betweenMississippi Power and theMississippi Public Utilities Staff related toMississippi Power's base rate case filed inNovember 2019 (Mississippi Power Rate Case Settlement Agreement). Under the terms of the Mississippi Power Rate Case Settlement Agreement, annual retail rates decreased approximately$16.7 million , or 1.85%, effective for the first billing cycle ofApril 2020 . During 2020,Mississippi Power substantially completed mine reclamation activities at theKemper County energy facility. OnSeptember 3, 2020 ,Mississippi Power andSouthern Company executed an agreement with theDOE completingMississippi Power's 2018 request for property closeout certification under the contract related toDOE grants received for theKemper County energy facility, which enabledMississippi Power to proceed with full dismantlement of the abandoned gasifier-related assets and II-5 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)Southern Company and Subsidiary Companies 2020 Annual Report site restoration activities. These activities are expected to be completed by 2026. See Note 3 to the financial statements under "Other Matters -Mississippi Power - Kemper County Energy Facility" for additional information. OnFebruary 12, 2021 ,Mississippi Power submitted its 2021ECO Plan filing to the Mississippi PSC, which requested an annual decrease in revenues of approximately$9 million , as well as its ad valorem tax adjustment filing for 2021, which requested an annual increase in revenues of approximately$28 million .Mississippi Power plans to submit its 2021 PEP filing inMarch 2021 . OnDecember 17, 2020 , the Mississippi PSC issued an order concluding the RMP docket and requiringMississippi Power to incorporate into its 2021 IRP a schedule of early or anticipated retirement of 950 MWs of fossil-steam generation by year-end 2027 to reduceMississippi Power's excess reserve margin.Mississippi Power's IRP is scheduled to be filed inApril 2021 . See Note 2 to the financial statements under "Mississippi Power " for additional information. The ultimate outcome of these matters cannot be determined at this time. Southern Power During 2020,Southern Power completed construction of and placed in service the 200-MW Reading and 136-MW Skookumchuck wind facilities, commenced construction of the 88-MW Garland and 72-MW Tranquillity battery energy storage facilities, and acquired and commenced construction of the 118-MW Glass Sands wind facility. InJanuary 2020 ,Southern Power completed the sale of its equity interests in Plant Mankato (including the 385-MW expansion unit completed inMay 2019 ) to a subsidiary of Xcel for a purchase price of approximately$663 million , including final working capital adjustments. InMarch 2020 ,Southern Power entered into an agreement to acquire a controlling membership interest in an approximately 300-MW wind facility located inSouth Dakota . The acquisition is subject to certain customary conditions to closing, including commercial operation of the facility, which is expected to occur in the first quarter 2021. Subsequent to the acquisition,Southern Power expects to complete a tax equity transaction. The facility's output is contracted under two long-term PPAs. The ultimate outcome of this matter cannot be determined at this time. InMay 2020 ,Southern Power purchased a controlling interest in the 56-MW Beech Ridge II wind facility located inWest Virginia fromInvenergy Renewables LLC . The facility's output is contracted under a 12-year PPA.Southern Power calculates an investment coverage ratio for its generating assets, including those owned with various partners, based on the ratio of investment under contract to total investment using the respective generation facilities' net book value (or expected in-service value for facilities under construction) as the investment amount. With the inclusion of investments associated with the facilities currently under construction, as well as other capacity and energy contracts,Southern Power's average investment coverage ratio atDecember 31, 2020 was 94% through 2025 and 91% through 2030, with an average remaining contract duration of approximately 14 years. See Note 15 to the financial statements under "Southern Power " for additional information. Southern Company Gas OnMarch 24, 2020 ,Southern Company Gas completed the sale of its interests in Pivotal LNG and Atlantic Coast Pipeline with aggregate proceeds of$178 million , including final working capital adjustments. OnDecember 1, 2020 ,Southern Company Gas completed the sale ofJefferson Island for a purchase price of$33 million , including estimated working capital adjustments. See Note 15 to the financial statements under "Southern Company Gas " for additional information. OnJune 1, 2020 ,Virginia Natural Gas filed a general rate case with theVirginia Commission seeking an increase in annual base revenues of$49.6 million based on a ROE of 10.35% and an equity ratio of 54%. Interim rate adjustments became effectiveNovember 1, 2020 , subject to refund.The Virginia Commission is expected to rule on the requested increase in the second quarter 2021. The ultimate outcome of this matter cannot be determined at this time. OnJuly 1, 2020 ,Atlanta Gas Light filed its 2020 GRAM filing with theGeorgia PSC requesting an annual base rate increase of$37.6 million . Rates became effective onJanuary 1, 2021 in accordance withAtlanta Gas Light's 2019 rate case order. OnJanuary 14, 2021 ,Nicor Gas filed a general base rate case with theIllinois Commission , requesting a$293 million increase in annual base rate revenues, including$94 million related to the recovery of investments under the Investing inIllinois program. The requested increase is based on a projected test year endingDecember 31, 2022 , a ROE of 10.35%, and an equity ratio of 54.5%.The Illinois Commission has an 11-month statutory time limit to rule on the requested increase, after which rate adjustments will be effective. The ultimate outcome of this matter cannot be determined at this time. See Note 2 to the financial statements under "Southern Company Gas - Rate Proceedings" for additional information. II-6 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)Southern Company and Subsidiary Companies 2020 Annual Report Key Performance Indicators In striving to achieve attractive risk-adjusted returns while providing cost-effective energy to approximately 8.6 million electric and gas utility customers collectively, the traditional electric operating companies andSouthern Company Gas continue to focus on several key performance indicators. These indicators include, but are not limited to, customer satisfaction, plant availability, electric and natural gas system reliability, and execution of major construction projects. In addition,Southern Company and the Subsidiary Registrants focus on earnings per share (EPS) and net income, respectively, as a key performance indicator. See RESULTS OF OPERATIONS herein for information on the Registrants' financial performance. See RESULTS OF OPERATIONS - "Southern Company Gas - Operating Metrics" for additional information onSouthern Company Gas' operating metrics, including Heating Degree Days, customer count, and volumes of natural gas sold. The financial success of the traditional electric operating companies andSouthern Company Gas is directly tied to customer satisfaction. Key elements of ensuring customer satisfaction include outstanding service, high reliability, and competitive prices. The traditional electric operating companies use customer satisfaction surveys to evaluate their results and generally target the top quartile of these surveys in measuring performance. Reliability indicators are also used to evaluate results. See Note 2 to the financial statements under "Alabama Power - Rate RSE" and " -Mississippi Power - Performance Evaluation Plan" for additional information onAlabama Power's Rate RSE and Mississippi Power's PEP rate plan, respectively, both of which contain mechanisms that directly tie customer service indicators to the allowed equity return.Southern Power continues to focus on several key performance indicators, including, but not limited to, the equivalent forced outage rate and contract availability to evaluate operating results and help ensure its ability to meet its contractual commitments to customers. RESULTS OF OPERATIONS Southern Company Consolidated net income attributable toSouthern Company was$3.1 billion in 2020, a decrease of$1.6 billion , or 34.2%, from the prior year. The decrease was primarily due to the$2.6 billion ($1.4 billion after tax) gain on the sale ofGulf Power in 2019 and after-tax charges totaling$242 million in 2020 related toGeorgia Power's construction of Plant Vogtle Units 3 and 4. See Notes 2 and 15 to the financial statements under "Georgia Power -Nuclear Construction " and "Southern Company ," respectively, for additional information. Basic EPS was$2.95 in 2020 and$4.53 in 2019. Diluted EPS, which factors in additional shares related to stock-based compensation, was$2.93 in 2020 and$4.50 in 2019. EPS for 2020 and 2019 was negatively impacted by$0.03 and$0.11 per share, respectively, as a result of increases in the average shares outstanding. See Note 8 to the financial statements under "Outstanding Classes of Capital Stock -Southern Company " for additional information. Dividends paid per share of common stock were$2.54 in 2020 and$2.46 in 2019. InJanuary 2021 ,Southern Company declared a quarterly dividend of64 cents per share. For 2020, the dividend payout ratio was 86% compared to 54% for 2019. The increase was due to the decrease in earnings in 2020. Discussion ofSouthern Company's results of operations is divided into three parts -the Southern Company system's primary business of electricity sales, its gas business, and its other business activities. 2020 2019 (in millions) Electricity business$ 3,115 $ 3,268 Gas business 590 585 Other business activities (586) 886 Net Income$ 3,119 $ 4,739 II-7
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Southern Company and Subsidiary Companies 2020 Annual Report
Electricity Business
Southern Company's electric utilities generate and sell electricity to retail
and wholesale customers. A condensed statement of income for the electricity
business follows:
Increase
(Decrease) from
2020 2019
(in millions)
Electric operating revenues $ 16,497 $ (598)
Fuel 2,967 (655)
Purchased power 799 (17)
Cost of other sales 94 18
Other operations and maintenance 4,250 (253)
Depreciation and amortization 2,941 469
Taxes other than income taxes 1,024 13
Estimated loss on Plant Vogtle Units 3 and 4 325 325
Impairment charges - (3)
(Gain) loss on dispositions, net (42) (21)
Total electric operating expenses 12,358 (124)
Operating income 4,139 (474)
Allowance for equity funds used during construction 138 17
Interest expense, net of amounts capitalized 976 (11)
Other income (expense), net 315 81
Income taxes 517 (191)
Net income 3,099 (174)
Less:
Dividends on preferred stock of subsidiaries 15 -
Net income (loss) attributable to noncontrolling interests (31) (21)
Net Income Attributable to Southern Company $ 3,115 $ (153)
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2020 2019
(in millions)
Retail electric - prior year $ 14,084
Estimated change resulting from -
Rates and pricing 484
Sales decline (132)
Weather (288)
Fuel and other cost recovery (505)
Retail electric - current year $ 13,643 $ 14,084
Wholesale electric revenues 1,945 2,152
Other electric revenues 672 636
Other revenues 237 223
Electric operating revenues $ 16,497 $ 17,095
Percent change (3.5) % (7.9) %
Retail electric revenues decreased $441 million , or 3.1%, in 2020 as compared to
the prior year. The significant factors driving this change are shown in the
preceding table. The increase in rates and pricing in 2020 was primarily due to
Georgia Power's recovery of environmental compliance costs and the impacts of
accruals for customer refunds in 2019 related to the Tax Reform Legislation and
earnings in excess of the allowed retail ROE range as well as the rate pricing
effects of decreased customer usage throughout 2020. The increase was also due
to customer bill credits at Alabama Power in 2019 related to the Tax Reform
Legislation. These increases were partially offset by lower contributions from
commercial and industrial customers with variable demand-driven pricing at
Georgia Power .
Electric rates for the traditional electric operating companies include
provisions to adjust billings for fluctuations in fuel costs, including the
energy component of purchased power costs. Under these provisions, fuel revenues
generally equal fuel expenses, including the energy component of PPA costs, and
do not affect net income. The traditional electric operating companies each have
one or more regulatory mechanisms to recover other costs such as environmental
and other compliance costs, storm damage, new plants, and PPA capacity costs.
See Note 2 to the financial statements under "Alabama Power " and "Georgia Power "
for additional information. Also see "Energy Sales" herein for a discussion of
changes in the volume of energy sold, including changes related to sales growth
(decline) and weather.
Wholesale electric revenues consist of PPAs and short-term opportunity sales.
Wholesale electric revenues from PPAs (other than solar and wind PPAs) have both
capacity and energy components. Capacity revenues generally represent the
greatest contribution to net income and are designed to provide recovery of
fixed costs plus a return on investment. Energy revenues will vary depending on
fuel prices, the market prices of wholesale energy compared to the Southern
Company system's generation, demand for energy within the Southern Company
system's electric service territory, and the availability of the Southern
Company system's generation. Increases and decreases in energy revenues that are
driven by fuel prices are accompanied by an increase or decrease in fuel costs
and do not have a significant impact on net income. Energy sales from solar and
wind PPAs do not have a capacity charge and customers either purchase the energy
output of a dedicated renewable facility through an energy charge or through a
fixed price related to the energy. As a result, the ability to recover fixed and
variable operations and maintenance expenses is dependent upon the level of
energy generated from these facilities, which can be impacted by weather
conditions, equipment performance, transmission constraints, and other factors.
Wholesale electric revenues at Mississippi Power include FERC -regulated MRA
sales as well as market-based sales. Short-term opportunity sales are made at
market-based rates that generally provide a margin above the Southern Company
system's variable cost to produce the energy.
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2020 2019
(in millions)
Capacity and other $ 476 $ 529
Energy 1,469 1,623
Total $ 1,945 $ 2,152
In 2020, wholesale electric revenues decreased $207 million , or 9.6%, as
compared to the prior year due to decreases of $154 million in energy revenues
and $53 million in capacity revenues. Energy revenues decreased $98 million at
Southern Power and $56 million at the traditional electric operating companies.
The decrease at Southern Power primarily resulted from a net decrease in the
volume of KWHs sold due to decreased demand and lower natural gas prices,
partially offset by increases in sales from solar facilities, wind facilities,
and fuel cell generation. The decrease at the traditional electric operating
companies was primarily due to lower energy prices. The decrease in capacity
revenues was primarily related to the sales of Southern Power's Plant Mankato in
the first quarter 2020 and Southern Power's Plant Nacogdoches in the second
quarter 2019. See Note 15 to the financial statements for additional
information.
Other Electric Revenues
Other electric revenues increased $36 million , or 5.7%, in 2020 as compared to
the prior year. The increase was primarily due to an increase of $23 million in
transmission revenues, an increase of $15 million from outdoor lighting at
Georgia Power , and an increase of $10 million in energy service revenues at
Alabama Power , as well as an increase of $6 million from pole attachment
agreements at Alabama Power and Georgia Power . These increases were partially
offset by a reduction of $26 million largely resulting from the temporary
suspension of customer disconnections and late fees related to the COVID-19
pandemic.
Energy Sales
Changes in revenues are influenced heavily by the change in the volume of energy
sold from year to year. KWH sales for 2020 and the percent change from the prior
year were as follows:
2020
Total Total KWH Weather-Adjusted
KWHs Percent Change Percent Change(*)
(in billions)
Residential 47.4 (2.2) % 3.1 %
Commercial 45.4 (7.5) (5.7)
Industrial 47.0 (6.2) (6.2)
Other 0.7 (9.5) (9.3)
Total retail 140.5 (5.3) (3.0) %
Wholesale 45.7 (4.9)
Total energy sales 186.2 (5.2) %
(*)Weather-adjusted KWH sales are estimated by removing from KWH sales the
effect of deviations from normal temperature conditions, based on statistical
models of the historical relationship between temperatures and energy sales.
Normal temperature conditions are defined as those experienced in the applicable
service territory over a specified historical period. This metric is useful
because it allows trends in historical operations to be evaluated apart from the
influence of weather conditions. Management also considers this metric in
developing long-term capital and financial plans.
Changes in retail energy sales are generally the result of changes in
electricity usage by customers, weather, and the number of customers.
Weather-adjusted retail energy sales decreased 4.4 billion KWHs in 2020 as
compared to the prior year largely due to the COVID-19 pandemic.
Weather-adjusted residential usage increases are primarily due to customer
growth and an increase in average customer usage, primarily due to
work-from-home policies. Weather-adjusted commercial usage decreases are
primarily due to lower customer usage resulting from changes in consumer and
business behavior in response to the COVID-19 pandemic. Industrial usage
decreases are primarily a result of disruptions in supply chain and business
operations related to the COVID-19 pandemic and the overall decrease in business
activity due to the resulting recession.
See "Electric Operating Revenues" above for a discussion of significant changes
in wholesale revenues related to changes in price and KWH sales.
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Southern Company and Subsidiary Companies 2020 Annual Report
Other Revenues
Other revenues increased $14 million , or 6.3%, in 2020 as compared to the prior
year. The increase was primarily due to increases in unregulated sales of
products and services of $9 million at Georgia Power and $5 million at Alabama
Power .
Fuel and Purchased Power Expenses
The mix of fuel sources for the generation of electricity is determined
primarily by demand, the unit cost of fuel consumed, and the availability of
generating units. Additionally, the electric utilities purchase a portion of
their electricity needs from the wholesale market.
Details of the Southern Company system's generation and purchased power were as
follows:
2020 2019
Total generation (in billions of KWHs) 176
187
Total purchased power (in billions of KWHs) 18
18
Sources of generation (percent) - Gas 53 52 Coal 18 22 Nuclear 17 16 Hydro 4 3 Wind, Solar, and Other 8 7 Cost of fuel, generated (in cents per net KWH) - Gas 2.00 2.36 Coal 2.91 2.87 Nuclear 0.78 0.79
Average cost of fuel, generated (in cents per net KWH) 1.95 2.20 Average cost of purchased power (in cents per net KWH)(*) 4.65 4.66
(*)Average cost of purchased power includes fuel purchased bythe Southern Company system for tolling agreements where power is generated by the provider. In 2020, total fuel and purchased power expenses were$3.8 billion , a decrease of$672 million , or 15.1%, as compared to the prior year. The decrease was primarily the result of a$363 million decrease in the volume of KWHs generated and purchased and a$309 million decrease primarily in the average cost of fuel. Fuel and purchased power energy transactions at the traditional electric operating companies are generally offset by fuel revenues and do not have a significant impact on net income. See Note 2 to the financial statements for additional information. Fuel expenses incurred underSouthern Power's PPAs are generally the responsibility of the counterparties and do not significantly impact net income. Fuel In 2020, fuel expense was$3.0 billion , a decrease of$655 million , or 18.1%, as compared to the prior year. The decrease was primarily due to a 23.9% decrease in the volume of KWHs generated by coal, a 15.3% decrease in the average cost of natural gas per KWH generated, and a 2.5% decrease in the volume of KWHs generated by natural gas, partially offset by a 1.4% increase in the average cost of coal per KWH generated.Purchased Power In 2020, purchased power expense was$799 million , a decrease of$17 million , or 2.1%, as compared to the prior year. The decrease was primarily due to a 2.7% decrease in the volume of KWHs purchased. Energy purchases will vary depending on demand for energy withinthe Southern Company system's electric service territory, the market prices of wholesale energy as compared to the cost ofthe Southern Company system's generation, and the availability ofthe Southern Company system's generation. II-11 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)Southern Company and Subsidiary Companies 2020 Annual Report Other Operations and Maintenance Expenses Other operations and maintenance expenses decreased$253 million , or 5.6%, in 2020 as compared to the prior year. The decrease reflects the impacts of cost containment activities implemented in 2020 to help offset the effects of the recessionary economy resulting from the COVID-19 pandemic. The decrease primarily results from decreases of$195 million in transmission and distribution expenses at the traditional electric operating companies, including$37 million of increases in reliability NDR credits atAlabama Power ,$180 million in scheduled generation outage and maintenance expenses, and$32 million in compliance and environmental expenses at the traditional electric operating companies, partially offset by a$183 million increase in storm damage recovery atGeorgia Power as authorized in the 2019 ARP and a$45 million increase in employee compensation and benefit expenses. The decrease also reflects a$32 million increase in nuclear property insurance refunds atAlabama Power andGeorgia Power . See Note 2 to the financial statements under "Alabama Power - Rate NDR" and "Georgia Power - Storm Damage Recovery" for additional information. Depreciation and Amortization Depreciation and amortization increased$469 million , or 19.0%, in 2020 as compared to the prior year. The increase was due to increased amortization of regulatory assets related to CCR AROs of$203 million and higher depreciation of$178 million as authorized inGeorgia Power's 2019 ARP, as well as an increase of$104 million in depreciation associated with additional plant in service. See Note 2 to the financial statements under "Georgia Power - Rate Plans" for additional information. Estimated Loss on Plant Vogtle Units 3 and 4 In the second and fourth quarters 2020, estimated probable losses of$149 million and$176 million , respectively, were recorded to reflectGeorgia Power's revised total project capital cost forecast to complete construction and start-up of Plant Vogtle Units 3 and 4. See Note 2 to the financial statements under "Georgia Power -Nuclear Construction " for additional information. (Gain) Loss on Dispositions,Net Gain on dispositions, net increased$21 million in 2020 as compared to the prior year primarily related to the sale of Plant Mankato in the first quarter 2020 and the sale of Plant Nacogdoches in the second quarter 2019. See Note 15 to the financial statements under "Southern Power - Sales of Natural Gas and Biomass Plants" for additional information. Allowance forEquity Funds Used During Construction Allowance for equity funds used during construction increased$17 million , or 14.0%, in 2020 as compared to the prior year primarily associated with the construction of Plant Vogtle Units 3 and 4 atGeorgia Power . See Note 2 to the financial statements under "Georgia Power -Nuclear Construction - Regulatory Matters" for additional information. Other Income (Expense), Net Other income (expense), net increased$81 million , or 34.6%, in 2020 as compared to the prior year primarily related to a$131 million increase in non-service cost-related retirement benefits income, partially offset by a$24 million net decrease associated with a 2019 litigation settlement atSouthern Power and a$21 million increase in charitable donations, primarily atGeorgia Power . See Note 11 to the financial statements for additional information. Income Taxes Income taxes decreased$191 million , or 27.0%, in 2020 as compared to the prior year. The decrease was primarily due to$208 million of flowback of excess deferred income taxes in 2020 as authorized inGeorgia Power's 2019 ARP and a$90 million decrease associated with lower pre-tax earnings, primarily from charges associated with the construction of Plant Vogtle Units 3 and 4 atGeorgia Power , partially offset by a$75 million income tax benefit in 2019 resulting from ITCs recognized upon the sale of Plant Nacogdoches and a$24 million net increase related to the application of an accounting order associated with the Tax Reform Legislation in the prior year atAlabama Power . See Note 2 to the financial statements under "Georgia Power - Rate Plans" and - "Nuclear Construction " for additional information. Net Income (Loss) Attributable to Noncontrolling Interests Substantially all noncontrolling interests relate to renewable projects atSouthern Power . Net loss attributable to noncontrolling interests increased$21 million in 2020 as compared to the prior year. The increased loss was primarily due to an allocation to the noncontrolling interest partner of approximately$26 million of income related to a litigation settlement atSouthern Power in 2019. II-12 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)Southern Company and Subsidiary Companies 2020 Annual Report Gas BusinessSouthern Company Gas distributes natural gas through utilities in four states and is involved in several other complementary businesses including gas pipeline investments, wholesale gas services, and gas marketing services. A condensed statement of income for the gas business follows: Increase (Decrease) from 2020 2019 (in millions) Operating revenues$ 3,434 $ (358) Cost of natural gas 972 (347) Other operations and maintenance 966 78 Depreciation and amortization 500 13 Taxes other than income taxes 206 (7) Impairment charges - (115) (Gain) loss on dispositions, net (22) (22) Total operating expenses 2,622 (400) Operating income 812 42 Earnings from equity method investments 141 (16) Interest expense, net of amounts capitalized 231 (1) Other income (expense), net 41 21 Income taxes 173 43 Net income$ 590 $ 5 Seasonality of Results During the period from November through March when natural gas usage and operating revenues are generally higher (Heating Season), more customers are connected toSouthern Company Gas' distribution systems and natural gas usage is higher in periods of colder weather. Occasionally in the summer, operating revenues are impacted due to peak usage by power generators in response to summer energy demands.Southern Company Gas' base operating expenses, excluding cost of natural gas, bad debt expense, and certain incentive compensation costs, are incurred relatively equally over any given year. Thus, operating results can vary significantly from quarter to quarter as a result of seasonality. For 2020, the percentage of operating revenues and net income generated during the Heating Season (January through March and November through December) were 67.6% and 85.6%, respectively. For 2019, the percentage of operating revenues and net income generated during the Heating Season were 68.7% and 86.8%, respectively. II-13 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)Southern Company and Subsidiary Companies 2020 Annual Report Operating Revenues Operating revenues in 2020 were$3.4 billion , a$358 million decrease compared to 2019. Details of operating revenues were as follows: 2020 (in millions) Operating revenues - prior year$ 3,792 Estimated change resulting from - Infrastructure replacement programs and base rate changes 186 Gas costs and other cost recovery (319) Wholesale gas services (220) Other (5) Operating revenues - current year$ 3,434 Percent change (9.4) % Revenues at the natural gas distribution utilities increased in 2020 compared to the prior year due to base rate increases and continued investments recovered through infrastructure replacement programs, including increases of$107 million atNicor Gas and$68 million atAtlanta Gas Light . See Note 2 to the financial statements under "Southern Company Gas " for additional information. Revenues associated with gas costs and other cost recovery decreased in 2020 compared to the prior year primarily due to lower natural gas prices and lower sales volumes as a result of warmer weather. The natural gas distribution utilities have weather or revenue normalization mechanisms that mitigate revenue fluctuations from customer consumption changes. Natural gas distribution rates include provisions to adjust billings for fluctuations in natural gas costs. Therefore, gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas and do not affect net income from the natural gas distribution utilities. See "Cost of Natural Gas" herein for additional information. Revenues from wholesale gas services decreased in 2020 primarily due to lower derivative gains and decreased commercial activity as a result of warmer weather.Southern Company Gas hedged its exposure to warmer-than-normal weather inIllinois for gas distribution operations and inIllinois andGeorgia for gas marketing services. The remaining impacts of weather on earnings were immaterial. Cost of Natural Gas ExcludingAtlanta Gas Light , which does not sell natural gas to end-use customers, the natural gas distribution utilities charge their utility customers for natural gas consumed using natural gas cost recovery mechanisms set by the applicable state regulatory agencies. Under these mechanisms, all prudently-incurred natural gas costs are passed through to customers without markup, subject to regulatory review. The natural gas distribution utilities defer or accrue the difference between the actual cost of natural gas and the amount of commodity revenue earned in a given period. The deferred or accrued amount is either billed or refunded to customers prospectively through adjustments to the commodity rate. Deferred natural gas costs are reflected as regulatory assets and accrued natural gas costs are reflected as regulatory liabilities. Therefore, gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas and do not affect net income from the natural gas distribution utilities. Cost of natural gas at the natural gas distribution utilities represented 88.3% of the total cost of natural gas for 2020. Gas marketing services customers are charged for actual and estimated natural gas consumed. Cost of natural gas includes the cost of fuel and associated transportation costs, lost and unaccounted for gas, adjustments to reduce the value of inventories to market value, if applicable, and gains and losses associated with certain derivatives. Cost of natural gas was$1.0 billion , a decrease of$347 million , or 26.3%, in 2020 compared to the prior year, which reflects a 23.6% decrease in natural gas prices compared to 2019 and decreased volumes primarily as a result of warmer weather. Other Operations and Maintenance Expenses Other operations and maintenance expenses increased$78 million , or 8.8%, in 2020 compared to the prior year. The increase was primarily due to increases of$40 million in compensation and benefit expenses,$10 million in charitable donations,$12 million II-14 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)Southern Company and Subsidiary Companies 2020 Annual Report in pipeline repair, compliance, and maintenance activities, and$19 million in expenses passed through directly to customers primarily related to bad debt. Depreciation and Amortization Depreciation and amortization increased$13 million , or 2.7%, in 2020 compared to the prior year. This increase was primarily due to continued infrastructure investments at the natural gas distribution utilities. See Note 2 to the financial statements under "Southern Company Gas - Infrastructure Replacement Programs and Capital Projects" for additional information. Impairment Charges In 2019,Southern Company Gas recorded impairment charges of$91 million related toJefferson Island and$24 million in contemplation of the sale of its interests in Pivotal LNG and Atlantic Coast Pipeline. See Notes 3 and 15 to the financial statements under "Other Matters -Southern Company Gas " and "Southern Company Gas ," respectively, for additional information. (Gain) Loss on Dispositions, Net In 2020, gain on dispositions, net was$22 million resulting from the sale ofJefferson Island . See Note 15 to the financial statements under "Southern Company Gas " for additional information. Earnings from Equity Method Investments Earnings from equity method investments decreased$16 million , or 10.2%, in 2020 compared to the prior year. This decrease was primarily due to a$12 million decrease in earnings from SNG as a result of lower demand and firm revenues and a$9 million decrease in earnings as a result of the sale ofAtlantic Coast Pipeline in the first quarter 2020, partially offset by a$6 million pre-tax loss on the sale of Triton inMay 2019 . See Notes 7 and 15 to the financial statements under "Southern Company Gas " for additional information. Other Income (Expense), Net Other income (expense), net increased$21 million in 2020 compared to the prior year. This increase primarily resulted from an increase in non-service cost-related retirement benefits income. See Note 11 to the financial statements for additional information. Income Taxes Income taxes increased$43 million , or 33.1%, in 2020 compared to the prior year. This increase was primarily due to the reversal of a federal income tax valuation allowance in connection with the sale of Triton in 2019, a decrease in the flowback of excess deferred income taxes in 2020 atAtlanta Gas Light as previously authorized by the Georgia PSC, and higher pre-tax earnings. See Note 2 to the financial statements under "Southern Company Gas ," Note 10 to the financial statements, and Note 15 to the financial statements under "Southern Company Gas " for additional information. Other Business ActivitiesSouthern Company's other business activities primarily include the parent company (which does not allocate operating expenses to business units); PowerSecure, a provider of energy solutions to electric utilities and their customers in the areas of distributed generation, energy storage and renewables, and energy efficiency;Southern Holdings , which invests in various projects, including leveraged lease projects; and Southern Linc, which provides digital wireless communications for use bythe Southern Company system and also markets these services to the public and provides fiber optics services within the Southeast. II-15 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)Southern Company and Subsidiary Companies 2020 Annual Report A condensed statement of income forSouthern Company's other business activities follows: 2020 Increase (Decrease) from 2019 (in millions) Operating revenues$ 444 $ (88) Cost of other sales 234 (125) Other operations and maintenance 196 (35) Depreciation and amortization 77 (3) Taxes other than income taxes 4 (2) Impairment charges - (50) (Gain) loss on dispositions, net (1) 2,547 Total operating expenses 510 2,332 Operating income (loss) (66) (2,420) Interest expense 614 97 Impairment of leveraged leases 206
206
Other income (expense), net 3 (6) Income taxes (benefit) (297) (1,257) Net income (loss)$ (586) $ (1,472) Operating RevenuesSouthern Company's operating revenues for these other business activities decreased$88 million , or 16.5%, in 2020 as compared to the prior year primarily from the sales of PowerSecure's utility infrastructure services business inJuly 2019 and its lighting business inDecember 2019 , as well as the wind-down of a segment of PowerSecure's distributed infrastructure business in the first quarter 2020. These decreases were partially offset by PowerSecure's continued growth in the core distributed infrastructure business and an increase at Southern Linc related to a contract for the design and construction of a fiber optic system. See Note 15 to the financial statements under "Southern Company " for additional information. Cost of Other Sales Cost of other sales for these other business activities decreased$125 million , or 34.8%, in 2020 as compared to the prior year primarily from the sales of PowerSecure's utility infrastructure services business inJuly 2019 and its lighting business inDecember 2019 , as well as the wind-down of a segment of PowerSecure's distributed infrastructure business in the first quarter 2020. These decreases were partially offset by PowerSecure's continued growth in the core distributed infrastructure business. See Note 15 to the financial statements under "Southern Company " for additional information. Other Operations and Maintenance Expenses Other operations and maintenance expenses for these other business activities decreased$35 million , or 15.2%, in 2020 as compared to the prior year. The decrease was primarily due to the sales of PowerSecure's utility infrastructure services business inJuly 2019 and its lighting business inDecember 2019 , partially offset by an increase at Southern Linc related to the design and construction of a fiber optic system. See Note 15 to the financial statements under "Southern Company " for additional information. Impairment Charges In 2019, goodwill and asset impairment charges totaling$50 million were recorded related to the sale of PowerSecure's utility infrastructure services business and in contemplation of the sale of its lighting business. See Note 15 to the financial statements under "Southern Company " for additional information. (Gain) Loss on Dispositions, Net The 2019 gain on dispositions, net primarily relates to the gain of$2.6 billion ($1.4 billion after tax) on the sale ofGulf Power . See Note 15 to the financial statements under "Southern Company " for additional information. II-16 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)Southern Company and Subsidiary Companies 2020 Annual Report Interest Expense Interest expense for these other business activities increased$97 million , or 18.8%, in 2020 as compared to the prior year primarily due to an increase in average outstanding long-term borrowings and fees associated with the extinguishment of debt at the parent company. See Note 8 to the financial statements for additional information. Impairment of Leveraged Leases Impairment charges totaling$206 million were recorded in 2020 related to leveraged lease investments atSouthern Holdings . See Notes 1 and 3 to the financial statements under "Leveraged Leases" and "Other Matters -Southern Company ," respectively, for additional information. Other Income (Expense), Net Other income (expense), net for these other business activities decreased$6 million , or 66.7%, in 2020 as compared to the prior year primarily due to a$32 million increase in charitable donations at the parent company, partially offset by a$15 million increase in leveraged lease income atSouthern Holdings , primarily due to an impairment charge in 2019, and a$9 million increase related to investment income atSouthern Holdings . Income Taxes (Benefit) Income taxes for these other business activities decreased$1.3 billion in 2020 as compared to the prior year primarily due to the tax impacts related to the sale ofGulf Power . See Note 10 to the financial statements and Note 15 to the financial statements under "Southern Company " for additional information.Alabama Power Alabama Power's 2020 net income after dividends on preferred stock was$1.15 billion , representing an$80 million , or 7.5%, increase over the previous year. The increase was primarily due to a decrease in operations and maintenance expenses, an increase in retail revenues associated with the impact of customer bill credits issued in 2019 related to the Tax Reform Legislation, and an increase in non-service cost-related retirement benefits income. These increases to income were partially offset by decreases in retail revenues associated with milder weather in 2020 when compared to 2019 and lower customer usage in the industrial and commercial sectors as a result of the COVID-19 pandemic. See Note 2 to the financial statements under "Alabama Power - Rate RSE" for additional information. A condensed income statement forAlabama Power follows: Increase (Decrease) 2020 from 2019 (in millions) Operating revenues$ 5,830 $ (295) Fuel 970 (142) Purchased power 319 (84) Other operations and maintenance 1,619 (202) Depreciation and amortization 812 19 Taxes other than income taxes 416 13 Total operating expenses 4,136 (396) Operating income 1,694 101 Allowance for equity funds used during construction 46
(6)
Interest expense, net of amounts capitalized 338
2
Other income (expense), net 100 54 Income taxes 337 67 Net income 1,165 80 Dividends on preferred stock 15
-
Net income after dividends on preferred stock
II-17
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
2020 2019
(in millions)
Retail - prior year $ 5,501
Estimated change resulting from -
Rates and pricing 51
Sales decline (50)
Weather (105)
Fuel and other cost recovery (184)
Retail - current year $ 5,213 $ 5,501
Wholesale revenues -
Non-affiliates 269 258
Affiliates 46 81
Total wholesale revenues 315 339
Other operating revenues 302 285
Total operating revenues $ 5,830 $ 6,125
Percent change (4.8) % 1.5 %
Retail revenues in 2020 were $5.2 billion . These revenues decreased $288
million , or 5.2%, in 2020 as compared to the prior year. The decrease in 2020
was primarily due to fuel and other cost recovery driven by decreases in
generation and the average cost of fuel, milder weather in 2020 when compared to
2019, and a decline in commercial and industrial sales due to social distancing
and safer-at-home guidelines related to the COVID-19 pandemic. These decreases
were partially offset by customer bill credits issued in 2019 related to the Tax
Reform Legislation and an increase in Rate CNP Compliance revenue in 2020.
See Note 2 to the financial statements under "Alabama Power - Rate RSE" and " -
Rate CNP Compliance" for additional information. See "Energy Sales" herein for a
discussion of changes in the volume of energy sold, including changes related to
sales decline and weather.
Electric rates include provisions to recognize the recovery of fuel costs,
purchased power costs, PPAs certificated by the Alabama PSC, and costs
associated with the NDR. Under these provisions, fuel and other cost recovery
revenues generally equal fuel and other cost recovery expenses and do not affect
net income. See Note 2 to the financial statements under "Alabama Power - Rate
ECR" for additional information.
Wholesale revenues from power sales to non-affiliated utilities were as follows:
2020 2019
(in millions)
Capacity and other $ 127 $ 102
Energy 142 156
Total non-affiliated $ 269 $ 258
Wholesale revenues from sales to non-affiliates will vary depending on fuel
prices, the market prices of wholesale energy compared to the cost of Alabama
Power's and the Southern Company system's generation, demand for energy within
the Southern Company system's electric service territory, and availability of
the Southern Company system's generation. Increases and decreases in energy
revenues that are driven by fuel prices are accompanied by an increase or
decrease in fuel costs and do not affect net income. Short-term opportunity
energy sales are also included in wholesale energy sales to non-affiliates.
These opportunity sales are made at market-based rates that generally provide a
margin above Alabama Power's variable cost to produce the energy.
In 2020, wholesale revenues from sales to non-affiliates increased $11 million ,
or 4.3%, as compared to the prior year primarily due to a $25 million increase
in non-affiliated capacity revenues as a result of a new power sales agreement
which began in
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
September 2020 , partially offset by a 17% decrease in the price of energy due to
lower natural gas prices. See Notes 2 and 15 to the financial statements under
"Alabama Power - Petition for Certificate of Convenience and Necessity" and
"Alabama Power ," respectively, for additional information.
Wholesale revenues from sales to affiliated companies will vary depending on
demand and the availability and cost of generating resources at each company.
These affiliate sales and purchases are made in accordance with the IIC, as
approved by the FERC . These transactions do not have a significant impact on
earnings since this energy is generally sold at marginal cost and energy
purchases are generally offset by energy revenues through Alabama Power's energy
cost recovery clause.
In 2020, wholesale revenues from sales to affiliates decreased $35 million , or
43.2%, as compared to the prior year. In 2020, KWH sales decreased 30% due to
decreased generation related to lower demand and the price of energy decreased
18.4% as a result of lower natural gas prices.
In 2020, other operating revenues increased $17 million , or 6.0%, as compared to
the prior year primarily due to increases in transmission and energy service
revenues and unregulated sales of products and services, partially offset by
decreased revenues resulting from the temporary suspension of customer
disconnections and late fees related to the COVID-19 pandemic.
Energy Sales
Changes in revenues are influenced heavily by the change in the volume of energy
sold from year to year. KWH sales for 2020 and the percent change from the prior
year were as follows:
2020
Total Total KWH Weather-Adjusted
KWHs Percent Change Percent Change
(in billions)
Residential 17.6 (3.5) % 2.7 %
Commercial 12.4 (8.3) (6.3)
Industrial 20.4 (8.0) (8.0)
Other 0.2 (11.3) (11.3)
Total retail 50.6 (6.6) (4.0) %
Wholesale
Non-affiliates 6.3 23.8
Affiliates 2.5 (30.0)
Total wholesale 8.8 1.9
Total energy sales 59.4 (5.4) %
Changes in retail energy sales are generally the result of changes in
electricity usage by customers, weather, and the number of customers. Revenues
attributable to changes in sales decreased in 2020 when compared to 2019 largely
due to the COVID-19 pandemic. In 2020, weather-adjusted residential KWH sales
were 2.7% higher compared to 2019 primarily due to COVID-19 pandemic impacts.
Weather-adjusted commercial KWH sales decreased 6.3% primarily due to lower
customer usage resulting from social distancing and safer-at-home guidelines
related to the COVID-19 pandemic. Industrial KWH sales decreased 8.0% primarily
as a result of disruptions in supply chain and business operations related to
the COVID-19 pandemic.
See "Operating Revenues" above for a discussion of significant changes in
wholesale revenues from sales to non-affiliates and wholesale revenues from
sales to affiliated companies related to changes in price and KWH sales.
Fuel and Purchased Power Expenses
The mix of fuel sources for generation of electricity is determined primarily by
the unit cost of fuel consumed, demand, and the availability of generating
units. Additionally, Alabama Power purchases a portion of its electricity needs
from the wholesale market.
II-19
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
2020 2019
Total generation (in billions of KWHs) 55.2
56.9
Total purchased power (in billions of KWHs) 6.9
9.5
Sources of generation (percent) - Coal 39 45 Nuclear 27 25 Gas 24 21 Hydro 10 9 Cost of fuel, generated (in cents per net KWH) - Coal 2.74 2.69 Nuclear 0.75 0.77 Gas 1.90 2.47
Average cost of fuel, generated (in cents per net KWH)(a) 1.92 2.11 Average cost of purchased power (in cents per net KWH)(b) 4.82 4.39
(a)KWHs generated by hydro are excluded from the average cost of fuel, generated. (b)Average cost of purchased power includes fuel, energy, and transmission purchased byAlabama Power for tolling agreements where power is generated by the provider. Fuel and purchased power expenses were$1.3 billion in 2020, a decrease of$226 million , or 14.9%, compared to 2019. The decrease was primarily due to a$189 million decrease related to the volume of KWHs purchased and generated and a$37 million net decrease in the average cost of fuel and purchased power. Fuel and purchased power energy transactions do not have a significant impact on earnings, since energy expenses are generally offset by energy revenues throughAlabama Power's energy cost recovery clause.Alabama Power , along with the Alabama PSC, continuously monitors the under/over recovered balance to determine whether adjustments to billing rates are required. See Note 2 to the financial statements under "Alabama Power - Rate ECR" for additional information. Fuel Fuel expenses were$970 million in 2020, a decrease of$142 million , or 12.8%, compared to 2019. The decrease was primarily due to a 23.1% decrease in the average cost of KWHs generated by natural gas, which excludes tolling agreements, a 15.6% decrease in the volume of KWHs generated by coal, and a 14.2% increase in the volume of KWHs generated by hydro.Purchased Power - Non-Affiliates Purchased power expense from non-affiliates was$191 million in 2020, a decrease of$12 million , or 5.9%, compared to 2019. This decrease was primarily due to a 6.4% decrease in the amount of energy purchased as a result of milder weather during 2020 as compared to 2019, partially offset by a 1.9% increase in the average cost per KWH purchased due to decreased generation from PPAs. Energy purchases from non-affiliates will vary depending on the market prices of wholesale energy as compared to the cost ofthe Southern Company system's generation, demand for energy withinthe Southern Company system's service territory, and the availability ofthe Southern Company system's generation.Purchased Power - Affiliates Purchased power expense from affiliates was$128 million in 2020, a decrease of$72 million , or 36.0%, compared to 2019. This decrease was primarily due to a 41.9% decrease in the amount of energy purchased primarily related to milder weather during 2020 as compared to 2019. This decrease was partially offset by a 10.3% increase in the average cost per KWH purchased due to decreased generation from PPAs. Energy purchases from affiliates will vary depending on demand for energy and the availability and cost of generating resources at each company withinthe Southern Company system. These purchases are made in accordance with the IIC or other contractual agreements, as approved by theFERC . II-20 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)Southern Company and Subsidiary Companies 2020 Annual Report Other Operations and Maintenance Expenses In 2020, other operations and maintenance expenses decreased$202 million , or 11.1%, as compared to the prior year. The decrease reflects the impact of cost containment activities implemented to help offset the effects of the recessionary economy resulting from the COVID-19 pandemic. The decrease was primarily due to decreases of$88 million in generation expenses,$27 million in vegetation management costs,$27 million in accruals to the NDR, and$20 million in Rate CNP Compliance-related expenses, as well as a$37 million increase in reliability NDR credits. See Note 2 to the financial statements under "Alabama Power - Rate NDR" and " - Rate CNP Compliance" for additional information. Other Income (Expense), Net Other income (expense), net increased$54 million , or 117.4%, in 2020 as compared to the prior year primarily due to an increase in non-service cost-related retirements benefits income. See Note 11 to the financial statements for additional information. Income Taxes Income taxes increased$67 million , or 24.8%, in 2020 as compared to the prior year primarily due to an increase in pre-tax net income and the application in 2019 of an Alabama PSC accounting order related to the Tax Reform Legislation. See Note 2 to the financial statements under "Alabama Power - Tax Reform Accounting Order" for additional information.Georgia Power Georgia Power's 2020 net income was$1.6 billion , representing a$145 million , or 8.4%, decrease from the previous year. The decrease was primarily due to after-tax charges totaling$242 million in 2020 related to the construction of Plant Vogtle Units 3 and 4, as well as lower retail revenues associated with milder weather as compared to 2019 and decreased customer usage resulting from the COVID-19 pandemic, partially offset by related cost containment activities and the impacts of accruals in 2019 for customer refunds. See Note 2 to the financial statements under "Georgia Power -Nuclear Construction " for additional information on the construction of Plant Vogtle Units 3 and 4. A condensed income statement forGeorgia Power follows: Increase (Decrease) 2020 from 2019 (in millions) Operating revenues$ 8,309 $ (99) Fuel 1,141 (303) Purchased power 1,049 (47) Other operations and maintenance 1,953 (19) Depreciation and amortization 1,425 444 Taxes other than income taxes 444 (10) Estimated loss on Plant Vogtle Units 3 and 4 325 325 Total operating expenses 6,337 390 Operating income 1,972 (489) Interest expense, net of amounts capitalized 425 16 Other income (expense), net 180 40 Income taxes 152 (320) Net income$ 1,575 $ (145) II-21
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
Operating Revenues
Operating revenues for 2020 were $8.3 billion , a $99 million decrease from 2019.
Details of operating revenues were as follows:
2020 2019
(in millions)
Retail - prior year $ 7,707
Estimated change resulting from -
Rates and pricing 462
Sales decline (71)
Weather (179)
Fuel cost recovery (310)
Retail - current year 7,609 $ 7,707
Wholesale revenues 115 140
Other operating revenues 585 561
Total operating revenues $ 8,309 $ 8,408
Percent change (1.2) % (0.1) %
Retail revenues of $7.6 billion in 2020 decreased $98 million , or 1.3%, compared
to 2019. The significant factors driving this change are shown in the preceding
table. The increase in rates and pricing was primarily due to an increase in
revenue recognized under the ECCR tariff effective January 1, 2020 as authorized
in the 2019 ARP and the impacts of accruals in 2019 for customer refunds related
to the Tax Reform Legislation and earnings in excess of the allowed retail ROE
range, as well as the rate pricing effects of decreased customer usage
throughout 2020 in the commercial and industrial classes. Partially offsetting
these increases were lower contributions from commercial and industrial
customers with variable demand-driven pricing. See Note 2 to the financial
statements under "Georgia Power - Rate Plans" for additional information.
See "Energy Sales" below for a discussion of changes in the volume of energy
sold, including changes related to the sales decline in 2020.
Electric rates include provisions to adjust billings for fluctuations in fuel
costs, including the energy component of purchased power costs. Under these fuel
cost recovery provisions, fuel revenues generally equal fuel expenses and do not
affect net income. See Note 2 to the financial statements under "Georgia Power -
Fuel Cost Recovery" for additional information.
Wholesale revenues from power sales were as follows:
2020 2019
(in millions)
Capacity and other $ 51 $ 55
Energy 64 85
Total $ 115 $ 140
Wholesale capacity revenues from PPAs are recognized in amounts billable under
the contract terms and provide for recovery of fixed costs and a return on
investment. Wholesale revenues from sales to non-affiliates will vary depending
on fuel prices, the market prices of wholesale energy compared to the cost of
Georgia Power's and the Southern Company system's generation, demand for energy
within the Southern Company system's electric service territory, and the
availability of the Southern Company system's generation. Increases and
decreases in energy revenues that are driven by fuel prices are accompanied by
an increase or decrease in fuel costs and do not have a significant impact on
net income. Short-term opportunity sales are made at market-based rates that
generally provide a margin above Georgia Power's variable cost of energy.
Wholesale revenues from sales to affiliated companies will vary depending on
demand and the availability and cost of generating resources at each company.
These affiliate sales are made in accordance with the IIC, as approved by the
FERC . These transactions do not have a significant impact on earnings since this
energy is generally sold at marginal cost.
In 2020, wholesale revenues decreased $25 million , or 17.9%, as compared to 2019
primarily due to the expiration of a non-affiliate PPA and lower energy prices.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
Other operating revenues increased $24 million , or 4.3%, in 2020 from the prior
year primarily due to increases of $33 million in unregulated sales associated
with power delivery construction and maintenance contracts and outdoor lighting,
$8 million in pole attachment revenues, and $6 million in open access
transmission tariff sales, partially offset by decreases of $13 million largely
resulting from the temporary suspension of customer disconnections and late fees
related to the COVID-19 pandemic and $10 million from unregulated sales
associated with energy conservation projects.
Energy Sales
Changes in revenues are influenced heavily by the change in the volume of energy
sold from year to year. KWH sales for 2020 and the percent change from the prior
year were as follows:
2020
Total Total KWH Weather-Adjusted
KWHs Percent Change Percent Change
(in billions)
Residential 27.8 (1.3) % 3.4 %
Commercial 30.5 (7.1) (5.3)
Industrial 22.0 (4.8) (4.5)
Other 0.5 (9.3) (9.1)
Total retail 80.8 (4.6) (2.2) %
Wholesale 2.7 (9.8)
Total energy sales 83.5 (4.8) %
Changes in retail energy sales are generally the result of changes in
electricity usage by customers, weather, and the number of customers. Revenues
attributable to changes in sales decreased in 2020 when compared to 2019 largely
due to the COVID-19 pandemic. In 2020, weather-adjusted residential KWH sales
increased 3.4% compared to 2019 primarily due to customer growth and an increase
in average customer usage, primarily due to work-from-home policies.
Weather-adjusted commercial KWH sales decreased 5.3% primarily due to lower
customer usage resulting from changes in consumer and business behavior in
response to the COVID-19 pandemic. Weather-adjusted industrial KWH sales
decreased 4.5% primarily as a result of disruptions in supply chain and business
operations related to the COVID-19 pandemic.
See "Operating Revenues" above for a discussion of significant changes in
wholesale sales to non-affiliates and affiliated companies.
Fuel and Purchased Power Expenses
Fuel costs constitute one of the largest expenses for Georgia Power . The mix of
fuel sources for the generation of electricity is determined primarily by
demand, the unit cost of fuel consumed, and the availability of generating
units. Additionally, Georgia Power purchases a portion of its electricity needs
from the wholesale market.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
2020 2019
Total generation (in billions of KWHs) 56.8
62.6
Total purchased power (in billions of KWHs) 30.5
29.1
Sources of generation (percent) - Gas 52 47 Nuclear 27 26 Coal 16 24 Hydro and other 5 3 Cost of fuel, generated (in cents per net KWH) - Gas 2.19 2.42 Nuclear 0.80 0.81 Coal 3.23 3.09
Average cost of fuel, generated (in cents per net KWH) 1.96 2.16 Average cost of purchased power (in cents per net KWH)(*) 3.69 4.21
(*) Average cost of purchased power includes fuel purchased byGeorgia Power for tolling agreements where power is generated by the provider. Fuel and purchased power expenses were$2.2 billion in 2020, a decrease of$350 million , or 13.8%, compared to 2019. The decrease was due to a decrease of$215 million related to the average cost of fuel and purchased power and a net decrease of$135 million related to the volume of KWHs generated and purchased. Fuel and purchased power energy transactions do not have a significant impact on earnings since these fuel expenses are generally offset by fuel revenues throughGeorgia Power's fuel cost recovery mechanism. See Note 2 to the financial statements under "Georgia Power - Fuel Cost Recovery" for additional information. Fuel Fuel expense was$1.1 billion in 2020, a decrease of$303 million , or 21.0%, compared to 2019. The decrease was primarily due to a 40.3% decrease in the volume of KWHs generated by coal and a 9.5% decrease in the average cost of natural gas per KWH generated.Purchased Power - Non-Affiliates Purchased power expense from non-affiliates was$540 million in 2020, an increase of$19 million , or 3.6%, compared to 2019. The increase was primarily due to an increase of 4.7% in the volume of KWHs purchased primarily due to the availability of lower cost market resources, partially offset by a 2.8% decrease in the average cost per KWH purchased primarily resulting from lower energy prices. Energy purchases from non-affiliates will vary depending on the market prices of wholesale energy as compared to the cost ofthe Southern Company system's generation, demand for energy withinthe Southern Company system's electric service territory, and the availability ofthe Southern Company system's generation.Purchased Power - Affiliates Purchased power expense from affiliates was$509 million in 2020, a decrease of$66 million , or 11.5%, compared to 2019. The decrease was primarily due to the expiration of a PPA and a 19.9% decrease in the average cost per KWH purchased primarily resulting from lower energy prices, partially offset by an increase of 4.4% in the volume of KWHs purchased due to lower costSouthern Company system resources as compared to availableGeorgia Power -owned generation. Energy purchases from affiliates will vary depending on the demand and the availability and cost of generating resources at each company withinthe Southern Company system. These purchases are made in accordance with the IIC or other contractual agreements, all as approved by theFERC . Other Operations and Maintenance Expenses In 2020, other operations and maintenance expenses decreased$19 million , or 1.0%, compared to 2019. The decrease was primarily due to decreases of$85 million in distribution- and transmission-related expenses,$78 million associated with II-24 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)Southern Company and Subsidiary Companies 2020 Annual Report generation maintenance and scheduled outages,$19 million in customer service and sales expense, and$12 million associated with generation environmental projects. These decreases reflect the impacts of cost containment activities implemented to help offset the effects of the recessionary economy resulting from the COVID-19 pandemic. Other expense reductions include a decrease of$15 million related to an adjustment in 2019 forFERC fees following the conclusion of a multi-year audit of headwater benefits associated with hydro facilities and an$11 million increase in nuclear property insurance refunds. Partially offsetting these decreases were increases of$183 million in storm damage recovery as authorized in the 2019 ARP and$20 million in employee benefit expenses. See Note 2 to the financial statements under "Georgia Power - Storm Damage Recovery" for additional information. Depreciation and Amortization Depreciation and amortization increased$444 million , or 45.3%, in 2020 compared to 2019. The increase primarily reflects increased amortization of regulatory assets related to CCR AROs of$203 million and higher depreciation of$178 million as authorized in the 2019 ARP. Also contributing to the increase was a$67 million increase in depreciation associated with additional plant in service. See Notes 2 and 5 to the financial statements under "Georgia Power - Rate Plans - 2019 ARP" and "Depreciation and Amortization," respectively, for additional information. Estimated Loss on Plant Vogtle Units 3 and 4 In the second and fourth quarters 2020, estimated probable losses of$149 million and$176 million , respectively, were recorded to reflectGeorgia Power's revised total project capital cost forecast to complete construction and start-up of Plant Vogtle Units 3 and 4. See Note 2 to the financial statements under "Georgia Power -Nuclear Construction " for additional information. Interest Expense, Net of Amounts Capitalized In 2020, interest expense, net of amounts capitalized increased$16 million , or 3.9%, compared to 2019. The increase was primarily due to a$36 million increase in interest expense associated with an increase in average outstanding long-term borrowings, partially offset by a$20 million increase in amounts capitalized in connection with the construction of Plant Vogtle Units 3 and 4. See FINANCIAL CONDITION AND LIQUIDITY - "Sources of Capital" and "Financing Activities" herein for additional information on borrowings and Note 2 to the financial statements under "Georgia Power -Nuclear Construction " for additional information regarding Plant Vogtle Units 3 and 4. Other Income (Expense), Net In 2020, other income (expense), net increased$40 million , or 28.6%, compared to the prior year primarily due to a$42 million increase in non-service cost-related retirement benefits income and a$23 million increase in AFUDC equity primarily associated with the construction of Plant Vogtle Units 3 and 4, partially offset by a$20 million increase in charitable donations. See Note 11 to the financial statements for additional information onGeorgia Power's net periodic pension and other postretirement benefit costs and Note 2 to the financial statements under "Georgia Power -Nuclear Construction " for additional information regarding Plant Vogtle Units 3 and 4. Income Taxes Income taxes decreased$320 million , or 67.8%, in 2020 compared to the prior year primarily as a result of the flowback of excess deferred income taxes in 2020 as authorized in the 2019 ARP and lower pre-tax earnings, which includes the charges in the second and fourth quarters 2020 associated with the construction of Plant Vogtle Units 3 and 4. See Note 2 to the financial statements under "Georgia Power -Nuclear Construction " and Note 10 to the financial statements for additional information.Mississippi Power Mississippi Power's net income was$152 million in 2020 compared to$139 million in 2019. The increase was primarily due to a decrease in operations and maintenance expenses primarily associated with a 2019 accrual for the closeout of aDOE contract related to theKemper County energy facility, a decrease in income taxes associated with the flowback of excess deferred income taxes, and a decrease in amortization associated withECO Plan regulatory assets, substantially offset by a decrease in revenues as a result of a base rate reduction that became effective for the first billing cycle ofApril 2020 , as well as a decrease in customer usage due to the COVID-19 pandemic. II-25 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Increase
(Decrease)
2020 from 2019
(in millions)
Operating revenues $ 1,172 $ (92)
Fuel 350 (57)
Purchased power 22 2
Other operations and maintenance 284 (23)
Depreciation and amortization 183 (9)
Taxes other than income taxes 124 11
Total operating expenses 963 (76)
Operating income 209 (16)
Interest expense, net of amounts capitalized 60 (9)
Other income (expense), net 17 4
Income taxes (benefit) 14 (16)
Net income $ 152 $ 13
Operating Revenues
Operating revenues for 2020 were $1.2 billion , a $92 million decrease from 2019.
Details of operating revenues were as follows:
2020 2019
(in millions)
Retail - prior year $ 877
Estimated change resulting from -
Rates and pricing (29)
Sales decline (11)
Weather (5)
Fuel and other cost recovery (11)
Retail - current year 821 $ 877
Wholesale revenues -
Non-affiliates 215 237
Affiliates 111 132
Total wholesale revenues 326 369
Other operating revenues 25 18
Total operating revenues $ 1,172 $ 1,264
Percent change (7.3) % (0.1) %
Total retail revenues for 2020 decreased $56 million , or 6.4%, compared to 2019
primarily due to decreases in rates in accordance with the Mississippi Power
Rate Case Settlement Agreement, a decrease in customer usage due to the COVID-19
pandemic, and a decrease in fuel and other cost recovery revenues primarily as a
result of lower recoverable fuel costs.
See Note 2 to the financial statements under "Mississippi Power - 2019 Base Rate
Case" for additional information. See "Energy Sales" below for a discussion of
changes in the volume of energy sold, including changes related to sales and
weather.
Electric rates for Mississippi Power include provisions to adjust billings for
fluctuations in fuel costs, including the energy component of purchased power
costs. Under these provisions, fuel revenues generally equal fuel expenses,
including the energy component of purchased power costs, and do not affect net
income. Recoverable fuel costs include fuel and purchased power expenses reduced
by the fuel and emissions portion of wholesale revenues from energy sold to
customers outside Mississippi
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
2020 2019
(in millions)
Capacity and other $ 3 $ 3
Energy 212 234
Total non-affiliated $ 215 $ 237
Wholesale revenues from sales to non-affiliates will vary depending on fuel
prices, the market prices of wholesale energy compared to the cost of
Mississippi Power's and the Southern Company system's generation, demand for
energy within the Southern Company system's electric service territory, and the
availability of the Southern Company system's generation. Increases and
decreases in energy revenues that are driven by fuel prices are accompanied by
an increase or decrease in fuel costs and do not have a significant impact on
net income. In addition, Mississippi Power provides service under long-term
contracts with rural electric cooperative associations and a municipality
located in southeastern Mississippi under full requirements cost-based electric
tariffs which are subject to regulation by the FERC . The contracts with these
wholesale customers represented 15.3% of Mississippi Power's total operating
revenues in 2020 and are generally subject to 10-year rolling cancellation
notices. Historically, these wholesale customers have acted as a group and any
changes in contractual relationships for one customer are likely to be followed
by the other wholesale customers. Short-term opportunity energy sales are also
included in sales for resale to non-affiliates. These opportunity sales are made
at market-based rates that generally provide a margin above Mississippi Power's
variable cost to produce the energy.
Wholesale revenues from sales to non-affiliates decreased $22 million , or 9.3%,
compared to 2019. This decrease was primarily due to decreases in revenue from
MRA customers as a result of lower fuel costs, milder weather, decreased
customer usage as a result of the COVID-19 pandemic, and fewer opportunity
sales.
Wholesale revenues from sales to affiliates will vary depending on demand and
the availability and cost of generating resources at each company. These
affiliate sales are made in accordance with the IIC, as approved by the FERC .
These transactions do not have a significant impact on earnings since this
energy is generally sold at marginal cost.
Wholesale revenues from sales to affiliates decreased $21 million , or 15.9%, in
2020 compared to 2019. This decrease was primarily due to a $34 million decrease
associated with lower natural gas prices, partially offset by a $13 million
increase associated with higher KWH sales due to the dispatch of Mississippi
Power's generation resources to serve the Southern Company system's territorial
load.
Other operating revenues increased $7 million , or 38.9%, in 2020 as compared to
the prior year primarily due to an increase in open access transmission tariff
revenues.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
Energy Sales
Changes in revenues are influenced heavily by the change in the volume of energy
sold from year to year. KWH sales for 2020 and the percent change from the prior
year were as follows:
2020
Total Total KWH
KWHs Percent Change Weather-Adjusted Percent Change
(in millions)
Residential 2,023 (1.9) % 3.3 %
Commercial 2,513 (7.4) (7.0)
Industrial 4,558 (4.9) (4.9)
Other 35 (3.3) (3.3)
Total retail 9,129 (5.0) (3.8) %
Wholesale
Non-affiliated 3,784 (4.6)
Affiliated 5,226 9.8
Total wholesale 9,010 3.3
Total energy sales 18,139 (1.1) %
Changes in retail energy sales are generally the result of changes in
electricity usage by customers, weather, and the number of customers. Revenues
attributable to changes in sales decreased in 2020 when compared to 2019 largely
due to the COVID-19 pandemic. Weather-adjusted residential KWH sales increased
3.3% compared to 2019 primarily due to an increase in average customer usage as
a result of changes in customer behavior and work-from-home policies in response
to the COVID-19 pandemic. Weather-adjusted commercial KWH sales decreased 7.0%
primarily due to lower customer usage resulting from changes in consumer and
business behavior, including the temporary closure of casinos, in response to
the COVID-19 pandemic. Industrial KWH sales decreased 4.9% primarily as a result
of disruptions in supply chain and business operations driven by the COVID-19
pandemic and the overall decrease in business activity due to the resulting
recession.
See "Operating Revenues" above for a discussion of significant changes in
wholesale revenues to affiliated companies.
Fuel and Purchased Power Expenses
The mix of fuel sources for generation of electricity is determined primarily by
demand, the unit cost of fuel consumed, and the availability of generating
units. Additionally, Mississippi Power purchases a portion of its electricity
needs from the wholesale market.
Details of Mississippi Power's generation and purchased power were as follows:
2020 2019
Total generation (in millions of KWHs) 17,833
18,269
Total purchased power (in millions of KWHs) 688
529
Sources of generation (percent) - Gas 94
94
Coal 6
6
Cost of fuel, generated (in cents per net KWH) - Gas 1.97
2.26
Coal 3.62
4.05
Average cost of fuel, generated (in cents per net KWH) 2.08 2.37 Average cost of purchased power (in cents per net KWH) 3.27 3.71
Fuel and purchased power expenses were$372 million in 2020, a decrease of$55 million , or 12.9%, as compared to the prior year. The decrease was primarily due to the lower average cost of natural gas. II-28 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)Southern Company and Subsidiary Companies 2020 Annual Report Fuel and purchased power energy transactions do not have a significant impact on earnings, since energy expenses are generally offset by energy revenues throughMississippi Power's fuel cost recovery clauses. See Note 2 to the financial statements under "Mississippi Power - Fuel Cost Recovery and Note 1 to the financial statements under "Fuel Costs" for additional information. Fuel Fuel expense decreased$57 million , or 14.0%, in 2020 compared to 2019 primarily due to a 12.6% decrease in the average cost of natural gas per KWH generated, a 10.7% decrease in the average cost of coal per KWH generated, and a 3.0% decrease in the volume of KWHs generated by natural gas.Purchased Power Purchased power expense increased$2 million , or 10.0%, in 2020 compared to 2019. The increase was primarily the result of a 30.2% increase in the volume of KWHs purchased, partially offset by an 11.9% decrease in the average cost per KWH purchased. Energy purchases will vary depending on the market prices of wholesale energy as compared to the cost ofthe Southern Company system's generation, demand for energy withinthe Southern Company system's service territory, and the availability ofthe Southern Company system's generation. These purchases are made in accordance with the IIC or other contractual agreements, as approved by theFERC . Other Operations and Maintenance Expenses Other operations and maintenance expenses decreased$23 million , or 7.5%, in 2020 compared to the prior year. The decrease primarily reflects the impacts of a$23 million accrual in 2019 for the closeout of aDOE contract related to theKemper County energy facility. See Note 3 to the financial statements under "Other Matters -Mississippi Power - Kemper County Energy Facility" for additional information. Depreciation and Amortization Depreciation and amortization decreased$9 million , or 4.7%, in 2020 compared to 2019. The decrease was primarily due to a decrease in regulatory asset amortization of$21 million primarily as a result of completing amortization of theECO Plan regulatory asset in 2019. This decrease was partially offset by an increase in depreciation of$12 million related to additional plant in service and an increase in depreciation rates in accordance with theMississippi Power Rate Case Settlement Agreement. See Note 2 to the financial statements under "Mississippi Power - 2019 Base Rate Case" and " - Environmental Compliance Overview Plan" for additional information. Taxes Other Than Income Taxes Taxes other than income taxes increased$11 million , or 9.7%, in 2020 compared to 2019 primarily due to an increase in ad valorem taxes. Interest Expense, Net of Amounts Capitalized Interest expense, net of amounts capitalized decreased$9 million , or 13.0%, in 2020 compared to 2019 primarily as the result of a decrease in outstanding long-term borrowings. See Note 8 to the financial statements for additional information. Income Taxes (Benefit) Income tax expense decreased$16 million , or 53.3%, in 2020 compared to 2019 primarily due to the flowback of excess deferred income taxes as a result of the Mississippi Power Rate Case Settlement Agreement. See Note 2 to the financial statements under "Mississippi Power - 2019 Base Rate Case" and Note 10 to the financial statements for additional information.Southern Power Net income attributable toSouthern Power for 2020 was$238 million , a$101 million decrease from 2019, primarily due to the$88 million after-tax gain on the sale of Plant Nacogdoches in the second quarter 2019, partially offset by the$23 million after-tax gain on the sale of Plant Mankato in the first quarter 2020. In addition, the decrease reflects the reduced net income resulting from these dispositions. See Note 15 to the financial statements under "Southern Power - Sales of Natural Gas and Biomass Plants" for additional information. II-29 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Increase
(Decrease)
2020 from 2019
(in millions)
Operating revenues $ 1,733 $ (205)
Fuel 470 (107)
Purchased power 74 (34)
Other operations and maintenance 353 (6)
Depreciation and amortization 494 15
Taxes other than income taxes 39 (1)
Asset impairment - (3)
(Gain) loss on dispositions, net (39) (16)
Total operating expenses 1,391 (152)
Operating income 342 (53)
Interest expense, net of amounts capitalized 151 (18)
Other income (expense), net 19 (28)
Income taxes (benefit) 3 59
Net income 207 (122)Net income (loss) attributable to noncontrolling interests (31)
(21)
Net income attributable to Southern Power$ 238
Operating Revenues Total operating revenues include PPA capacity revenues, which are derived primarily from long-term contracts involving natural gas facilities and a biomass generating facility (through the second quarter 2019 sale of Plant Nacogdoches), and PPA energy revenues fromSouthern Power's generation facilities. To the extentSouthern Power has capacity not contracted under a PPA, it may sell power into an accessible wholesale market, or, to the extent those generation assets are part of theFERC -approved IIC, it may sell power intothe Southern Company power pool. Natural Gas and Biomass Capacity and Energy Revenue Capacity revenues generally represent the greatest contribution to operating income and are designed to provide recovery of fixed costs plus a return on investment. Energy is generally sold at variable cost or is indexed to published natural gas indices. Energy revenues will vary depending on the energy demand ofSouthern Power's customers and their generation capacity, as well as the market prices of wholesale energy compared to the cost ofSouthern Power's energy. Energy revenues also include fees for support services, fuel storage, and unit start charges. Increases and decreases in energy revenues under PPAs that are driven by fuel or purchased power prices are accompanied by an increase or decrease in fuel and purchased power costs and do not have a significant impact on net income. Solar and Wind Energy RevenueSouthern Power's energy sales from solar and wind generating facilities are predominantly through long-term PPAs that do not have capacity revenue. Customers either purchase the energy output of a dedicated renewable facility through an energy charge or pay a fixed price related to the energy generated from the respective facility and sold to the grid. As a result,Southern Power's ability to recover fixed and variable operations and maintenance expenses is dependent upon the level of energy generated from these facilities, which can be impacted by weather conditions, equipment performance, transmission constraints, and other factors. See FUTURE EARNINGS POTENTIAL - "Southern Power's Power Sales Agreements" herein for additional information regardingSouthern Power's PPAs. II-30 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
2020 2019
(in millions)
PPA capacity revenues $ 384 $ 482
PPA energy revenues 1,019 1,081
Total PPA revenues 1,403 1,563
Non-PPA revenues 316 363
Other revenues 14 12
Total operating revenues $ 1,733 $ 1,938
Operating revenues for 2020 were $1.7 billion , a $205 million , or 11%, decrease
from 2019. The decrease in operating revenues was primarily due to the
following:
•PPA capacity revenues decreased $98 million , or 20%, primarily due to decreases
of $72 million related to the dispositions of Plant Nacogdoches in the second
quarter 2019 and Plant Mankato in the first quarter 2020 and $24 million from
the contractual expiration of an affiliate natural gas PPA.
•PPA energy revenues decreased $62 million , or 6%, primarily due to a $125
million decrease in sales from natural gas facilities resulting from an $89
million decrease in the volume of KWHs sold due to decreased demand and a $36
million decrease in the price of fuel and purchased power. This decrease was
partially offset by increases of $33 million in sales primarily driven by the
volume of KWHs generated by solar and wind facilities and $30 million in sales
from fuel cell generation acquired in 2019.
•Non-PPA revenues decreased $47 million , or 13%, due to a $99 million decrease
in the market price of energy, partially offset by a $52 million increase in the
volume of KWHs sold through short-term sales.
Fuel and Purchased Power Expenses
Details of Southern Power's generation and purchased power were as follows:
Total Total
KWHs Total KWH % Change KWHs
2020 2019
(in billions of KWHs)
Generation 44 47
Purchased power 3 3
Total generation and purchased power 47 (6)% 50
Total generation and purchased power (excluding solar, wind, and tolling agreements)
28 (3)% 29
Southern Power's PPAs for natural gas generation generally provide that the
purchasers are responsible for either procuring the fuel (tolling agreements) or
reimbursing Southern Power for substantially all of the cost of fuel relating to
the energy delivered under such PPAs. Consequently, changes in such fuel costs
are generally accompanied by a corresponding change in related fuel revenues and
do not have a significant impact on net income. Southern Power is responsible
for the cost of fuel for generating units that are not covered under PPAs. Power
from these generating units is sold into the wholesale market or into the
Southern Company power pool for capacity owned directly by Southern Power .
Purchased power expenses will vary depending on demand, availability, and the
cost of generating resources throughout the Southern Company system and other
contract resources. Load requirements are submitted to the Southern Company
power pool on an hourly basis and are fulfilled with the lowest cost
alternative, whether that is generation owned by Southern Power , an affiliate
company, or external parties. Such purchased power costs are generally recovered
through PPA revenues.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
Details of Southern Power's fuel and purchased power expenses were as follows:
2020 2019
(in millions)
Fuel $ 470 $ 577
Purchased power 74 108
Total fuel and purchased power expenses
In 2020, total fuel and purchased power expenses decreased$141 million , or 21%, compared to 2019. Fuel expense decreased$107 million , or 19%, due to an$82 million decrease in the average cost of fuel per KWH generated and a$25 million decrease associated with the volume of KWHs generated. Purchased power expense decreased$34 million , or 31%, due to a$21 million decrease associated with the average cost of purchased power and a$13 million decrease associated with the volume of KWHs purchased. (Gain) Loss on Dispositions, Net In 2020, gain on dispositions, net increased$16 million , or 70%, compared to 2019 reflecting the sale of Plant Mankato in the first quarter 2020 and the sale of Plant Nacogdoches in the second quarter 2019. See Note 15 to the financial statements under "Southern Power - Sales of Natural Gas and Biomass Plants" for additional information. Interest Expense, Net of Amounts Capitalized In 2020, interest expense, net of amounts capitalized decreased$18 million , or 11%, compared to 2019, primarily due to a decrease in the amount of outstanding debt. See Note 8 to the financial statements for additional information. Other Income (Expense), Net In 2020, other income (expense), net decreased$28 million , or 60%, compared to 2019 primarily due to a$36 million gain arising from a litigation settlement in 2019, partially offset by the resolution of certain related contingencies in the third quarter 2020. Income Taxes (Benefit) In 2020, income tax expense was$3 million compared to a$56 million benefit for 2019, a change of$59 million , primarily due to a$75 million income tax benefit in 2019 resulting from ITCs recognized upon the sale of Plant Nacogdoches, partially offset by a decrease in income tax expense as a result of lower pre-tax earnings in 2020. See Notes 1, 10, and 15 to the financial statements under "Income Taxes," "Effective Tax Rate," and "Southern Power ," respectively, for additional information. Net Income (Loss) Attributable to Noncontrolling Interests In 2020, net loss attributable to noncontrolling interests increased$21 million compared to 2019. The increased loss was primarily due to an allocation to the noncontrolling interest partner of approximately$26 million of income related to a litigation settlement in 2019.Southern Company Gas Operating MetricsSouthern Company Gas continues to focus on several operating metrics, including Heating Degree Days, customer count, and volumes of natural gas sold.Southern Company Gas measures weather and the effect on its business using Heating Degree Days. Generally, increased Heating Degree Days result in higher demand for natural gas onSouthern Company Gas' distribution system.Southern Company Gas has various regulatory mechanisms, such as weather and revenue normalization and straight-fixed-variable rate design, which limit its exposure to weather changes within typical ranges in each of its utility's respective service territory, includingNicor Gas following the approval of a revenue decoupling mechanism for residential customers in its base rate case that concluded in 2019.Southern Company Gas also utilizes weather hedges to limit the negative income impacts in the event of warmer-than-normal weather. The number of customers served by gas distribution operations and gas marketing services can be impacted by natural gas prices, economic conditions, and competition from alternative fuels. Gas distribution operations and gas marketing services' customers are primarily located inGeorgia andIllinois . II-32 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)Southern Company and Subsidiary Companies 2020 AnnualReport Southern Company Gas' natural gas volume metrics for gas distribution operations and gas marketing services illustrate the effects of weather and customer demand for natural gas. Wholesale gas services' physical sales volumes represent the daily average natural gas volumes sold to its customers. Seasonality of Results During the Heating Season, natural gas usage and operating revenues are generally higher as more customers are connected to the gas distribution systems and natural gas usage is higher in periods of colder weather. Occasionally in the summer, wholesale gas services' operating revenues are impacted due to peak usage by power generators in response to summer energy demands.Southern Company Gas' base operating expenses, excluding cost of natural gas, bad debt expense, and certain incentive compensation costs, are incurred relatively evenly throughout the year. Seasonality also affects the comparison of certain balance sheet items across quarters, including receivables, unbilled revenues, natural gas for sale, and notes payable. However, these items are comparable when reviewingSouthern Company Gas' annual results. Thus,Southern Company Gas' operating results can vary significantly from quarter to quarter as a result of seasonality, which is illustrated in the table below. Percent Generated During Heating Season Net Operating Revenues Income 2020 67.6 % 85.6 % 2019 68.7 % 86.8 % Net Income Net income attributable toSouthern Company Gas in 2020 was$590 million , an increase of$5 million , or 0.9%, compared to the prior year. This increase was primarily due to impairment charges in 2019 of$69 million related toJefferson Island and$17 million in contemplation of the sale of interests in Pivotal LNG and Atlantic Coast Pipeline, a$16 million gain in 2020 related to the sale ofJefferson Island , and a$53 million increase at gas distribution operations primarily due to base rate increases for all of the natural gas distribution utilities and continued investment in infrastructure replacement programs, partially offset by reduced flowback of excess deferred income taxes atAtlanta Gas Light in 2020. These increases were partially offset by a$149 million decrease at wholesale gas services in 2020 primarily due to lower commercial activity and lower derivative gains. See Note 2 to the financial statements under "Southern Company Gas " for additional information. A condensed income statement forSouthern Company Gas follows: Increase (Decrease) from 2020 2019 (in millions) Operating revenues$ 3,434 $ (358) Cost of natural gas 972 (347) Other operations and maintenance 966 78 Depreciation and amortization 500 13 Taxes other than income taxes 206 (7) Impairment charges - (115) (Gain) loss on dispositions, net (22) (22) Total operating expenses 2,622 (400) Operating income 812 42 Earnings from equity method investments 141 (16) Interest expense, net of amounts capitalized 231 (1) Other income (expense), net 41 21 Income taxes 173 43 Net Income$ 590 $ 5 II-33
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Southern Company and Subsidiary Companies 2020 Annual Report
Operating Revenues
Operating revenues in 2020 were $3.4 billion , a $358 million decrease compared
to 2019. Details of operating revenues were as follows:
2020
(in millions)
Operating revenues - prior year $ 3,792
Estimated change resulting from -
Infrastructure replacement programs and base rate changes 186
Gas costs and other cost recovery
(319)
Wholesale gas services (220)
Other (5)
Operating revenues - current year $ 3,434
Percent change (9.4) %
Revenues at the natural gas distribution utilities increased in 2020 compared to
the prior year due to base rate increases and continued investments recovered
through infrastructure replacement programs, including increases of $107 million
at Nicor Gas and $68 million at Atlanta Gas Light . See Note 2 to the financial
statements under "Southern Company Gas " for additional information.
Revenues associated with gas costs and other cost recovery decreased in 2020
compared to the prior year primarily due to lower natural gas prices and lower
sales volumes as a result of warmer weather. The natural gas distribution
utilities have weather or revenue normalization mechanisms that mitigate revenue
fluctuations from customer consumption changes. Natural gas distribution rates
include provisions to adjust billings for fluctuations in natural gas costs.
Therefore, gas costs recovered through natural gas revenues generally equal the
amount expensed in cost of natural gas and do not affect net income from gas
distribution operations. See "Cost of Natural Gas" herein for additional
information.
Revenues from wholesale gas services decreased in 2020 primarily due to lower
derivative gains and decreased commercial activity as a result of warmer
weather. See "Segment Information - Wholesale Gas Services" herein for
additional information.
Heating Degree Days
During Heating Season, natural gas usage and operating revenues are generally
higher. Weather typically does not have a significant net income impact other
than during the Heating Season. The following table presents Heating Degree Days
information for Illinois and Georgia , the primary locations where Southern
Company Gas' operations are impacted by weather.
Years Ended December 31, 2020 vs. normal 2020 vs. 2019
Normal(a) 2020 2019 (warmer) (warmer)
(in thousands)
Illinois(b) 5,777 5,477 6,136 (5.2) % (10.7) %
Georgia 2,483 2,122 2,157 (14.5) % (1.6) %
(a)Normal represents the 10-year average from January 1, 2010 through December
31, 2019 for Illinois at Chicago Midway International Airport and for Georgia at
Atlanta Hartsfield-Jackson International Airport , based on information obtained
from the National Oceanic and Atmospheric Administration , National Climatic Data
Center .
(b)Heating Degree Days in Illinois had a limited financial impact in 2020 and
the impact is expected to be limited in future years. In October 2019 , Nicor Gas
received approval for a volume balancing adjustment, a revenue decoupling
mechanism for residential customers that provides a monthly benchmark level of
revenue per rate class for recovery.
Southern Company Gas hedged its exposure to warmer-than-normal weather in
Illinois for gas distribution operations and in Illinois and Georgia for gas
marketing services. The remaining impacts of weather on earnings were
immaterial.
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Southern Company and Subsidiary Companies 2020 Annual Report
Customer Count
The following table provides the number of customers served by Southern Company
Gas at December 31, 2020 and 2019:
2020 2019
(in thousands, except market share %)
Gas distribution operations 4,308 4,277
Gas marketing services
Energy customers(*) 666 631
Market share of energy customers in Georgia 28.9 % 28.9 %
(*)Gas marketing services' customers are primarily located in Georgia and
Illinois . December 31, 2020 also includes approximately 50,000 customers in Ohio
contracted through an annual auction process to serve for 12 months beginning
April 1, 2020 .
Southern Company Gas anticipates continued customer growth as it expects
continued low natural gas prices. Southern Company Gas uses a variety of
targeted marketing programs to attract new customers and to retain existing
customers.
Cost of Natural Gas
Excluding Atlanta Gas Light , which does not sell natural gas to end-use
customers, gas distribution operations charges its utility customers for natural
gas consumed using natural gas cost recovery mechanisms set by the applicable
state regulatory agencies. Under these mechanisms, all prudently-incurred
natural gas costs are passed through to customers without markup, subject to
regulatory review. Gas distribution operations defers or accrues the difference
between the actual cost of natural gas and the amount of commodity revenue
earned in a given period. The deferred or accrued amount is either billed or
refunded to customers prospectively through adjustments to the commodity rate.
Deferred natural gas costs are reflected as regulatory assets and accrued
natural gas costs are reflected as regulatory liabilities. Therefore, gas costs
recovered through natural gas revenues generally equal the amount expensed in
cost of natural gas and do not affect net income from gas distribution
operations. Cost of natural gas at gas distribution operations represented 88.3%
of the total cost of natural gas for 2020.
Gas marketing services customers are charged for actual and estimated natural
gas consumed. Cost of natural gas includes the cost of fuel and associated
transportation costs, lost and unaccounted for gas, adjustments to reduce the
value of inventories to market value, if applicable, and gains and losses
associated with certain derivatives.
In 2020, cost of natural gas was $1.0 billion , a decrease of $347 million , or
26.3%, compared to the prior year, which reflects a 23.6% decrease in natural
gas prices compared to 2019 and decreased volumes primarily as a result of
warmer weather.
Volumes of Natural Gas Sold
The following table details the volumes of natural gas sold during all periods
presented.
2020 vs. 2019
2020 2019 % Change
Gas distribution operations (mmBtu in millions)
Firm 623 677 (8.0) %
Interruptible 92 92 - %
Total 715 769 (7.0) %
Wholesale gas services (mmBtu in millions/day)
Daily physical sales 6.9 6.4 7.8 %
Gas marketing services (mmBtu in millions)
Firm:
Georgia 33 33 - %
Illinois 9 12 (25.0) %
Other 13 15 (13.3) %
Interruptible large commercial and industrial 14 14
- %
Total 69 74 (6.8) %
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Southern Company and Subsidiary Companies 2020 Annual Report
Other Operations and Maintenance Expenses
In 2020, other operations and maintenance expenses increased $78 million , or
8.8%, compared to the prior year. The increase was primarily due to increases of
$40 million in compensation and benefit expenses, $10 million in charitable
donations, $12 million in pipeline repair, compliance, and maintenance
activities, and $19 million in expenses passed through directly to customers
primarily related to bad debt.
Depreciation and Amortization
In 2020, depreciation and amortization increased $13 million , or 2.7%, compared
to the prior year. This increase was primarily due to continued infrastructure
investments at gas distribution operations. See Note 2 to the financial
statements under "Southern Company Gas - Infrastructure Replacement Programs and
Capital Projects" for additional information.
Impairment Charges
In 2019, Southern Company Gas recorded impairment charges of $91 million related
to Jefferson Island and $24 million in contemplation of the sale of its
interests in Pivotal LNG and Atlantic Coast Pipeline. See Notes 3 and 15 to the
financial statements under "Other Matters - Southern Company Gas " and "Southern
Company Gas ," respectively, for additional information.
(Gain) Loss on Dispositions, Net
In 2020, gain on dispositions, net was $22 million resulting from the sale of
Jefferson Island . See Note 15 to the financial statements under "Southern
Company Gas " for additional information.
Earnings from Equity Method Investments
In 2020, earnings from equity method investments decreased $16 million , or
10.2%, compared to the prior year. This decrease was primarily due to a $12
million decrease in earnings from SNG as a result of lower demand and firm
revenues and a $9 million decrease in earnings as a result of the sale of
Atlantic Coast Pipeline in the first quarter 2020, partially offset by a $6
million pre-tax loss on the sale of Triton in May 2019 . See Notes 7 and 15 to
the financial statements under "Southern Company Gas " for additional
information.
Other Income (Expense), Net
In 2020, other income (expense), net increased $21 million compared to the prior
year. This increase primarily resulted from an increase in non-service
cost-related retirement benefits income. See Note 11 to the financial statements
for additional information.
Income Taxes
In 2020, income taxes increased $43 million , or 33.1%, compared to the prior
year. This increase was primarily due to the reversal of a federal income tax
valuation allowance in connection with the sale of Triton in 2019, a decrease in
the flowback of excess deferred income taxes in 2020 at Atlanta Gas Light as
previously authorized by the Georgia PSC, and higher pre-tax earnings. See Note
2 to the financial statements under "Southern Company Gas ," Note 10 to the
financial statements, and Note 15 to the financial statements under "Southern
Company Gas " for additional information.
Performance and Non-GAAP Measures
Adjusted operating margin is a non-GAAP measure that is calculated as operating
revenues less cost of natural gas, cost of other sales, and revenue tax expense.
Adjusted operating margin excludes other operations and maintenance expenses,
depreciation and amortization, taxes other than income taxes, impairment
charges, and (gain) loss on dispositions, net, which are included in the
calculation of operating income as calculated in accordance with GAAP and
reflected in the statements of income. The presentation of adjusted operating
margin is believed to provide useful information regarding the contribution
resulting from base rate changes, infrastructure replacement programs and
capital projects, and customer growth at gas distribution operations since the
cost of natural gas and revenue tax expense can vary significantly and are
generally billed directly to customers. Southern Company Gas further believes
that utilizing adjusted operating margin at gas pipeline investments, wholesale
gas services, and gas marketing services allows it to focus on a direct measure
of performance before overhead costs. The applicable reconciliation of operating
income to adjusted operating margin is provided herein.
Adjusted operating margin should not be considered an alternative to, or a more
meaningful indicator of, Southern Company Gas' operating performance than
operating income as determined in accordance with GAAP. In addition, Southern
Company Gas' adjusted operating margin may not be comparable to similarly titled
measures of other companies.
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Southern Company and Subsidiary Companies 2020 Annual Report
Detailed variance explanations of Southern Company Gas' financial performance
are provided herein.
Reconciliations of operating income to adjusted operating margin are as follows:
2020 2019
(in millions)
Operating Income $ 812 $ 770 Other operating expenses(a) 1,650 1,703 Revenue taxes(b)
(104) (114)
Adjusted Operating Margin
(a)Includes other operations and maintenance, depreciation and amortization, taxes other than income taxes, impairment charges, and (gain) loss on dispositions, net. (b)Nicor Gas' revenue tax expenses, which are passed through directly to customers. Segment Information 2020 2019 Adjusted Adjusted Operating Operating Net Income Operating Operating
Net Income
Margin(*) Expenses(*) (Loss) Margin(*) Expenses (*) (Loss)
(in millions) (in millions)
Gas distribution operations $ 1,990 $ 1,335 $ 390 $ 1,799 $ 1,226 $ 337
Gas pipeline investments 32 12 99 32 12 94
Wholesale gas services 73 53 14 273 54 163
Gas marketing services 240 121 89 234 122 83
All other 29 36 (2) 28 182 (92)
Intercompany eliminations (6) (11) - (7) (7) -
Consolidated $ 2,358 $ 1,546 $ 590 $ 2,359 $ 1,589 $ 585
(*)Adjusted operating margin and operating expenses are adjusted for Nicor Gas'
revenue tax expenses, which are passed through directly to customers.
Gas Distribution Operations
Gas distribution operations is the largest component of Southern Company Gas'
business and is subject to regulation and oversight by regulatory agencies in
each of the states it serves. These agencies approve natural gas rates designed
to provide Southern Company Gas with the opportunity to generate revenues to
recover the cost of natural gas delivered to its customers and its fixed and
variable costs, including depreciation, interest expense, operations and
maintenance, taxes, and overhead costs, and to earn a reasonable return on its
investments.
With the exception of Atlanta Gas Light , Southern Company Gas' second largest
utility that operates in a deregulated natural gas market and has a
straight-fixed-variable rate design that minimizes the variability of its
revenues based on consumption, the earnings of the natural gas distribution
utilities can be affected by customer consumption patterns that are a function
of weather conditions, price levels for natural gas, and general economic
conditions that may impact customers' ability to pay for natural gas consumed.
Southern Company Gas has various regulatory and other mechanisms, such as
weather and revenue normalization mechanisms and weather derivative instruments,
that limit its exposure to changes in customer consumption, including weather
changes within typical ranges in its natural gas distribution utilities' service
territories.
In 2020, net income increased $53 million , or 16%, compared to the prior year.
The increase primarily relates to $191 million in adjusted operating margin
which reflects base rate increases for all of the natural gas distribution
utilities and continued investments recovered through infrastructure replacement
programs. The $109 million increase in operating expenses includes increases for
compensation and benefit expenses and pipeline compliance as well as bad debt
costs passed through directly to customers. The increase also reflects higher
depreciation primarily due to additional assets placed in service. The $27
million increase in other income is primarily due to an increase in non-service
cost-related retirement benefits income. The $51 million increase in income tax
expense is primarily due to higher pre-tax earnings and a decrease in the
flowback of excess deferred income taxes at Atlanta Gas Light as authorized by
the Georgia PSC.
See Note 2 to the financial statements under "Southern Company Gas - Rate
Proceedings - Atlanta Gas Light " and " - Infrastructure Replacement Programs and
Capital Projects - Atlanta Gas Light " herein for additional information on
Atlanta Gas
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Southern Company and Subsidiary Companies 2020 Annual Report
Light's stipulation reflecting the impacts of the Tax Reform Legislation. Also
see Note 11 to the financial statements for additional information on retirement
benefits.
Gas Pipeline Investments
Gas pipeline investments consists primarily of joint ventures in natural gas
pipeline investments including SNG, PennEast Pipeline, Dalton Pipeline, and
Atlantic Coast Pipeline (until its sale on March 24, 2020 ). Net income in 2020
increased $5 million , or 5%, compared to the prior year. This increase primarily
relates to a $25 million decrease in income taxes primarily related to a 2019
increase associated with changes in state apportionment rates, partially offset
by a $12 million decrease in earnings from SNG and a $9 million decrease in
earnings as a result of the sale of the interest in Atlantic Coast Pipeline. See
Note 7 to the financial statements under "Southern Company Gas " for additional
information.
Wholesale Gas Services
Wholesale gas services is involved in asset management and optimization,
storage, transportation, producer and peaking services, natural gas supply,
natural gas services, and wholesale gas marketing. Southern Company Gas has
positioned the business to generate positive economic earnings on an annual
basis even under low volatility market conditions that can result from a number
of factors. When market price volatility increases, wholesale gas services is
well positioned to capture significant value and generate stronger results.
Operating expenses primarily reflect employee compensation and benefits.
Net income in 2020 decreased $149 million , or 91%, compared to the prior year.
This decrease primarily relates to a $200 million decrease in adjusted operating
margin, partially offset by a $49 million decrease in income taxes due to lower
pre-tax earnings.
Details of adjusted operating margin are provided in the table below.
2020 2019
(in millions)
Commercial activity recognized $ (40) $ 54
Gain on storage derivatives 8 40
Gain on transportation and forward commodity derivatives 106 186
LOCOM adjustments, net of current period recoveries - (16)
Purchase accounting adjustments to fair value inventory and
contracts (1) 9
Adjusted operating margin $ 73 $ 273
Change in Commercial Activity
The commercial activity at wholesale gas services includes recognition of
storage and transportation values that were generated in prior periods, which
reflect the impact of prior period hedge gains and losses as associated physical
transactions occur. The decrease in commercial activity in 2020 compared to the
prior year was primarily due to warmer-than-normal weather conditions and
tightening transportation spreads.
Change in Storage and Transportation Derivatives
Volatility in the natural gas market arises from a number of factors, such as
weather fluctuations or changes in supply or demand for natural gas in different
regions of the U.S. The volatility of natural gas commodity prices has a
significant impact on Southern Company Gas' customer rates, long-term
competitive position against other energy sources, and the ability of wholesale
gas services to capture value from locational and seasonal spreads. Forward
storage or time spreads applicable to the locations of wholesale gas services'
specific storage positions in 2020 resulted in storage derivative gains.
Transportation and forward commodity derivative gains in 2020 are primarily the
result of narrowing transportation spreads due to supply constraints and
increases in natural gas supply, which impacted forward prices at natural gas
receipt and delivery points, primarily in the Northeast and Midwest regions.
The natural gas that wholesale gas services purchases and injects into storage
is accounted for at the LOCOM value utilizing gas daily or spot prices at the
end of the year. See Note 1 to the financial statements under "Natural Gas for
Sale" for additional information.
Withdrawal Schedule and Physical Transportation Transactions
The expected natural gas withdrawals from storage and expected offset to prior
hedge losses/gains associated with the transportation portfolio of wholesale gas
services are presented in the following table, along with the net operating
revenues expected at the time of withdrawal from storage and the physical flow
of natural gas between contracted transportation receipt and
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Southern Company and Subsidiary Companies 2020 Annual Report
delivery points. Wholesale gas services' expected net operating revenues exclude
storage and transportation demand charges, as well as other variable fuel,
withdrawal, receipt, and delivery charges, and exclude estimated profit sharing
under asset management agreements. Further, the amounts that are realizable in
future periods are based on the inventory withdrawal schedule, planned physical
flow of natural gas between the transportation receipt and delivery points, and
forward natural gas prices at December 31, 2020 . A portion of wholesale gas
services' storage inventory and transportation capacity is economically hedged
with futures contracts, which results in the realization of substantially fixed
net operating revenues.
Physical Transportation
Storage Withdrawal Transactions
Expected net
operating gains Expected net operating
Total storage(a) (losses)(b) gains (losses)(c)
(in mmBtu in millions) (in millions) (in millions)
2021 40 $ 23 $ (65)
2022 and thereafter 7 6 (41)
Total at December 31, 2020 47 $ 29 $ (106)
(a)At December 31, 2020 , the WACOG of wholesale gas services' expected natural
gas withdrawals from storage was $1.81 per mmBtu.
(b)Represents expected operating gains from planned storage withdrawals
associated with existing inventory positions and could change as wholesale gas
services adjusts its daily injection and withdrawal plans in response to changes
in future market conditions and forward NYMEX price fluctuations.
(c)Represents the expected net losses during the periods in which the
derivatives will be settled and the physical transportation transactions will
occur that offset the derivative gains and losses previously recognized.
Gas Marketing Services
Gas marketing services provides energy-related products and services to natural
gas markets and participants in customer choice programs that were approved in
various states to increase competition. These programs allow customers to choose
their natural gas supplier while the local distribution utility continues to
provide distribution and transportation services. Gas marketing services is
weather sensitive and uses a variety of hedging strategies, such as weather
derivative instruments and other risk management tools, to partially mitigate
potential weather impacts.
Net income increased $6 million , or 7%, in 2020 compared to the prior year. This
increase primarily relates to a $6 million increase in adjusted operating
margin, which primarily reflects recovery of prior period hedge losses.
All Other
All other includes natural gas storage businesses, including Jefferson Island
through its sale on December 1, 2020 , fuels operations through the sale of
Southern Company Gas' interest in Pivotal LNG on March 24, 2020 , the investment
in Triton through its sale on May 29, 2019 , AGL Services Company , and Southern
Company Gas Capital , as well as various corporate operating expenses that are
not allocated to the reportable segments and interest income (expense)
associated with affiliate financing arrangements.
Net loss decreased $90 million , or 98%, in 2020 compared to the prior year. This
decrease primarily reflects a $146 million decrease in operating expenses
primarily related to impairment charges in 2019 of $91 million related to
Jefferson Island and $24 million in contemplation of the sale of Southern
Company Gas' interests in Pivotal LNG and Atlantic Coast Pipeline. Also included
was the $22 million pre-tax gain on the sale of Jefferson Island and a $5
million increase in earnings from equity method investments primarily due to a
pre-tax loss on the sale of Triton in 2019, partially offset by a $65 million
increase in income taxes as a result of lower pre-tax losses. See Note 15 to the
financial statements under "Southern Company Gas " for additional information.
Segment Reconciliations
Reconciliations of operating income to adjusted operating margin for 2020 and
2019 are provided in the following tables. See Note 16 to the financial
statements under "Southern Company Gas " for additional segment information.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
2020
Gas Distribution Gas Pipeline Wholesale Gas Gas Marketing Intercompany
Operations Investments Services Services All Other Elimination Consolidated
(in millions)
Operating Income (Loss) $ 655 $ 20 $ 20 $ 119 $ (7) $ 5 $ 812
Other operating expenses(a) 1,439 12 53 121 36 (11) 1,650
Revenue tax expense(b) (104) - - - - - (104)
Adjusted Operating Margin $ 1,990 $ 32 $ 73 $ 240 $ 29 $ (6) $ 2,358
2019
Gas Distribution Gas Pipeline Wholesale Gas Gas Marketing Intercompany
Operations Investments Services Services All Other Elimination Consolidated
(in millions)
Operating Income (Loss) $ 573 $ 20 $ 219 $ 112 $ (154) $ - $ 770
Other operating expenses(a) 1,340 12 54 122 182 (7) 1,703 Revenue tax expense(b) (114) - - - - - (114) Adjusted Operating Margin $ 1,799 $ 32 $ 273 $ 234$ 28 $ (7) $
2,359
(a)Includes other operations and maintenance, depreciation and amortization, taxes other than income taxes, impairment charges and (gain) loss on dispositions, net. (b)Nicor Gas' revenue tax expenses, which are passed through directly to customers. FUTURE EARNINGS POTENTIAL General Prices for electric service provided by the traditional electric operating companies and natural gas distributed by the natural gas distribution utilities to retail customers are set by state PSCs or other applicable state regulatory agencies under cost-based regulatory principles. Retail rates and earnings are reviewed and may be adjusted periodically within certain limitations. Prices for wholesale electricity sales, interconnecting transmission lines, and the exchange of electric power are regulated by theFERC .Southern Power continues to focus on long-term PPAs. See ACCOUNTING POLICIES - "Application of Critical Accounting Policies and Estimates - Utility Regulation" herein and Note 2 to the financial statements for additional information about regulatory matters. Each Registrant's results of operations are not necessarily indicative of its future earnings potential. The disposition activities described in Note 15 to the financial statements have reduced earnings for the applicable Registrants. The level of the Registrants' future earnings depends on numerous factors that affect the opportunities, challenges, and risks of the Registrants' primary businesses of selling electricity and/or distributing natural gas, as described further herein. For the traditional electric operating companies, these factors include the ability to maintain constructive regulatory environments that allow for the timely recovery of prudently-incurred costs during a time of increasing costs, continued customer growth, and the trend of reduced electricity usage per customer, especially in residential and commercial markets. ForGeorgia Power , completing construction of Plant Vogtle Units 3 and 4 and related cost recovery proceedings is another major factor. Earnings in the electricity business will also depend upon maintaining and growing sales, considering, among other things, the adoption and/or penetration rates of increasingly energy-efficient technologies and increasing volumes of electronic commerce transactions, which could contribute to a net reduction in customer usage. Global andU.S. economic conditions have been significantly affected by a series of demand and supply shocks that have caused a global and national economic recession. Most prominently, the COVID-19 pandemic has negatively impacted global supply chains and global demand for goods and services and public policy responses of social distancing and closing non-essential businesses have further restricted economic activity. The drivers, speed, and depth of this economic contraction are unprecedented and have reduced energy demand acrossthe Southern Company system's service territory, primarily in the commercial and industrial classes. The negative impacts, which started inlate-March 2020 , of the COVID-19 pandemic and related recession onthe Southern Company system's retail electric sales began to improve in the middle ofMay 2020 ; however, retail electric revenues declined slightly in 2020 compared to 2019. Recovery is expected to continue into the second half of 2021, but responses to the II-40 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)Southern Company and Subsidiary Companies 2020 Annual Report COVID-19 pandemic by both customers and governments could significantly affect the pace of recovery. The ultimate extent of the negative impact on revenues depends on the depth and duration of the economic contraction inthe Southern Company system's service territory and cannot be determined at this time. See RESULTS OF OPERATIONS herein for information on COVID-19-related impacts on energy demand inthe Southern Company system's service territory during 2020. The traditional electric operating companies have established installment payment plans to allow customers to repay over a period of time past due accounts resulting from the COVID-19 pandemic. See Note 2 to the financial statements for additional information on the status of disconnections and the deferral of costs resulting from the COVID-19 pandemic atGeorgia Power ,Mississippi Power , and the natural gas distribution utilities. The ultimate outcome of these matters cannot be determined at this time. The level of future earnings forSouthern Power's competitive wholesale electric business depends on numerous factors includingSouthern Power's ability to execute its growth strategy through the development or acquisition of renewable facilities and other energy projects while containing costs, as well as regulatory matters, creditworthiness of customers, total electric generating capacity available inSouthern Power's market areas, andSouthern Power's ability to successfully remarket capacity as current contracts expire. In addition, renewable portfolio standards, availability of tax credits, transmission constraints, cost of generation from units withinthe Southern Company power pool, and operational limitations could influenceSouthern Power's future earnings. The level of future earnings forSouthern Company Gas' primary business of distributing natural gas and its complementary businesses in the gas pipeline investments, wholesale gas services, and gas marketing services sectors depends on numerous factors. These factors include the natural gas distribution utilities' ability to maintain constructive regulatory environments that allow for the timely recovery of prudently-incurred costs, the completion and subsequent operation of ongoing infrastructure and other construction projects, creditworthiness of customers, andSouthern Company Gas' ability to optimize its transportation and storage positions and to re-contract storage rates at favorable prices. The volatility of natural gas prices has an impact onSouthern Company Gas' customer rates, its long-term competitive position against other energy sources, and the ability ofSouthern Company Gas' gas marketing services and wholesale gas services businesses to capture value from locational and seasonal spreads. Additionally, changes in commodity prices subject a portion ofSouthern Company Gas' operations to earnings variability. Over the longer term, volatility is expected to be low to moderate and locational and/or transportation spreads are expected to decrease as new pipelines are built to reduce the existing supply constraints in the shale areas of theNortheast U.S. To the extent these pipelines are delayed or not built, volatility could increase. See Note 3 to the financial statements under "Other Matters -Southern Company Gas -PennEast Pipeline Project " for additional information on permitting challenges experienced by the PennEast Pipeline. Additional economic factors may contribute to this environment, including a significant drop in oil and natural gas prices, which could lead to consolidation of natural gas producers or reduced levels of natural gas production. In addition, if the COVID-19 pandemic results in continued economic uncertainty for a sustained period, demand for natural gas may decrease, resulting in further downward pressure on natural gas prices and lower volatility in the natural gas markets on a longer-term basis. Earnings for both the electricity and natural gas businesses are subject to a variety of other factors. These factors include weather, competition, developing new and maintaining existing energy contracts and associated load requirements with wholesale customers, energy conservation practiced by customers, the use of alternative energy sources by customers, government incentives to reduce overall energy usage, the prices of electricity and natural gas, and the price elasticity of demand. Demand for electricity and natural gas in the Registrants' service territories is primarily driven by the pace of economic growth or decline that may be affected by changes in regional and global economic conditions, which may impact future earnings.Mississippi Power provides service under long-term contracts with rural electric cooperative associations and a municipality located in southeasternMississippi under full requirements cost-based electric tariffs which are subject to regulation by theFERC . The contracts with these wholesale customers represented 15.3% ofMississippi Power's total operating revenues in 2020 and are generally subject to 10-year rolling cancellation notices. Historically, these wholesale customers have acted as a group and any changes in contractual relationships for one customer are likely to be followed by the other wholesale customers. As part of its ongoing effort to adapt to changing market conditions,Southern Company continues to evaluate and consider a wide array of potential business strategies. These strategies may include business combinations, partnerships, and acquisitions involving other utility or non-utility businesses or properties, disposition of certain assets or businesses, internal restructuring, or some combination thereof. Furthermore,Southern Company may engage in new business ventures that arise from competitive and regulatory changes in the utility industry. Pursuit of any of the above strategies, or any combination thereof, may significantly affect the business operations, risks, and financial condition ofSouthern Company . In addition,Southern Power andSouthern Company Gas regularly consider and evaluate joint development arrangements as well as acquisitions and dispositions of businesses and assets as part of their business strategies. See Note 15 to the financial statements for additional information. II-41 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)Southern Company and Subsidiary Companies 2020 Annual Report Environmental MattersThe Southern Company system's operations are regulated by state and federal environmental agencies through a variety of laws and regulations governing air, water, land, and other natural resources.The Southern Company system maintains comprehensive environmental compliance and GHG strategies to assess both current and upcoming requirements and compliance costs associated with these environmental laws and regulations. The costs required to comply with environmental laws and regulations and to achieve stated goals, including capital expenditures, operations and maintenance costs, and costs reflected in ARO liabilities, may impact future electric generating unit retirement and replacement decisions (which are subject to approval from the traditional electric operating companies' respective state PSCs), results of operations, cash flows, and/or financial condition. Related costs may result from the installation of additional environmental controls, closure and monitoring of CCR facilities, unit retirements, or changing fuel sources for certain existing units, as well as related upgrades tothe Southern Company system's transmission and distribution (electric and natural gas) systems. A major portion of these costs is expected to be recovered through retail and wholesale rates, including existing ratemaking and billing provisions. The ultimate impact of environmental laws and regulations and the GHG goals discussed herein cannot be determined at this time and will depend on various factors, such as state adoption and implementation of requirements, the availability and cost of any deployed technology, fuel prices, and the outcome of pending and/or future legal challenges. New or revised environmental laws and regulations could affect many areas of operations for the Subsidiary Registrants. The impact of any such changes cannot be determined at this time. Environmental compliance costs could affect earnings, cash flows, and/or financial condition if such costs cannot continue to be recovered on a timely basis in rates for the traditional electric operating companies and the natural gas distribution utilities or through long-term wholesale agreements for the traditional electric operating companies andSouthern Power .Alabama Power andMississippi Power recover environmental compliance costs through separate mechanisms, Rate CNP Compliance and theECO Plan , respectively.Georgia Power's base rates include an ECCR tariff that allows for the recovery of environmental compliance costs. The natural gas distribution utilities ofSouthern Company Gas generally recover environmental remediation expenditures through rate mechanisms approved by their applicable state regulatory agencies. See Notes 2 and 3 to the financial statements for additional information.Southern Power's PPAs generally contain provisions that permit charging the counterparty with some of the new costs incurred as a result of changes in environmental laws and regulations. SinceSouthern Power's units are generally newer natural gas and renewable generating facilities, costs associated with environmental compliance for these facilities have been less significant than for similarly situated coal or older natural gas generating facilities. Environmental, natural resource, and land use concerns, including the applicability of air quality limitations, the potential presence of wetlands or threatened and endangered species, the availability of water withdrawal rights, uncertainties regarding impacts such as increased light or noise, and concerns about potential adverse health impacts can, however, increase the cost of siting and operating any type of future electric generating facility. The impact of such laws, regulations, and other considerations onSouthern Power and subsequent recovery through PPA provisions cannot be determined at this time. Further, increased costs that are recovered through regulated rates could contribute to reduced demand for electricity and natural gas, which could negatively affect results of operations, cash flows, and/or financial condition. Additionally, many commercial and industrial customers may also be affected by existing and future environmental requirements, which for some may have the potential to affect their demand for electricity and natural gas. Although the timing, requirements, and estimated costs could change as environmental laws and regulations are adopted or modified, as compliance plans are revised or updated, and as legal challenges to rules are initiated or completed, estimated capital expenditures through 2025 based on the current environmental compliance strategy forthe Southern Company system and the traditional electric operating companies are as follows: 2021 2022 2023 2024 2025 Total (in millions) Southern Company$ 120 $ 145 $ 257 $ 255 $ 152 $ 929 Alabama Power 67 78 78 99 70 392 Georgia Power 34 42 164 151 59 450 Mississippi Power 19 15 9 5 14 62 These estimates do not include any costs associated with potential regulation of GHG emissions. See "Global Climate Issues" herein for additional information.The Southern Company system also anticipates substantial expenditures associated with ash II-42 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)Southern Company and Subsidiary Companies 2020 Annual Report pond closure and ground water monitoring under the CCR Rule and related state rules, which are reflected in the applicable Registrants' ARO liabilities. See FINANCIAL CONDITION AND LIQUIDITY - "Cash Requirements" herein and Note 6 to the financial statements for additional information. Environmental Laws and Regulations Executive Orders OnJanuary 20, 2021 ,President Biden issued a regulatory freeze that requires further reviews of certain regulatory actions authorized under the previous administration before they become effective.President Biden also signed executive orders related to federal regulations and subsequently signed additional orders to address climate change and other environmental issues. Air QualityThe Southern Company system reduced SO2 and NOX air emissions by 99% and 91%, respectively, from 1990 to 2019.The Southern Company system reduced mercury air emissions by over 97% from 2005 to 2019. TheEPA finalized regional haze regulations in 2005 and 2017. These regulations require states, tribal governments, and various federal agencies to develop and implement plans to reduce pollutants that impair visibility and demonstrate reasonable progress toward the goal of restoring natural visibility conditions in certain areas, including national parks and wilderness areas. States are required to submit state implementation plans for the second 10-year planning period (2018 through 2028) byJuly 31, 2021 . These plans could require further reductions in particulate matter, SO2, and/or NOX, which could result in increased compliance costs at affected electric generating units. Water Quality In 2014, theEPA finalized requirements under Section 316(b) of the Clean Water Act (CWA) to regulate cooling water intake structures (CWIS) to minimize their effects on fish and other aquatic life at existing power plants. The regulation requires plant-specific studies to determine applicable CWIS changes to protect organisms. The results of these plant-specific studies, which are ongoing withinthe Southern Company system, are being submitted with each plant's next National Pollutant Discharge Elimination System (NPDES) permit cycle.The Southern Company system anticipates applicable CWIS changes may include fish-friendly CWIS screens with fish return systems and minor additions of monitoring equipment at certain plants. The impact of this rule will depend on the outcome of these plant-specific studies, any additional protective measures required to be incorporated into each plant's NPDES permit based on site-specific factors, and the outcome of any legal challenges. In 2015, theEPA finalized the steam electric effluent limitations guidelines (ELG) rule (2015 ELG Rule) that set national standards for wastewater discharges from new and existing steam electric generating units generating greater than 50 MWs, including substantially all of the coal-fired generating units inthe Southern Company system. The 2015 ELG Rule prohibits effluent discharges of certain wastestreams and imposes stringent limits on flue gas desulfurization (FGD) wastewater discharges. OnOctober 13, 2020 , theEPA published the final ELG reconsideration rule, a reconsideration of the 2015 ELG Rule's limits on bottom ash transport water and FGD wastewater that extends the latest applicability date for both discharges toDecember 31, 2025 . The ELG reconsideration rule also updates the voluntary incentive program and provides new subcategories for low utilization electric generating units and electric generating units that will permanently cease coal combustion by 2028. An initial notice of planned participation (NOPP) must be submitted to the applicable permitting authority no later thanOctober 13, 2021 for units seeking to qualify for these subcategories. A subsequent NOPP must be submitted to transfer a unit to an alternative compliance option. The 2015 ELG Rule and the ELG reconsideration rule (ELG rules) are expected to require capital expenditures and increased operational costs for the traditional electric operating companies and SEGCO. ForGeorgia Power's Plant Wansley Units 1 and 2, which are currently challenged due to their operating profiles and positions within the economic dispatch, the anticipated cost of the controls necessary to comply with the ELG rules could accelerate a determination that continued operation is uneconomical. As a result,Georgia Power may request in its 2022 IRP filing to accelerate the retirement of these units, which had a net book value totaling approximately$665 million atDecember 31, 2020 . However, the ultimate impact of the ELG rules will depend onthe Southern Company system's final assessment of compliance options, the incorporation of these assessments into each of the traditional electric operating company's IRP processes, the incorporation of these new requirements into each generating unit's NPDES permit, and the outcome of legal challenges. The ELG reconsideration rule has been challenged by several environmental organizations and the cases have been consolidated in theU.S. Court of Appeals for the Fourth Circuit . II-43 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)Southern Company and Subsidiary Companies 2020 Annual Report Coal Combustion Residuals In 2015, theEPA finalized non-hazardous solid waste regulations for the disposal of CCR, including coal ash and gypsum, in landfills and surface impoundments (ash ponds) at active electric generating power plants. The CCR Rule requires landfills and ash ponds to be evaluated against a set of performance criteria and potentially closed if certain criteria are not met. Closure of existing landfills and ash ponds requires installation of equipment and infrastructure to manage CCR in accordance with the CCR Rule. TheEPA is in the process of amending portions of the CCR Rule. In addition to the CCR Rule, the States ofAlabama andGeorgia finalized state regulations regarding the handling of CCR within their respective states. TheState of Georgia received approval from theEPA on its partial permit program implementing the state CCR permit program in lieu of the federal self-implementing rule in accordance with the Water Infrastructure Improvements for the Nation Act. OnFebruary 15, 2021 , revisions to alignState of Alabama regulations with the federal CCR Rule became effective, as approved by theAlabama Environmental Management Commission . TheState of Mississippi has not yet developed a state CCR permit program. Based on requirements for closure and monitoring of landfills and ash ponds pursuant to the CCR Rule and applicable state rules, the traditional electric operating companies have periodically updated, and expect to continue periodically updating, their related cost estimates and ARO liabilities for each CCR unit as additional information related to ash pond closure methodologies, schedules, and/or costs becomes available. Some of these updates have been, and future updates may be, material. Additionally, the closure designs and plans in the States ofAlabama andGeorgia are subject to approval by environmental regulatory agencies. Absent continued recovery of ARO costs through regulated rates, results of operations, cash flows, and financial condition forSouthern Company and the traditional electric operating companies could be materially impacted. See FINANCIAL CONDITION AND LIQUIDITY - "Cash Requirements," Note 2 to the financial statements under "Georgia Power - Rate Plans," and Note 6 to the financial statements for additional information. Environmental RemediationThe Southern Company system must comply with environmental laws and regulations governing the handling and disposal of waste and releases of hazardous substances. Under these various laws and regulations,the Southern Company system could incur substantial costs to clean up affected sites. The traditional electric operating companies andSouthern Company Gas conduct studies to determine the extent of any required cleanup and have recognized the estimated costs to clean up known impacted sites in their financial statements. Amounts for cleanup and ongoing monitoring costs were not material for any year presented. The traditional electric operating companies and the natural gas distribution utilities inIllinois andGeorgia (which represent substantially all ofSouthern Company Gas' accrued remediation costs) have all received authority from their respective state PSCs or other applicable state regulatory agencies to recover approved environmental remediation costs through regulatory mechanisms. These regulatory mechanisms are adjusted annually or as necessary within limits approved by the state PSCs or other applicable state regulatory agencies. The traditional electric operating companies andSouthern Company Gas may be liable for some or all required cleanup costs for additional sites that may require environmental remediation. See Note 3 to the financial statements under "Environmental Remediation" for additional information. Global Climate Issues InJuly 2019 , theEPA published the final Affordable Clean Energy rule (ACE Rule) to repeal and replace the CPP. The ACE Rule requires states to develop unit-specific CO2 emission rate standards for existing coal-fired units based on heat-rate efficiency improvements. OnJanuary 19, 2021 , theD.C. Circuit Court of Appeals vacated and remanded the ACE Rule back to theEPA . Once the decision becomes final, the ACE Rule will no longer be in effect. OnJanuary 20, 2021 ,President Biden accepted the Paris Agreement on behalf ofthe United States , which will result inthe United States officially becoming a party to the agreement onFebruary 19, 2021 . The Paris Agreement establishes a non-binding universal framework for addressing GHG emissions based on nationally determined emissions reduction contributions and sets in place a process for tracking progress towards the goals every five years. Additional GHG policies, including legislation, may emerge in the future requiringthe United States to transition to a lower GHG emitting economy; however, associated impacts are currently unknown.The Southern Company system has transitioned from an electric generating mix of 70% coal and 15% natural gas in 2007 to a mix of 18% coal and 53% natural gas in 2020, along with over 10,000 MWs of renewable resource capacity. This transition has been supported in part bythe Southern Company system retiring over 5,600 MWs of coal- and oil-fired generating capacity since 2010 and converting over 3,400 MWs of generating capacity from coal to natural gas since 2015. In addition,Southern Company Gas has replaced over 6,000 miles of pipe material that was more prone to fugitive emissions (unprotected steel and cast-iron pipe), resulting in mitigation of more than 3.3 million metric tons of CO2 equivalents from its natural gas distribution system since 1998. 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2019 Preliminary 2020
(in million metric tons of CO2 equivalent)
Southern Company(*) 88 75
Alabama Power 33 28
Georgia Power 28 21
Mississippi Power 9 8
Southern Power(*) 13 12
Southern Company Gas 1 1
(*)Includes GHG emissions attributable to disposed assets through the date of
the applicable disposition and to acquired assets beginning with the date of the
applicable acquisition. See Note 15 to the financial statements for additional
information.
With 2007 as a baseline, in 2018, Southern Company system management established
an interim goal of a 50% reduction in carbon emissions by 2030 and a long-term
goal of low- to no-carbon operations by 2050. In 2020, Southern Company system
management updated the long-term GHG emissions reduction goal to net zero
emissions by 2050. Based on the preliminary 2020 emissions, the Southern Company
system achieved an estimated GHG emission reduction of 52% since 2007. In 2020,
the combination of the COVID-19 pandemic and relatively mild weather
significantly reduced demand. As these factors fluctuate, coal generation and
GHG emissions may temporarily increase in future years. Southern Company system
management expects to achieve sustained GHG emissions reductions of at least 50%
as early as 2025. Southern Company system management, working with applicable
regulators, plans to transition its generating fleet in a manner responsible to
customers, communities, employees, and other stakeholders. Achievement of these
goals is dependent on many factors, including natural gas prices and the pace
and extent of development of low- to no-carbon energy technologies and negative
carbon concepts. Southern Company system management will continue to pursue a
diverse portfolio including low-carbon and carbon-free resources and energy
efficiency resources; continue its research and development with a particular
focus on technologies that lower GHG emissions, including methods of removing
carbon from the atmosphere; and constructively engage with policymakers,
regulators, investors, and customers to support outcomes leading to a net zero
future.
Regulatory Matters
See OVERVIEW - "Recent Developments" herein and Note 2 to the financial
statements for a discussion of regulatory matters related to Alabama Power ,
Georgia Power , Mississippi Power , and Southern Company Gas , including items that
could impact the applicable registrants' future earnings, cash flows, and/or
financial condition.
Construction Programs
The Subsidiary Registrants are engaged in continuous construction programs to
accommodate existing and estimated future loads on their respective systems. The
Southern Company system intends to continue its strategy of developing and
constructing new electric generating facilities, expanding and improving the
electric transmission and electric and natural gas distribution systems, and
undertaking projects to comply with environmental laws and regulations.
For the traditional electric operating companies, major generation construction
projects are subject to state PSC approval in order to be included in retail
rates. The largest construction project currently underway in the Southern
Company system is Plant Vogtle Units 3 and 4. See Note 2 to the financial
statements under "Georgia Power - Nuclear Construction " for additional
information. Also see Note 2 to the financial statements under "Alabama Power -
Petition for Certificate of Convenience and Necessity" for information regarding
Alabama Power's construction of Plant Barry Unit 8.
See Note 15 to the financial statements under "Southern Power " for information
about costs relating to Southern Power's acquisitions that involve construction
of renewable energy facilities.
Southern Company Gas is engaged in various infrastructure improvement programs
designed to update or expand the natural gas distribution systems of the natural
gas distribution utilities to improve reliability and meet operational
flexibility and growth. The natural gas distribution utilities recover their
investment and a return associated with these infrastructure programs through
their regulated rates. See Notes 2 and 3 to the financial statements under
"Southern Company Gas - Infrastructure Replacement Programs and Capital
Projects" and "Other Matters - Southern Company Gas - PennEast Pipeline
Project ," respectively, for additional information on Southern Company Gas'
construction program.
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See FINANCIAL CONDITION AND LIQUIDITY - "Cash Requirements" herein for
additional information regarding the Registrants' capital requirements for their
construction programs, including estimated totals for each of the next five
years.
Southern Power's Power Sales Agreements
General
Southern Power has PPAs with some of the traditional electric operating
companies, other investor-owned utilities, IPPs, municipalities, and other
load-serving entities, as well as commercial and industrial customers. The PPAs
are expected to provide Southern Power with a stable source of revenue during
their respective terms.
Many of Southern Power's PPAs have provisions that require Southern Power or the
counterparty to post collateral or an acceptable substitute guarantee if (i) S&P
or Moody's downgrades the credit ratings of the respective company to an
unacceptable credit rating, (ii) the counterparty is not rated, or (iii) the
counterparty fails to maintain a minimum coverage ratio.
Southern Power is working to maintain and expand its share of the wholesale
markets. During 2020, Southern Power continued to be successful in remarketing
350 MWs to 1,130 MWs of annual natural gas generation capacity to load-serving
entities through several PPAs extending over the next 17 years. Market demand is
being driven by load-serving entities replacing expired purchase contracts
and/or retired generation, as well as planning for future growth. However,
generation capacity market forecasts indicate an oversupply, especially in the
Southeast, and the highly competitive remarketing environment is expected to
continue in the near term.
Natural Gas
Southern Power's electricity sales from natural gas facilities are primarily
through long-term PPAs that consist of two types of agreements. The first type,
referred to as a unit or block sale, is a customer purchase from a dedicated
generating unit where all or a portion of the generation from that unit is
reserved for that customer. Southern Power typically has the ability to serve
the unit or block sale customer from an alternate resource. The second type,
referred to as requirements service, provides that Southern Power serve the
customer's capacity and energy requirements from a combination of the customer's
own generating units and from Southern Power resources not dedicated to serve
unit or block sales. Southern Power has rights to purchase power provided by the
requirements customers' resources when economically viable.
As a general matter, substantially all of the PPAs provide that the purchasers
are responsible for either procuring the fuel (tolling agreements) or
reimbursing Southern Power for substantially all of the cost of fuel or
purchased power relating to the energy delivered under such PPAs. To the extent
a particular generating facility does not meet the operational requirements
contemplated in the PPAs, Southern Power may be responsible for excess fuel
costs. With respect to fuel transportation risk, most of Southern Power's PPAs
provide that the counterparties are responsible for the availability of fuel
transportation to the particular generating facility.
Capacity charges that form part of the PPA payments are designed to recover
fixed and variable operation and maintenance costs based on dollars-per-kilowatt
year. In general, to reduce Southern Power's exposure to certain operation and
maintenance costs, Southern Power has LTSAs. See Note 1 to the financial
statements under "Long-Term Service Agreements" for additional information.
Solar and Wind
Southern Power's electricity sales from solar and wind (renewable) generating
facilities are also primarily through long-term PPAs; however, these solar and
wind PPAs do not have a capacity charge and customers either purchase the energy
output of a dedicated renewable facility through an energy charge or provide
Southern Power a certain fixed price for the electricity sold to the grid. As a
result, Southern Power's ability to recover fixed and variable operations and
maintenance expenses is dependent upon the level of energy generated from these
facilities, which can be impacted by weather conditions, equipment performance,
transmission constraints, and other factors. Generally, under the renewable
generation PPAs, the purchasing party retains the right to keep or resell the
renewable energy credits.
Southern Company Gas' Affiliate Asset Management Agreements
With the exception of Nicor Gas , the natural gas distribution utilities use
asset management agreements with an affiliate, Sequent, for the primary purpose
of reducing utility customers' gas cost recovery rates through payments to the
utilities by Sequent. For Atlanta Gas Light , these payments are set by the
Georgia PSC and are utilized for infrastructure improvements and to fund heating
assistance programs, rather than as a reduction to gas cost recovery rates.
Under these asset management agreements, Sequent supplies natural gas to the
utility and markets available pipeline and storage capacity to improve the
overall cost of supplying gas to the utility customers. Currently, the natural
gas distribution utilities primarily purchase their gas from
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Sequent. The purchase agreements require Sequent to provide firm gas to the
natural gas distribution utilities, but the natural gas distribution utilities
maintain the right and ability to make their own long-term supply arrangements
if they believe it is in the best interest of their customers.
Each agreement provides for Sequent to make payments to the natural gas
distribution utility through an annual minimum guarantee within a profit sharing
structure, a profit sharing structure without an annual minimum guarantee, or a
fixed fee.
Income Tax Matters
Consolidated Income Taxes
The impact of certain tax events at Southern Company and/or its other
subsidiaries can, and does, affect each Registrant's ability to utilize certain
tax credits. See "Tax Credits" and ACCOUNTING POLICIES - "Application of
Critical Accounting Policies and Estimates - Accounting for Income Taxes" herein
and Note 10 to the financial statements for additional information.
Tax Credits
The Tax Reform Legislation, as modified by the 2021 Consolidated Appropriations
Act signed into law in December 2020 , retained solar energy incentives of 30%
ITC for projects that commenced construction by December 31, 2019 ; 26% ITC for
projects that commence construction in 2020 through 2022; 22% ITC for projects
that commence construction in 2023; and a permanent 10% ITC for projects that
commence construction on or after January 1, 2024 , or projects which are placed
in service after December 31, 2025 regardless of when construction began. In
addition, the Tax Reform Legislation retained wind energy incentives for
projects that commenced construction in 2016, 2017, 2018, and 2019 of 100% PTC,
80% PTC, 60% PTC, and 40% PTC, respectively. As a result of a tax extenders bill
passed in December 2019 and the 2021 Consolidated Appropriations Act, projects
that begin construction in 2020 or 2021 are entitled to 60% PTC. Projects
commencing construction after 2021 will not be entitled to any PTCs. Southern
Company has received ITCs and PTCs in connection with investments in solar,
wind, fuel cell, and biomass facilities primarily at Southern Power and Georgia
Power .
Southern Power's ITCs relate to its investment in new solar facilities acquired
or constructed and its PTCs relate to the first 10 years of energy production
from its wind facilities, which have had, and may continue to have, a material
impact on Southern Power's cash flows and net income. At December 31, 2020 ,
Southern Company and Southern Power had approximately $1.4 billion and $1.1
billion , respectively, of unutilized ITCs and PTCs, which are currently expected
to be fully utilized by 2024, but could be further delayed. Since 2018, Southern
Power has been utilizing tax equity partnerships for wind and solar projects,
where the tax partner takes significantly all of the respective federal tax
benefits. These tax equity partnerships are consolidated in Southern Company's
and Southern Power's financial statements using the HLBV methodology to allocate
partnership gains and losses. See Note 1 to the financial statements under
"General" for additional information on the HLBV methodology and Note 1 to the
financial statements under "Income Taxes" and Note 10 to the financial
statements under "Deferred Tax Assets and Liabilities - Tax Credit
Carryforwards" and "Effective Tax Rate" for additional information regarding
utilization and amortization of credits and the tax benefit related to
associated basis differences.
Alabama State Tax Reform Legislation
On February 12, 2021 , the State of Alabama enacted tax legislation that changes
the apportionment methodology effective for the 2021 tax year. This legislation
is expected to reduce the amount of Southern Power's future earnings apportioned
to the State of Alabama and, thus, reduce Southern Power's existing state
accumulated deferred tax liabilities, which would have a favorable impact on
Southern Power's net income. The ultimate outcome of this matter cannot be
determined at this time.
General Litigation and Other Matters
The Registrants are involved in various matters being litigated and/or
regulatory and other matters that could affect future earnings, cash flows,
and/or financial condition. The ultimate outcome of such pending or potential
litigation against each Registrant and any subsidiaries or regulatory and other
matters cannot be determined at this time; however, for current proceedings
and/or matters not specifically reported herein or in Notes 2 and 3 to the
financial statements, management does not anticipate that the ultimate
liabilities, if any, arising from such current proceedings and/or matters would
have a material effect on such Registrant's financial statements. See Notes 2
and 3 to the financial statements for a discussion of various contingencies,
including matters being litigated, regulatory matters, and other matters which
may affect future earnings potential.
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ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
The Registrants prepare their financial statements in accordance with GAAP.
Significant accounting policies are described in the notes to the financial
statements. In the application of these policies, certain estimates are made
that may have a material impact on the results of operations and related
disclosures of the applicable Registrants (as indicated in the section
descriptions herein). Different assumptions and measurements could produce
estimates that are significantly different from those recorded in the financial
statements. Senior management has reviewed and discussed the following critical
accounting policies and estimates with the Audit Committee of Southern Company's
Board of Directors.
Utility Regulation (Southern Company , Alabama Power , Georgia Power , Mississippi
Power , and Southern Company Gas )
The traditional electric operating companies and the natural gas distribution
utilities are subject to retail regulation by their respective state PSCs or
other applicable state regulatory agencies and wholesale regulation by the FERC .
These regulatory agencies set the rates the traditional electric operating
companies and the natural gas distribution utilities are permitted to charge
customers based on allowable costs, including a reasonable ROE. As a result, the
traditional electric operating companies and the natural gas distribution
utilities apply accounting standards which require the financial statements to
reflect the effects of rate regulation. Through the ratemaking process, the
regulators may require the inclusion of costs or revenues in periods different
than when they would be recognized by a non-regulated company. This treatment
may result in the deferral of expenses and the recording of related regulatory
assets based on anticipated future recovery through rates or the deferral of
gains or creation of liabilities and the recording of related regulatory
liabilities. The application of the accounting standards for rate regulated
entities also impacts their financial statements as a result of the estimates of
allowable costs used in the ratemaking process. These estimates may differ from
those actually incurred by the traditional electric operating companies and the
natural gas distribution utilities; therefore, the accounting estimates inherent
in specific costs such as depreciation, AROs, and pension and other
postretirement benefits have less of a direct impact on the results of
operations and financial condition of the applicable Registrants than they would
on a non-regulated company.
Revenues related to regulated utility operations as a percentage of total
operating revenues in 2020 for the applicable Registrants were as follows: 89%
for Southern Company , 99% for Alabama Power , 96% for Georgia Power , 99% for
Mississippi Power , and 86% for Southern Company Gas .
As reflected in Note 2 to the financial statements, significant regulatory
assets and liabilities have been recorded. Management reviews the ultimate
recoverability of these regulatory assets and any requirement to refund these
regulatory liabilities based on applicable regulatory guidelines and GAAP.
However, adverse legislative, judicial, or regulatory actions could materially
impact the amounts of such regulatory assets and liabilities and could adversely
impact the financial statements of the applicable Registrants.
Estimated Cost, Schedule, and Rate Recovery for the Construction of Plant Vogtle
Units 3 and 4
(Southern Company and Georgia Power )
In 2016, the Georgia PSC approved the Vogtle Cost Settlement Agreement, which
resolved certain prudency matters in connection with Georgia Power's fifteenth
VCM report. In 2017, the Georgia PSC approved Georgia Power's seventeenth VCM
report, which included a recommendation to continue construction of Plant Vogtle
Units 3 and 4, with Southern Nuclear serving as project manager and Bechtel
serving as the primary construction contractor, as well as a modification of the
Vogtle Cost Settlement Agreement. The Georgia PSC's related order stated that
under the modified Vogtle Cost Settlement Agreement, (i) none of the $3.3
billion of costs incurred through December 31, 2015 should be disallowed as
imprudent; (ii) the Contractor Settlement Agreement was reasonable and prudent
and none of the $0.3 billion paid pursuant to the Contractor Settlement
Agreement should be disallowed from rate base on the basis of imprudence; (iii)
capital costs incurred up to $5.68 billion would be presumed to be reasonable
and prudent with the burden of proof on any party challenging such costs; (iv)
Georgia Power would have the burden of proof to show that any capital costs
above $5.68 billion were prudent; (v) Georgia Power's total project capital cost
forecast of $7.3 billion (net of $1.7 billion received under the Guarantee
Settlement Agreement and approximately $188 million in related customer refunds)
was found reasonable and did not represent a cost cap; and (vi) prudence
decisions would be made subsequent to achieving fuel load for Unit 4.
In its order, the Georgia PSC also stated if other conditions change and
assumptions upon which Georgia Power's seventeenth VCM report are based do not
materialize, the Georgia PSC reserved the right to reconsider the decision to
continue construction.
As of December 31, 2020 , Georgia Power revised its total project capital cost
forecast to $8.7 billion (net of $1.7 billion received under the Guarantee
Settlement Agreement and approximately $188 million in related customer
refunds). This forecast includes
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construction contingency of $171 million and is based on the regulatory-approved
in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4. Since
2018, construction contingency totaling $0.5 billion has been assigned to the
base capital cost forecast. Although Georgia Power believes these incremental
costs are reasonable and necessary to complete the project and the Georgia PSC's
order in the seventeenth VCM proceeding specifically states that the
construction of Plant Vogtle Units 3 and 4 is not subject to a cost cap, Georgia
Power did not seek rate recovery for a $0.7 billion increase in the base capital
cost forecast in 2018 and has not sought rate recovery for the construction
contingency costs. After considering the significant level of uncertainty that
exists regarding the future recoverability of these costs since the ultimate
outcome of these matters is subject to the outcome of future assessments by
management, as well as Georgia PSC decisions in these future regulatory
proceedings, Georgia Power recorded total pre-tax charges to income of $1.1
billion ($0.8 billion after tax) in the second quarter 2018 and $149 million
($111 million after tax) and $176 million ($131 million after tax) as of June
30, 2020 and December 31, 2020 , respectively.
As part of its ongoing processes, Southern Nuclear continues to evaluate cost
and schedule forecasts on a regular basis to incorporate current information
available, particularly in the areas of engineering support, commodity
installation, system turnovers and related test results, and workforce
statistics. The project continues to face challenges including, but not limited
to, higher than expected absenteeism; overall construction and subcontractor
labor productivity; system turnover and testing activities; and electrical
equipment and commodity installation. In addition, Georgia Power estimates the
productivity impacts of the COVID-19 pandemic have consumed approximately three
to four months of embedded schedule margin. With minimal schedule margin
remaining, the Unit 3 schedule is challenged, and any further extension of the
hot functional testing or fuel load milestones, or other delays from the
challenges described below, could impact the ability to achieve the November
2021 in-service date.
As construction, including subcontract work, continues and testing and system
turnover activities increase, challenges with management of contractors and
vendors; subcontractor performance; supervision of craft labor and related
productivity, particularly in the installation of electrical, mechanical, and
instrumentation and controls commodities, ability to attract and retain craft
labor, and/or related cost escalation; procurement, fabrication, delivery,
assembly, installation, system turnover, and the initial testing and start-up,
including any required engineering changes or any remediation related thereto,
of plant systems, structures, or components (some of which are based on new
technology that only within the last few years began initial operation in the
global nuclear industry at this scale), any of which may require additional
labor and/or materials; or other issues could arise and change the projected
schedule and estimated cost. In addition, the continuing effects of the COVID-19
pandemic could further disrupt or delay construction and testing activities at
Plant Vogtle Units 3 and 4.
There have been technical and procedural challenges to the construction and
licensing of Plant Vogtle Units 3 and 4 at the federal and state level and
additional challenges may arise. Processes are in place that are designed to
assure compliance with the requirements specified in the Westinghouse Design
Control Document and the combined construction and operating licenses, including
inspections by Southern Nuclear and the NRC that occur throughout construction.
Findings resulting from such inspections could require additional remediation
and/or further NRC oversight. In addition, certain license amendment requests
have been filed and approved or are pending before the NRC. Various design and
other licensing-based compliance matters, including the timely submittal by
Southern Nuclear of the ITAAC documentation for each unit and the related
reviews and approvals by the NRC necessary to support NRC authorization to load
fuel, may arise, which may result in additional license amendments or require
other resolution. If any license amendment requests or other licensing-based
compliance issues, including inspections and ITAACs, are not resolved in a
timely manner, there may be delays in the project schedule that could result in
increased costs.
The ultimate outcome of these matters cannot be determined at this time.
However, any schedule extension beyond the regulatory-approved in-service dates
is currently estimated to result in additional base capital costs for Georgia
Power of approximately $25 million per month for Unit 3 and approximately $15
million per month for Unit 4, as well as the related AFUDC. While Georgia Power
is not precluded from seeking recovery of any future capital cost forecast
increase, management will ultimately determine whether or not to seek recovery.
Any further changes to the capital cost forecast that are not expected to be
recoverable through regulated rates will be required to be charged to income and
such charges could be material.
Given the significant complexity involved in estimating the future costs to
complete construction and start-up of Plant Vogtle Units 3 and 4 and the
significant management judgment necessary to assess the related uncertainties
surrounding future rate recovery of any projected cost increases, as well as the
potential impact on results of operations and cash flows, Southern Company and
Georgia Power consider these items to be critical accounting estimates. See Note
2 to the financial statements under "Georgia Power - Nuclear Construction " for
additional information.
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Southern Company and Subsidiary Companies 2020 Annual Report
Accounting for Income Taxes (Southern Company , Mississippi Power , Southern
Power , and Southern Company Gas )
The consolidated income tax provision and deferred income tax assets and
liabilities, as well as any unrecognized tax benefits and valuation allowances,
require significant judgment and estimates. These estimates are supported by
historical tax return data, reasonable projections of taxable income, the
ability and intent to implement tax planning strategies if necessary, and
interpretations of applicable tax laws and regulations across multiple taxing
jurisdictions. The effective tax rate reflects the statutory tax rates and
calculated apportionments for the various states in which the Southern Company
system operates.
Southern Company files a consolidated federal income tax return and the
Registrants file various state income tax returns, some of which are combined or
unitary. Under a joint consolidated income tax allocation agreement, each
Southern Company subsidiary's current and deferred tax expense is computed on a
stand-alone basis and each subsidiary is allocated an amount of tax similar to
that which would be paid if it filed a separate income tax return. In accordance
with IRS regulations, each company is jointly and severally liable for the
federal tax liability. Certain deductions and credits can be limited or utilized
at the consolidated or combined level resulting in tax credit and/or state NOL
carryforwards that would not otherwise result on a stand-alone
basis. Utilization of these carryforwards and the assessment of valuation
allowances are based on significant judgment and extensive analysis of Southern
Company's and its subsidiaries' current financial position and results of
operations, including currently available information about future years, to
estimate when future taxable income will be realized.
Current and deferred state income tax liabilities and assets are estimated based
on laws of multiple states that determine the income to be apportioned to their
jurisdictions. States have various filing methodologies and utilize specific
formulas to calculate the apportionment of taxable income. The calculation of
deferred state taxes considers apportionment factors and filing methodologies
that are expected to apply in future years. The apportionments and methodologies
which are ultimately finalized in a manner inconsistent with expectations could
have a material effect on the financial statements of the applicable
Registrants.
Given the significant judgment involved in estimating tax credit and/or state
NOL carryforwards and multi-state apportionments for all subsidiaries, the
applicable Registrants consider deferred income tax liabilities and assets to be
critical accounting estimates.
Asset Retirement Obligations (Southern Company , Alabama Power , Georgia Power ,
Mississippi Power , and Southern Company Gas )
AROs are computed as the present value of the estimated costs for an asset's
future retirement and are recorded in the period in which the liability is
incurred. The estimated costs are capitalized as part of the related long-lived
asset and depreciated over the asset's useful life. In the absence of quoted
market prices, AROs are estimated using present value techniques in which
estimates of future cash outlays associated with the asset retirements are
discounted using a credit-adjusted risk-free rate. Estimates of the timing and
amounts of future cash outlays are based on projections of when and how the
assets will be retired and the cost of future removal activities.
The ARO liabilities for the traditional electric operating companies primarily
relate to facilities that are subject to the CCR Rule and the related state
rules, principally ash ponds. In addition, Alabama Power and Georgia Power have
retirement obligations related to the decommissioning of nuclear facilities
(Alabama Power's Plant Farley and Georgia Power's ownership interests in Plant
Hatch and Plant Vogtle Units 1 and 2). Other significant AROs include various
landfill sites and asbestos removal for Alabama Power , Georgia Power , and
Mississippi Power and gypsum cells and mine reclamation for Mississippi Power .
The traditional electric operating companies and Southern Company Gas also have
identified other retirement obligations, such as obligations related to certain
electric transmission and distribution facilities, certain asbestos-containing
material within long-term assets not subject to ongoing repair and maintenance
activities, certain wireless communication towers, the disposal of
polychlorinated biphenyls in certain transformers, leasehold improvements,
equipment on customer property, and property associated with the Southern
Company system's rail lines and natural gas pipelines. However, liabilities for
the removal of these assets have not been recorded because the settlement timing
for certain retirement obligations related to these assets is indeterminable
and, therefore, the fair value of the retirement obligations cannot be
reasonably estimated. A liability for these retirement obligations will be
recognized when sufficient information becomes available to support a reasonable
estimation of the ARO.
The cost estimates for AROs related to the disposal of CCR are based on
information using various assumptions related to closure and post-closure costs,
timing of future cash outlays, inflation and discount rates, and the potential
methods for complying with the CCR Rule and the related state rules. The
traditional electric operating companies have periodically updated, and expect
to continue periodically updating, their related cost estimates and ARO
liabilities for each CCR unit as additional information related to these
assumptions becomes available. Some of these updates have been, and future
updates may be, material. See Note 6 to the financial statements for additional
information, including increases to AROs related to ash ponds recorded during
2020 by certain Registrants.
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Given the significant judgment involved in estimating AROs, the applicable
Registrants consider the liabilities for AROs to be critical accounting
estimates.
Pension and Other Postretirement Benefits (Southern Company , Alabama Power ,
Georgia Power , Mississippi Power , and Southern Company Gas )
The applicable Registrants' calculations of pension and other postretirement
benefits expense are dependent on a number of assumptions. These assumptions
include discount rates, healthcare cost trend rates, expected long-term rate of
return (LRR) on plan assets, mortality rates, expected salary and wage
increases, and other factors. Components of pension and other postretirement
benefits expense include interest and service cost on the pension and other
postretirement benefit plans, expected return on plan assets, and amortization
of certain unrecognized costs and obligations. Actual results that differ from
the assumptions utilized are accumulated and amortized over future periods and,
therefore, generally affect recognized expense and the recorded obligation in
future periods. While the applicable Registrants believe the assumptions used
are appropriate, differences in actual experience or significant changes in
assumptions would affect their pension and other postretirement benefit costs
and obligations.
Key elements in determining the applicable Registrants' pension and other
postretirement benefit expense are the LRR and the discount rate used to measure
the benefit plan obligations and the periodic benefit plan expense for future
periods. For purposes of determining the applicable Registrants' liabilities
related to the pension and other postretirement benefit plans, Southern Company
discounts the future related cash flows using a single-point discount rate for
each plan developed from the weighted average of market-observed yields for high
quality fixed income securities with maturities that correspond to expected
benefit payments. The discount rate assumption impacts both the service cost and
non-service costs components of net periodic benefit costs as well as the
projected benefit obligations.
The LRR on pension and other postretirement benefit plan assets is based on
Southern Company's investment strategy, historical experience, and expectations
that consider external actuarial advice, and represents the average rate of
earnings expected over the long term on the assets invested to provide for
anticipated future benefit payments. Southern Company determines the amount of
the expected return on plan assets component of non-service costs by applying
the LRR of various asset classes to Southern Company's target asset allocation.
The LRR only impacts the non-service costs component of net periodic benefit
costs for the following year and is set annually at the beginning of the year.
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Southern Company and Subsidiary Companies 2020 Annual Report
The following table illustrates the sensitivity to changes in the applicable
Registrants' long-term assumptions with respect to the discount rate, salary
increases, and the long-term rate of return on plan assets:
Increase/(Decrease) in
Projected Obligation for
Projected Obligation for Other Postretirement
Total Benefit Expense Pension Plan at December 31, Benefit Plans at
25 Basis Point Change in: for 2021 2020 December 31, 2020
(in millions)
Discount rate:
Southern Company $42 /$(40) $628 /$(592) $57 /$(54)
Alabama Power $11 /$(10) $151 /$(142) $14 /$(14)
Georgia Power $12 /$(11) $187 /$(177) $20 /$(19)
Mississippi Power $2 /$(2) $28 /$(27) $2 /$(2)
Southern Company Gas $-/$- $43 /$(40) $6 /$(6)
Salaries:
Southern Company $25 /$(24) $136 /$(132) $-/$-
Alabama Power $7 /$(7) $38 /$(37) $-/$-
Georgia Power $7 /$(7) $39 /$(38) $-/$-
Mississippi Power $1 /$(1) $6 /$(6) $-/$-
Southern Company Gas $1 /$(1) $3 /$(3) $-/$-
Long-term return on plan assets:
Southern Company $38 /$(38) N/A N/A
Alabama Power $10 /$(10) N/A N/A
Georgia Power $12 /$(12) N/A N/A
Mississippi Power $2 /$(2) N/A N/A
Southern Company Gas $3 /$(3) N/A N/A
See Note 11 to the financial statements for additional information regarding
pension and other postretirement benefits.
Asset Impairment (Southern Company , Southern Power , and Southern Company Gas )
Goodwill (Southern Company and Southern Company Gas )
The acquisition method of accounting requires the assets acquired and
liabilities assumed to be recorded at the date of acquisition at their
respective estimated fair values. The applicable Registrants have recognized
goodwill as of the date of their acquisitions, as a residual over the fair
values of the identifiable net assets acquired. Goodwill is tested for
impairment at the reporting unit level on an annual basis in the fourth quarter
of the year as well as on an interim basis as events and changes in
circumstances occur, including, but not limited to, a significant change in
operating performance, the business climate, legal or regulatory factors, or a
planned sale or disposition of a significant portion of the business. A
reporting unit is the operating segment, or a business one level below the
operating segment (a component), if discrete financial information is prepared
and regularly reviewed by management. Components are aggregated if they have
similar economic characteristics.
As part of the impairment tests, the applicable Registrant may perform an
initial qualitative assessment to determine whether it is more likely than not
that the fair value of each reporting unit is less than its carrying amount
before applying the quantitative goodwill impairment test. If the applicable
Registrant elects to perform the qualitative assessment, it evaluates relevant
events and circumstances, including but not limited to, macroeconomic
conditions, industry and market conditions, cost factors, financial performance,
entity specific events, and events specific to each reporting unit. If the
applicable Registrant determines that it is more likely than not that the fair
value of a reporting unit is less than its carrying amount, or it elects not to
perform a qualitative assessment, it compares the fair value of the reporting
unit to its carrying value to determine if the fair value is greater than its
carrying value.
Goodwill for Southern Company and Southern Company Gas was $5.3 billion and $5.0
billion , respectively, at December 31, 2020 . For its annual impairment tests,
Southern Company Gas performed the qualitative assessment and determined that it
was
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Southern Company and Subsidiary Companies 2020 Annual Report
more likely than not that the fair value of all of its reporting units with
goodwill exceeded their carrying amounts, and therefore no quantitative analysis
was required. For its annual impairment tests for PowerSecure, Southern Company
performed the quantitative assessment, which resulted in the fair value of
goodwill at PowerSecure exceeding its carrying value in all years presented.
However, Southern Company recorded goodwill impairment charges totaling $34
million in 2019 as a result of its decision to sell certain PowerSecure business
units. See Note 15 to the financial statements under "Southern Company " for
additional information. The continued COVID-19 pandemic and related responses
continue to disrupt supply chains, reduce labor availability and productivity,
and reduce economic activity. These effects could have a variety of adverse
impacts on Southern Company and its subsidiaries, including the $263 million of
goodwill recorded at PowerSecure. If the impact of the COVID-19 pandemic becomes
significant to the operating results of PowerSecure and its businesses, a
portion of the associated goodwill may become impaired. The ultimate outcome of
this matter cannot be determined at this time.
The judgments made in determining the estimated fair value assigned to each
class of assets acquired and liabilities assumed, as well as asset lives, can
significantly impact the applicable Registrant's results of operations. Fair
values and useful lives are determined based on, among other factors, the
expected future period of benefit of the asset, the various characteristics of
the asset, and projected cash flows. As the determination of an asset's fair
value and useful life involves management making certain estimates and because
these estimates form the basis for the determination of whether or not an
impairment charge should be recorded, the applicable Registrants consider these
estimates to be critical accounting estimates.
See Note 1 to the financial statements under "Goodwill and Other Intangible
Assets and Liabilities" for additional information regarding the applicable
Registrants' goodwill.
Long-Lived Assets (Southern Company , Southern Power , and Southern Company Gas )
Impairments of long-lived assets of the traditional electric utilities and
natural gas distribution utilities are generally related to specific regulatory
disallowances. The applicable Registrants assess their other long-lived assets
for impairment whenever events or changes in circumstances indicate that an
asset's carrying amount may not be recoverable. If an indicator exists, the
asset is tested for recoverability by comparing the asset carrying value to the
sum of the undiscounted expected future cash flows directly attributable to the
asset's use and eventual disposition. If the estimate of undiscounted future
cash flows is less than the carrying value of the asset, the fair value of the
asset is determined and a loss is recorded equal to the difference between the
carrying value and the fair value of the asset. In addition, when assets are
identified as held for sale, an impairment loss is recognized to the extent the
carrying value of the assets or asset group exceeds their fair value less cost
to sell. A high degree of judgment is required in developing estimates related
to these evaluations, which are based on projections of various factors, some of
which have been quite volatile in recent years.
Southern Power's investments in long-lived assets are primarily generation
assets. Excluding the natural gas distribution utilities, Southern Company Gas'
investments in long-lived assets are primarily natural gas transportation and
storage facility assets, whether in service or under construction. In addition,
exclusive of the traditional electric operating companies and natural gas
distribution utilities, Southern Company's investments in long-lived assets also
include investments in leveraged leases. During 2020, Southern Company recorded
impairment charges totaling $206 million ($105 million after tax) related to two
of its leveraged lease investments.
For Southern Power , examples of impairment indicators could include significant
changes in construction schedules, current period losses combined with a history
of losses or a projection of continuing losses, a significant decrease in market
prices, the inability to remarket generating capacity for an extended period, or
the unplanned termination of a customer contract or the inability of a customer
to perform under the terms of the contract. For Southern Company Gas , examples
of impairment indicators could include, but are not limited to, significant
changes in the U.S. natural gas storage market, construction schedules, current
period losses combined with a history of losses or a projection of continuing
losses, a significant decrease in market prices, the inability to renew or
extend customer contracts or the inability of a customer to perform under the
terms of the contract, attrition rates, or the inability to deploy a development
project. For Southern Company's investments in leveraged leases, impairment
indicators include changes in estimates of future rental payments to be received
under the lease as well as the residual value of the leased asset at the end of
the lease.
As the determination of the expected future cash flows generated from an asset,
an asset's fair value, and useful life involves management making certain
estimates and because these estimates form the basis for the determination of
whether or not an impairment charge should be recorded, the applicable
Registrants consider these estimates to be critical accounting estimates.
See Note 3 to the financial statements under "Other Matters" and Note 15 to the
financial statements for additional information on certain assets recently
evaluated for impairment, including Southern Company's leveraged lease
investments.
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Southern Company and Subsidiary Companies 2020 Annual Report
Derivatives and Hedging Activities (Southern Company and Southern Company Gas )
Determining whether a contract meets the definition of a derivative instrument,
contains an embedded derivative requiring bifurcation, or qualifies for hedge
accounting treatment is complex. The treatment of a single contract may vary
from period to period depending upon accounting elections, changes in the
applicable Registrant's assessment of the likelihood of future hedged
transactions, or new interpretations of accounting guidance. As a result,
judgment is required in determining the appropriate accounting treatment. In
addition, the estimated fair value of derivative instruments may change
significantly from period to period depending upon market conditions, and
changes in hedge effectiveness may impact the accounting treatment.
Derivative instruments (including certain derivative instruments embedded in
other contracts) are recorded on the balance sheets as either assets or
liabilities measured at their fair value. If the transaction qualifies for, and
is designated as, a normal purchase or normal sale, it is exempt from fair value
accounting treatment and is, instead, subject to traditional accrual accounting.
The applicable Registrant utilizes market data or assumptions that market
participants would use in pricing the derivative asset or liability, including
assumptions about risk and the risks inherent in the inputs of the valuation
technique.
Changes in the derivatives' fair value are recognized concurrently in earnings
unless specific hedge accounting criteria are met. If the derivatives meet those
criteria, derivative gains and losses offset related results of the hedged item
in the income statement in the case of a fair value hedge, or gains and losses
are deferred in OCI on the balance sheets until the hedged transaction affects
earnings in the case of a cash flow hedge. Additionally, a company is required
to formally designate a derivative as a hedge as well as document and assess the
effectiveness of derivatives associated with transactions that receive hedge
accounting treatment.
Southern Company Gas uses derivative instruments primarily to reduce the impact
to its results of operations due to the risk of changes in the price of natural
gas and, to a lesser extent, Southern Company Gas hedges against
warmer-than-normal weather and interest rates. The majority of these contracts
are over-the-counter wholesale contracts for the purchase or sale of natural gas
or consist of contracts which do not include asset management agreements,
financial optionality, or potential embedded derivatives. The fair value of
natural gas derivative instruments used to manage exposure to changing natural
gas prices reflects the estimated amounts that Southern Company Gas would
receive or pay to terminate or close the contracts at the reporting date, taking
into account the current unrealized gains or losses on open contracts. For
derivatives utilized at gas marketing services and wholesale gas services that
are not designated as accounting hedges, changes in fair value are reported as
gains or losses in results of operations in the period of change. Gas marketing
services records derivative gains or losses arising from cash flow hedges in OCI
and reclassifies them into earnings in the same period that the underlying
hedged item is recognized in earnings.
Derivative assets and liabilities are classified based on the lowest level of
input that is significant to the fair value measurement. The assessment of the
significance of a particular input to the fair value measurement requires
judgment and may affect the valuation of fair value assets and liabilities and
their placement within the fair value hierarchy. The determination of the fair
value of the derivative instruments incorporates various required factors. These
factors include:
•the creditworthiness of the counterparties involved and the impact of credit
enhancements (such as cash deposits and letters of credit);
•events specific to a given counterparty; and
•the impact of nonperformance risk on liabilities.
A significant change in the underlying market prices or pricing assumptions used
in pricing derivative assets or liabilities may result in a significant
financial statement impact.
Given the assumptions used in pricing the derivative asset or liability,
Southern Company and Southern Company Gas consider the valuation of derivative
assets and liabilities a critical accounting estimate. See FINANCIAL CONDITION
AND LIQUIDITY - "Market Price Risk" herein and Note 14 to the financial
statements for more information.
Revenue Recognition (Southern Power)
Southern Power's power sale transactions, which include PPAs, are classified in
one of four general categories: leases, non-derivatives or normal sale
derivatives, derivatives designated as cash flow hedges, and derivatives not
designated as hedges. The two categories with the most judgment required for
Southern Power are described further below. Southern Power's revenues are
dependent upon significant judgments used to determine the appropriate
transaction classification, which must be documented upon the inception of each
contract.
Lease Transactions
Southern Power considers the terms of a sales contract to determine whether it
should be accounted for as a lease. A contract is or contains a lease if the
contract conveys the right to control the use of identified property, plant, or
equipment for a period of time in exchange for consideration. If the contract
meets the criteria for a lease, Southern Power performs further analysis to
determine
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Southern Company and Subsidiary Companies 2020 Annual Report
whether the lease is classified as operating, financing, or sales-type.
Generally, all of Southern Power's power sales contracts that are determined to
be leases are accounted for as operating leases and the capacity revenue is
recognized on a straight-line basis over the term of the contract and is
included in Southern Power's operating revenues. Energy revenues and other
contingent revenues are recognized in the period the energy is delivered or the
service is rendered. See Note 9 to the financial statements for additional
information.
Non-Derivative and Normal Sale Derivative Transactions
If the power sales contract is not classified as a lease, Southern Power further
considers whether the contract meets the definition of a derivative. If the
contract does meet the definition of a derivative, Southern Power will assess
whether it can be designated as a normal sale contract. The determination of
whether a contract can be designated as a normal sale contract requires
judgment, including whether the sale of electricity involves physical delivery
in quantities within Southern Power's available generating capacity and that the
purchaser will take quantities expected to be used or sold in the normal course
of business.
Contracts that do not meet the definition of a derivative or are designated as
normal sales are accounted for as executory contracts. For contracts that have a
capacity charge, the revenue is generally recognized in the period that it
becomes billable. Revenues related to energy and ancillary services are
recognized in the period the energy is delivered or the service is rendered. See
Note 4 to the financial statements for additional information.
Acquisition Accounting (Southern Power)
Southern Power may acquire generation assets as part of its overall growth
strategy. At the time of an acquisition, Southern Power will assess if these
assets and activities meet the definition of a business. For acquisitions that
meet the definition of a business, the purchase price, including any contingent
consideration, is allocated based on the fair value of the identifiable assets
acquired and liabilities assumed (including any intangible assets, primarily
related to acquired PPAs). Assets acquired that do not meet the definition of a
business are accounted for as an asset acquisition. The purchase price of each
asset acquisition is allocated based on the relative fair value of assets
acquired.
Determining the fair value of assets acquired and liabilities assumed requires
management judgment and Southern Power may engage independent valuation experts
to assist in this process. Fair values are determined by using market
participant assumptions, and typically include the timing and amounts of future
cash flows, incurred construction costs, the nature of acquired contracts,
discount rates, power market prices, and expected asset lives. Any due diligence
or transition costs incurred by Southern Power for potential or successful
acquisitions are expensed as incurred.
See Note 13 to the financial statements for additional fair value information
and Note 15 to the financial statements for additional information on recent
acquisitions.
Variable Interest Entities (Southern Power)
Southern Power enters into partnerships with varying ownership structures. Upon
entering into these arrangements, membership interests and other variable
interests are evaluated to determine if the legal entity is a VIE. If the legal
entity is a VIE, Southern Power will assess if it has both the power to direct
the activities of the VIE that most significantly impact the VIE's economic
performance and the obligation to absorb losses or the right to receive benefits
from the VIE that could potentially be significant to the VIE, making it the
primary beneficiary. Making this determination may require significant
management judgment.
If Southern Power is the primary beneficiary and is considered to have a
controlling ownership, the assets, liabilities, and results of operations of the
entity are consolidated. If Southern Power is not the primary beneficiary, the
legal entity is generally accounted for under the equity method of accounting.
Southern Power reconsiders its conclusions as to whether the legal entity is a
VIE and whether it is the primary beneficiary for events that impact the rights
of variable interests, such as ownership changes in membership interests.
Southern Power has controlling ownership in certain legal entities for which the
contractual provisions represent profit-sharing arrangements because the
allocations of cash distributions and tax benefits are not based on fixed
ownership percentages. For these arrangements, the noncontrolling interest is
accounted for under a balance sheet approach utilizing the HLBV method. The HLBV
method calculates each partner's share of income based on the change in net
equity the partner can legally claim in a HLBV at the end of the period compared
to the beginning of the period.
Contingent Obligations (All Registrants)
The Registrants are subject to a number of federal and state laws and
regulations, as well as other factors and conditions that subject them to
environmental, litigation, and other risks. See FUTURE EARNINGS POTENTIAL herein
and Notes 2 and 3 to the financial statements for more information regarding
certain of these contingencies. The Registrants periodically evaluate their
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exposure to such risks and record reserves for those matters where a
non-tax-related loss is considered probable and reasonably estimable. The
adequacy of reserves can be significantly affected by external events or
conditions that can be unpredictable; thus, the ultimate outcome of such matters
could materially affect the results of operations, cash flows, or financial
condition of the Registrants.
Recently Issued Accounting Standards
See Note 1 to the financial statements under "Recently Adopted Accounting
Standards" for additional information.
On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic
848): Facilitation of the Effects of Reference Rate Reform on Financial
Reporting (ASU 2020-04) providing temporary guidance to ease the potential
burden in accounting for reference rate reform primarily resulting from the
discontinuation of LIBOR, which is currently expected to begin phasing out on
December 31, 2021. The amendments in ASU 2020-04 are elective and apply to all
entities that have contracts, hedging relationships, and other transactions that
reference LIBOR or another reference rate expected to be discontinued. The new
guidance provides the following optional expedients: (i) simplifies accounting
analyses under current GAAP for contract modifications; (ii) simplifies the
assessment of hedge effectiveness and allows hedging relationships affected by
reference rate reform to continue; and (iii) allows a one-time election to sell
or transfer debt securities classified as held to maturity that reference a rate
affected by reference rate reform. An entity may elect to apply the amendments
prospectively from March 12, 2020 through December 31, 2022 by accounting topic.
The Registrants currently reference LIBOR for certain debt and hedging
arrangements. Contract language has been, or is expected to be, incorporated
into each of these agreements to address the transition to an alternative rate
for agreements that will be in place at the transition date. While existing
effective hedging relationships are expected to continue, the Registrants will
continue to evaluate the provisions of ASU 2020-04 and the impacts of
transitioning to an alternative rate. The ultimate outcome of the transition
cannot be determined at this time, but is not expected to have a material impact
on the Registrants' financial statements. See FINANCIAL CONDITION AND LIQUIDITY
- "Financing Activities" herein and Note 14 to the financial statements under
"Interest Rate Derivatives" herein for additional information.
FINANCIAL CONDITION AND LIQUIDITY
Overview
The financial condition of each Registrant remained stable at December 31, 2020.
The Registrants maintained adequate access to capital throughout 2020, including
through a period of volatility in the short-term financial markets during the
first quarter 2020 primarily related to the COVID-19 pandemic. As a
precautionary measure, in the first quarter 2020, Southern Company , Georgia
Power, Mississippi Power, and Southern Company Gas increased their outstanding
short-term debt and cash and cash equivalents by entering into new bank term
loans, entering into and funding new committed and uncommitted credit
facilities, and funding existing uncommitted credit facilities. During the
second half of 2020, most of these additional borrowings were repaid. No
material changes occurred in the terms of the applicable Registrants' bank
credit arrangements or their interest expense on short-term debt as a result of
these actions. The Registrants experienced no material counterparty credit
losses during 2020 as a result of the volatility in the financial markets during
the first half of 2020.
The Registrants' cash requirements primarily consist of funding ongoing
operations, including unconsolidated subsidiaries, as well as common stock
dividends, capital expenditures, and debt maturities. Southern Power's cash
requirements also include distributions to noncontrolling interests. Capital
expenditures and other investing activities for the traditional electric
operating companies include investments to meet projected long-term demand
requirements, including to build new generation facilities, to maintain existing
generation facilities, to comply with environmental regulations including adding
environmental modifications to certain existing generating units and closures of
ash ponds, to expand and improve transmission and distribution facilities, and
for restoration following major storms. Southern Power's capital expenditures
and other investing activities may include acquisitions or new construction
associated with its overall growth strategy and to maintain its existing
generation fleet's performance. Southern Company Gas' capital expenditures and
other investing activities include investments to meet projected long-term
demand requirements, to maintain existing natural gas distribution systems as
well as to update and expand these systems, and to comply with environmental
regulations. See "Cash Requirements" herein for additional information.
Operating cash flows provide a substantial portion of the Registrants' cash
needs. During 2020, Southern Power utilized tax credits, which provided $340
million in operating cash flows. For the three-year period from 2021 through
2023, each Registrant's projected stock dividends, capital expenditures, and
debt maturities, as well as distributions to noncontrolling interests for
Southern Power, are expected to exceed its operating cash flows. Southern
Company plans to finance future cash needs in excess of its operating cash flows
primarily by accessing borrowings from financial institutions and issuing debt
and hybrid securities in the capital markets. Each Subsidiary Registrant plans
to finance its future cash needs in excess of its operating cash flows
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Southern Company and Subsidiary Companies 2020 Annual Report
primarily through external securities issuances, borrowings from financial
institutions, and equity contributions from Southern Company . In addition,
Georgia Power plans to utilize borrowings through the FFB and Southern Power
plans to utilize tax equity partnership contributions. The Registrants plan to
use commercial paper to manage seasonal variations in operating cash flows and
for other working capital needs and continue to monitor their access to
short-term and long-term capital markets as well as their bank credit
arrangements to meet future capital and liquidity needs. See "Sources of
Capital" and "Financing Activities" herein for additional information.
The Registrants' investments in their qualified pension plans and Alabama
Power's and Georgia Power's investments in their nuclear decommissioning trust
funds increased in value at December 31, 2020 as compared to December 31, 2019.
No contributions to the qualified pension plan were made during 2020 and no
mandatory contributions to the qualified pension plans are anticipated during
2021. See Notes 6 and 11 to the financial statements under "Nuclear
Decommissioning" and "Pension Plans," respectively, for additional information.
At the end of 2020, the market price of Southern Company's common stock was
$61.43 per share (based on the closing price as reported on the NYSE) and the
book value was $26.48 per share, representing a market-to-book value ratio of
232%, compared to $63.70, $26.11, and 244%, respectively, at the end of 2019.
Cash Requirements
Capital Expenditures
Total estimated capital expenditures, including LTSA and nuclear fuel
commitments, for the Registrants through 2025 based on their current
construction programs are as follows:
2021 2022 2023 2024 2025
(in billions)
Southern Company(a)(b)(c) $ 8.2 $ 7.0 $ 7.0 $ 6.8 $ 6.7
Alabama Power(a) 1.9 1.8 1.7 1.6 1.6
Georgia Power(b) 3.8 3.0 3.1 3.1 3.1
Mississippi Power 0.3 0.2 0.3 0.3 0.3
Southern Power(c) 0.7 0.2 0.2 0.1 0.1
Southern Company Gas 1.5 1.7 1.7 1.7 1.6
(a)Includes amounts related to Plant Barry Unit 8. See Note 2 to the financial
statements under "Alabama Power" for additional information.
(b)Includes expenditures of approximately $1.3 billion and $0.4 billion for the
construction of Plant Vogtle Units 3 and 4 in 2021 and 2022, respectively.
(c)Excludes approximately $0.5 billion per year for 2021 through 2025 for
Southern Power's planned acquisitions and placeholder growth, which may vary
materially due to market opportunities and Southern Power's ability to execute
its growth strategy.
These capital expenditures include estimates to comply with environmental laws
and regulations, but do not include any potential compliance costs associated
with any future regulation of CO2 emissions from fossil fuel-fired electric
generating units. See FUTURE EARNINGS POTENTIAL - "Environmental Matters" herein
for additional information. At December 31, 2020, significant purchase
commitments were outstanding in connection with the Registrants' construction
programs.
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Southern Company and Subsidiary Companies 2020 Annual Report
The traditional electric operating companies also anticipate expenditures
associated with closure and monitoring of ash ponds and landfills in accordance
with the CCR Rule and the related state rules, which are reflected in the
applicable Registrants' ARO liabilities. Alabama Power's cost estimates are
based on closure-in-place for all of its ash ponds. The cost estimates for
Georgia Power and Mississippi Power are based on a combination of
closure-in-place for some ash ponds and closure by removal for others. These
anticipated costs are likely to change, and could change materially, as
assumptions and details pertaining to closure are refined and compliance
activities continue. Current estimates of these costs through 2025 are provided
in the table below. Material expenditures in future years for ARO settlements
will also be required for ash ponds, nuclear decommissioning (for Alabama Power
and Georgia Power), and other liabilities reflected in the applicable
Registrants' AROs, as discussed further in Note 6 to the financial statements.
Also see FUTURE EARNINGS POTENTIAL - "Environmental Matters - Environmental Laws
and Regulations - Coal Combustion Residuals" herein.
2021 2022 2023 2024 2025
(in millions)
Southern Company $ 585 $ 759 $ 957 $ 903 $ 931
Alabama Power 254 338 412 354 299
Georgia Power 287 354 467 498 601
Mississippi Power 28 23 23 20 14
The construction programs are subject to periodic review and revision, and
actual construction costs may vary from these estimates because of numerous
factors. These factors include: changes in business conditions; changes in load
projections; changes in environmental laws and regulations; the outcome of any
legal challenges to environmental rules; changes in electric generating plants,
including unit retirements and replacements and adding or changing fuel sources
at existing electric generating units, to meet regulatory requirements; changes
in FERC rules and regulations; state regulatory agency approvals; changes in the
expected environmental compliance program; changes in legislation; the cost and
efficiency of construction labor, equipment, and materials; project scope and
design changes; abnormal weather; delays in construction due to judicial or
regulatory action; storm impacts; and the cost of capital. The continued
COVID-19 pandemic could also impair the ability to develop, construct, and
operate facilities, as discussed further in Item 1A herein. In addition, there
can be no assurance that costs related to capital expenditures will be fully
recovered. Additionally, expenditures associated with Southern Power's planned
acquisitions may vary due to market opportunities and the execution of its
growth strategy. See Note 15 to the financial statements under "Southern Power"
for additional information regarding Southern Power's plant acquisitions and
construction projects.
The construction program of Georgia Power includes Plant Vogtle Units 3 and 4,
which includes components based on new technology that only within the last few
years began initial operation in the global nuclear industry at this scale and
which may be subject to additional revised cost estimates during construction.
See Note 2 to the financial statements under "Georgia Power - Nuclear
Construction" for information regarding Plant Vogtle Units 3 and 4 and
additional factors that may impact construction expenditures.
See FUTURE EARNINGS POTENTIAL - "Construction Programs" herein for additional
information.
Other Significant Cash Requirements
Long-term debt maturities and the interest payable on long-term debt each
represent a significant cash requirement for the Registrants. See Note 8 to the
financial statements for information regarding the Registrants' long-term debt
at December 31, 2020, the weighted average interest rate applicable to each
long-term debt category, and a schedule of long-term debt maturities over the
next five years. The Registrants plan to continue, when economically feasible,
to retire higher-cost securities and replace these obligations with lower-cost
capital if market conditions permit.
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Southern Company and Subsidiary Companies 2020 Annual Report
Fuel and purchased power costs represent a significant component of funding
ongoing operations for the traditional electric operating companies and Southern
Power. See Note 3 to the financial statements under "Commitments" for
information on Southern Company Gas' commitments for pipeline charges, storage
capacity, and gas supply. Total estimated costs for fuel and purchased power
commitments at December 31, 2020 for the applicable Registrants are provided in
the table below. Fuel costs include purchases of coal (for the traditional
electric operating companies) and natural gas (for the traditional electric
operating companies and Southern Power), as well as the related transportation
and storage. In most cases, these contracts contain provisions for price
escalation, minimum purchase levels, and other financial commitments. Natural
gas purchase commitments are based on various indices at the time of delivery;
the amounts reflected below have been estimated based on the NYMEX future prices
at December 31, 2020. As discussed under "Capital Expenditures" herein,
estimated expenditures for nuclear fuel are included in the applicable
Registrants' construction programs for the years 2021 through 2025. Nuclear fuel
commitments at December 31, 2020 that extend beyond 2025 are included in the
table below. Purchased power costs represent estimated minimum obligations for
various PPAs for the purchase of capacity and energy, except for those accounted
for as leases, which are discussed in Note 9 to the financial statements.
2021 2022 2023 2024 2025 Thereafter
(in millions)
Southern Company(*) $ 2,818 $ 1,831 $ 883 $ 705 $ 659 $ 5,607
Alabama Power 888 643 289 183 171 1,205
Georgia Power(*) 1,037 656 339 302 299 3,894
Mississippi Power 342 210 115 102 82 502
Southern Power 551 322 140 118 107 5
(*)Excludes capacity payments related to Plant Vogtle Units 1 and 2, which are
discussed in Note 3 to the financial statements under "Commitments."
The traditional electric operating companies and Southern Power have entered
into LTSAs for the purpose of securing maintenance support for certain of their
generating facilities. See Note 1 to the financial statements under "Long-term
Service Agreements" for additional information. As discussed under "Capital
Expenditures" herein, estimated expenditures related to LTSAs are included in
the applicable Registrants' construction programs for the years 2021 through
2025. Total estimated payments for LTSA commitments at December 31, 2020 that
extend beyond 2025 are provided in the following table and include price
escalation based on inflation indices:
Southern Georgia
Company Alabama Power Power Mississippi Power Southern Power
(in millions)
LTSA commitments (after 2025) $ 1,871 $ 206 $ 191 $ 178 $ 1,296
In addition, Southern Power has certain other operations and maintenance agreements. Total estimated costs for these commitments at December 31, 2020 are provided in the table below.
2021 2022 2023 2024 2025 Thereafter
(in millions)
Southern Power's operations and maintenance agreements $ 65 $ 48 $ 41 $
36 $ 25 $ 194
See Note 9 to the financial statements for information on the Registrants' operating lease obligations, including a maturity analysis of the lease liabilities over the next five years and thereafter. Sources of CapitalSouthern Company intends to meet its future capital needs through operating cash flows, borrowings from financial institutions, and debt and equity issuances in the capital markets. Equity capital can be provided from any combination ofSouthern Company's stock plans, private placements, or public offerings.Southern Company does not expect to issue any equity in the capital markets through 2025. See Note 8 to the financial statements under "Equity Units" for information on stock purchase contracts associated withSouthern Company's equity units. The Subsidiary Registrants plan to obtain the funds to meet their future capital needs from sources similar to those they used in the past, which were primarily from operating cash flows, external securities issuances, borrowings from financial institutions, and equity contributions fromSouthern Company . In addition, Georgia Power plans to utilize borrowings from the FFB (as II-59 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)Southern Company and Subsidiary Companies 2020 Annual Report discussed further in Note 8 to the financial statements under "Long-term Debt - DOE Loan Guarantee Borrowings") and Southern Power plans to utilize tax equity partnership contributions (as discussed further herein). At certain periods during 2020, the traditional electric operating companies and the natural gas distribution utilities experienced a reduction in operating cash flows as a result of the temporary suspension of disconnections for non-payment by customers resulting from the COVID-19 pandemic and the related overall economic contraction. To date, this reduction of operating cash flows has not had a material impact on the liquidity of any of the Registrants, and, during the third quarter 2020, most of the temporary measures in place expired. The ultimate extent of the negative impact on the Registrants' liquidity depends on the duration of the COVID-19 pandemic and any federal, state, or local response and cannot be determined at this time. See Note 2 to the financial statements for information regarding suspended disconnections for non-payment by the traditional electric operating companies and the natural gas distribution utilities. The amount, type, and timing of any financings in 2021, as well as in subsequent years, will be contingent on investment opportunities and the Registrants' capital requirements and will depend upon prevailing market conditions, regulatory approvals (for certain of the Subsidiary Registrants), and other factors. See "Cash Requirements" herein for additional information. Southern Power utilizes tax equity partnerships as one of its financing sources, where the tax partner takes significantly all of the federal tax benefits. These tax equity partnerships are consolidated in Southern Power's financial statements and are accounted for using HLBV methodology to allocate partnership gains and losses. During 2020, Southern Power obtained tax equity funding for the Reading and Skookumchuck wind projects and received proceeds totaling $277 million. In addition, Southern Power received tax equity funding totaling $16 million from existing partnerships. See Notes 1 and 15 to the financial statements under "General" and "Southern Power," respectively, for additional information. The issuance of securities by the traditional electric operating companies and Nicor Gas is generally subject to the approval of the applicable state PSC or other applicable state regulatory agency. The issuance of all securities by Mississippi Power and short-term securities by Georgia Power is generally subject to regulatory approval by theFERC . Additionally, with respect to the public offering of securities,Southern Company , the traditional electric operating companies, and Southern Power (excluding its subsidiaries), Southern Company Gas Capital, andSouthern Company Gas (excluding its other subsidiaries) file registration statements with theSEC under the Securities Act of 1933, as amended (1933 Act). The amounts of securities authorized by the appropriate regulatory authorities, as well as the securities registered under the 1933 Act, are closely monitored and appropriate filings are made to ensure flexibility in the capital markets. The Registrants generally obtain financing separately without credit support from any affiliate. See Note 8 to the financial statements under "Bank Credit Arrangements" for additional information.The Southern Company system does not maintain a centralized cash or money pool. Therefore, funds of each company are not commingled with funds of any other company inthe Southern Company system, except in the case ofSouthern Company Gas , as described below. The traditional electric operating companies and SEGCO may utilize aSouthern Company subsidiary organized to issue and sell commercial paper at their request and for their benefit. Proceeds from such issuances for the benefit of an individual company are loaned directly to that company. The obligations of each traditional electric operating company and SEGCO under these arrangements are several and there is no cross-affiliate credit support.Alabama Power also maintains its own separate commercial paper program. Southern Company Gas Capital obtains external financing forSouthern Company Gas and its subsidiaries, other than Nicor Gas, which obtains financing separately without credit support from any affiliates.Southern Company Gas maintains commercial paper programs at Southern Company Gas Capital and Nicor Gas. Nicor Gas' commercial paper program supports its working capital needs as Nicor Gas is not permitted to make money pool loans to affiliates. All of the otherSouthern Company Gas subsidiaries benefit from Southern Company Gas Capital's commercial paper program. By regulation, Nicor Gas is restricted, to the extent of its retained earnings balance, in the amount it can dividend or loan to affiliates and is not permitted to make money pool loans to affiliates. At December 31, 2020, the amount of subsidiary retained earnings restricted to dividend totaled $1.1 billion. This restriction did not impactSouthern Company Gas' ability to meet its cash obligations, nor does management expect such restriction to materially impactSouthern Company Gas' ability to meet its currently anticipated cash obligations. II-60 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)Southern Company and Subsidiary Companies 2020 Annual Report Certain Registrants' current liabilities frequently exceed their current assets because of long-term debt maturities and the periodic use of short-term debt as a funding source, as well as significant seasonal fluctuations in cash needs. The Registrants generally plan to refinance long-term debt as it matures. See Note 8 to the financial statements for additional information. Also see "Financing Activities" herein for information on financing activities that occurred subsequent to December 31, 2020. The following table shows the amount by which current liabilities exceeded current assets at December 31, 2020 for the applicable Registrants: Southern Georgia Southern At December 31, 2020 Company Power Mississippi Power Southern Power Company Gas (in millions) Current liabilities in excess of current assets $ 3,462 $ 1,343 $ 572 $ 250 $ 303 The Registrants believe the need for working capital can be adequately met by utilizing operating cash flows, as well as commercial paper, lines of credit, and short-term bank notes, as market conditions permit. In addition, under certain circumstances, the Subsidiary Registrants may utilize equity contributions and/or loans fromSouthern Company .Bank Credit Arrangements At December 31, 2020, the Registrants' unused committed credit arrangements with banks were as follows: Southern Southern Company Alabama Georgia Southern Company Southern At December 31, 2020 parent Power Power
Mississippi Power Power(a) Gas(b) SEGCO Company
(in millions)
Unused committed credit $ 1,999 $ 1,328 $ 1,728 $ 250 $ 591 $ 1,745 $ 30 $ 7,671
(a)At December 31, 2020, Southern Power also had two continuing letters of
credit facilities for standby letters of credit, of which $16 million was
unused. Southern Power's subsidiaries are not parties to its bank credit
arrangements or letter of credit facilities.
(b)Includes $1.245 billion and $500 million at Southern Company Gas Capital and
Nicor Gas, respectively.
Subject to applicable market conditions, the Registrants, Nicor Gas, and SEGCO
expect to renew or replace their bank credit arrangements as needed, prior to
expiration. In connection therewith, the Registrants, Nicor Gas, and SEGCO may
extend the maturity dates and/or increase or decrease the lending commitments
thereunder. A portion of the unused credit with banks is allocated to provide
liquidity support to the revenue bonds of the traditional electric operating
companies and the commercial paper programs of the Registrants, Nicor Gas, and
SEGCO. The amount of variable rate revenue bonds of the traditional electric
operating companies outstanding requiring liquidity support at December 31, 2020
was approximately $1.4 billion (comprised of approximately $854 million at
Alabama Power , $550 million at Georgia Power, and $34 million at Mississippi
Power). In addition, at December 31, 2020, Georgia Power and Mississippi Power
had approximately $174 million and $50 million, respectively, of fixed rate
revenue bonds outstanding that are required to be remarketed within the next 12
months. See Note 8 to the financial statements under "Bank Credit Arrangements"
for additional information.
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Southern Company and Subsidiary Companies 2020 Annual Report
Short-term Borrowings
The Registrants, Nicor Gas, and SEGCO make short-term borrowings primarily
through commercial paper programs that have the liquidity support of the
committed bank credit arrangements described above. Southern Power's
subsidiaries are not issuers or obligors under its commercial paper program.
Commercial paper and short-term bank term loans are included in notes payable in
the balance sheets. Details of the Registrants' short-term borrowings were as
follows:
Short-term Debt at the End of the Period
Amount Weighted Average
Outstanding Interest Rate
December 31, December 31,
2020 2019 2018 2020 2019 2018
(in millions)
Southern Company $ 609 $ 2,055 $ 2,915 0.3 % 2.1 % 3.1 %
Georgia Power 60 365 294 0.3 2.2 3.1
Mississippi Power 25 - - 0.4 - -
Southern Power 175 549 100 0.3 2.2 3.1
Southern Company Gas :
Southern Company Gas Capital $ 220 $ 372 $ 403 0.3 % 2.1 % 3.1 %
Nicor Gas 104 278 247 0.2 1.8 3.0
Southern Company Gas Total $ 324 $ 650 $ 650
0.2 % 2.0 % 3.0 %
Short-term Debt During the Period(*)
Weighted Average
Average Amount Outstanding Interest Rate Maximum Amount Outstanding
2020 2019 2018 2020 2019 2018 2020 2019 2018
(in millions) (in millions)
Southern Company $ 1,017 $ 1,240 $ 3,377 1.6 % 2.6 % 2.6 % $ 2,113 $ 2,914 $ 5,447
Alabama Power 20 17 27 1.1 2.6 2.3 155 190 258
Georgia Power 264 371 139 1.7 2.7 2.5 478 935 710
Mississippi Power 9 - 68 1.6 - 2.0 40 - 300
Southern Power 64 76 188 1.5 2.7 2.5 550 578 385
Southern Company Gas :
Southern Company Gas
Capital $ 316 $ 302 $ 520 1.4 % 2.6 % 2.3 % $ 641 $ 490 $ 1,361
Nicor Gas 49 91 123 1.4 2.3 2.2 278 278 275
Southern Company Gas
Total $ 365 $ 393 $ 643 1.4 % 2.5 % 2.3 %
(*) Average and maximum amounts are based upon daily balances during the 12-month periods ended December 31, 2020, 2019, and 2018.
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Georgia Southern
for): Company Alabama Power Power Mississippi Power Southern Power Company Gas
(in millions)
2020
Operating activities $ 6,696 $ 1,742 $ 2,784 $ 298 $ 901 $ 1,207
Investing activities (7,030) (2,122) (3,503) (323) 374 (1,417)
Financing activities (576) 16 676 (222) (1,372) 180
2019
Operating activities $ 5,781 $ 1,779 $ 2,907 $ 339 $ 1,385 $ 1,067
Investing activities (3,392) (1,963) (3,885) (263) (167) (1,386)
Financing activities (1,930) 765 918 (83) (1,120) 298
Fluctuations in cash flows from financing activities vary from year to year
based on capital needs and the maturity or redemption of securities.
Southern Company
Net cash provided from operating activities increased $0.9 billion in 2020 as
compared to 2019 primarily due to a $1.1 billion voluntary contribution to the
qualified pension plan in 2019 and the timing of vendor payments, partially
offset by the timing of receivable collections and customer bill credits issued
in 2020 by Alabama Power and Georgia Power. See Note 2 to the financial
statements under "Alabama Power" and "Georgia Power" and Note 11 to the
financial statements for additional information.
The net cash used for investing activities in 2020 and 2019 was primarily
related to the Subsidiary Registrants' construction programs, partially offset
by proceeds from the sale transactions described in Note 15 to the financial
statements, which totaled $1.0 billion and $5.1 billion in 2020 and 2019,
respectively.
The net cash used for financing activities in 2020 and 2019 was primarily
related to common stock dividend payments and net repayments of short-term bank
debt and commercial paper, partially offset by net issuances of long-term debt
and issuances of common stock.
Alabama Power
Net cash provided from operating activities decreased $37 million in 2020 as
compared to 2019 primarily due to approximately $136 million in customer
refunds, payments related to ARO settlements, timing of Rate CNP Compliance cost
recovery, and purchases of materials and supplies, partially offset by a $362
million voluntary contribution to the qualified pension plan in 2019. See Note 2
to the financial statements under "Alabama Power - Rate RSE" and " - Rate ECR"
and Notes 6 and 11 to the financial statements for additional information.
The net cash used for investing activities in 2020 and 2019 was primarily
related to gross property additions.
The net cash provided from financing activities in 2020 and 2019 was primarily
related to capital contributions from Southern Company and net long-term debt
issuances, partially offset by common stock dividend payments.
Georgia Power
Net cash provided from operating activities decreased $123 million in 2020 as
compared to 2019 primarily due to approximately $220 million in customer bill
credits issued in 2020 associated with the Georgia Power Tax Reform Settlement
Agreement and 2018 and 2019 earnings in excess of the allowed retail ROE range,
lower retail revenues, and higher income tax payments, partially offset by a
$200 million voluntary contribution to the qualified pension plan in 2019,
higher recovery of storm damage costs, and the timing of vendor payments. See
Note 2 to the financial statements under "Georgia Power" and Note 11 to the
financial statements for additional information.
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Southern Company and Subsidiary Companies 2020 Annual Report
The net cash used for investing activities in 2020 and 2019 was primarily
related to gross property additions, including a total of $2.7 billion related
to the construction of Plant Vogtle Units 3 and 4. See Note 2 to the financial
statements under "Georgia Power - Nuclear Construction" for additional
information on construction of Plant Vogtle Units 3 and 4.
The net cash provided from financing activities in 2020 and 2019 was primarily
related to capital contributions from Southern Company , borrowings from the FFB
for construction of Plant Vogtle Units 3 and 4, and net issuances and
reofferings of other debt, partially offset by common stock dividend payments.
Mississippi Power
Net cash provided from operating activities decreased $41 million in 2020 as
compared to 2019 primarily due to the closeout of the DOE contract related to
the Kemper County energy facility, $13 million of storm damage costs primarily
associated with Hurricane Zeta, $11 million primarily related to decreased fuel
cost recovery, and higher income tax payments, partially offset by a $54 million
voluntary contribution to the qualified pension plan in 2019. See Note 3 to the
financial statements under "Mississippi Power" and Note 11 to the financial
statements for additional information.
The net cash used for investing activities in 2020 and 2019 was primarily
related to gross property additions.
The net cash used for financing activities in 2020 was primarily related to the
repayment of senior notes at maturity, a return of capital and common stock
dividends paid to Southern Company , redemption of pollution control revenue
bonds, and repayment of short-term borrowings, partially offset by debt
issuances and capital contributions from Southern Company . The net cash used for
financing activities in 2019 was primarily related to a return of capital to
Southern Company and the redemption of senior notes, partially offset by capital
contributions from Southern Company and pollution control revenue bonds
reoffered to the public.
Southern Power
Net cash provided from operating activities decreased $484 million in 2020 as
compared to 2019 primarily due to a reduction in the utilization of tax credits
in 2020. See FUTURE EARNINGS POTENTIAL - "Income Tax Matters - Tax Credits"
herein and Note 10 to the financial statements for additional information.
The net cash provided from investing activities in 2020 was primarily related to
proceeds from the disposition of Plant Mankato, partially offset by ongoing
construction activities and the acquisition of the Beech Ridge II wind facility.
The net cash used for investing activities in 2019 was primarily related to
Southern Power's investment in DSGP and ongoing construction activities, largely
offset by proceeds from the sales of Plant Nacogdoches and certain wind turbine
equipment. See Note 15 to the financial statements under "Southern Power" for
additional information.
The net cash used for financing activities in 2020 was primarily related to the
repayment of senior notes at maturity, common stock dividend payments, and net
repayments of short-term bank debt and commercial paper, partially offset by net
contributions from noncontrolling interests. The net cash used for financing
activities in 2019 was primarily related to returns of capital and common stock
dividends paid to Southern Company , the repayment at maturity of senior notes,
and distributions to noncontrolling interests, partially offset by proceeds from
net issuances of commercial paper.
Southern Company Gas
Net cash provided from operating activities increased $140 million in 2020 as
compared to 2019 primarily due to a $145 million voluntary contribution to the
qualified pension plan in 2019, as well as the timing of vendor payments, energy
marketing payables, and income tax payments, partially offset by the timing of
customer receivable collections and energy marketing receivables. The timing of
energy marketing payables and receivables was due to increased volumes of
natural gas purchased and sold and higher natural gas prices. See Note 11 to the
financial statements for additional information.
The net cash used for investing activities in 2020 was primarily related to
construction of transportation and distribution assets recovered through base
rates and infrastructure investments recovered through replacement programs at
gas distribution operations and capital contributed to equity method
investments, partially offset by proceeds from the sales of Jefferson Island and
interests in Pivotal LNG and Atlantic Coast Pipeline. The net cash used for
investing activities in 2019 was primarily related to gross property additions
related to utility capital expenditures and infrastructure investments recovered
through replacement programs at gas distribution operations and capital
contributed to equity method pipeline investments, partially offset by proceeds
from the sale of Triton and capital distributions in excess of earnings from
equity method pipeline investments. See Notes 7 and 15 to the financial
statements for additional information.
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Southern Company and Subsidiary Companies 2020 Annual Report
The net cash provided from financing activities in 2020 was primarily related to
proceeds from issuances of senior notes and first mortgage bonds, as well as
capital contributions from Southern Company , partially offset by common stock
dividend payments and net repayments of short-term borrowings. The net cash
provided from financing activities in 2019 was primarily related to capital
contributions from Southern Company and net proceeds from the issuance of
long-term debt, partially offset by payments of common stock dividends.
Significant Balance Sheet Changes
Southern Company
Significant balance sheet changes in 2020 for Southern Company included:
•an increase of $4.6 billion in total property, plant, and equipment primarily
related to the Subsidiary Registrants' construction programs;
•an increase of $3.8 billion in long-term debt (including amounts due within one
year) related to new issuances;
•a decrease of $1.4 billion in notes payable related to net repayments of
short-term bank debt and commercial paper;
•increases of $0.9 billion and $0.8 billion in AROs and regulatory assets
associated with AROs, respectively, primarily related to cost estimate updates
at Alabama Power and Georgia Power for ash pond facilities;
•a decrease of $0.9 billion in cash and cash equivalents, as discussed further
under "Analysis of Cash Flows - Southern Company " herein;
•a decrease of $0.7 billion in assets held for sale related to the completion of
Southern Power's sale of Plant Mankato and Southern Company Gas' sale of its
interests in Pivotal LNG and Atlantic Coast Pipeline; and
•an increase of $0.5 billion in total common stockholders' equity related to net
income, partially offset by common stock dividend payments.
See "Financing Activities" herein and Notes 5, 6, 8, and 15 to the financial
statements for additional information.
Alabama Power
Significant balance sheet changes in 2020 for Alabama Power included:
•an increase of $1.3 billion in total property, plant, and equipment primarily
related to the acquisition of the Central Alabama Generating Station,
construction of distribution and transmission facilities, and the installation
of equipment to comply with environmental standards;
•an increase of $855 million in total common stockholder's equity primarily due
to capital contributions from Southern Company ;
•increases of $422 million and $375 million in regulatory assets associated with
AROs and ARO deferred liabilities, respectively, primarily related to cost
estimate updates for certain ash pond facilities;
•a decrease of $364 million in cash and cash equivalents primarily due to the
acquisition of the Central Alabama Generation Station; and
•an increase of $348 million in long-term debt (including securities due within
one year) primarily due to an increase in outstanding senior notes.
See "Financing Activities - Alabama Power " herein and Notes 5, 6, and 15 to the
financial statements for additional information.
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Southern Company and Subsidiary Companies 2020 Annual Report
Georgia Power
Significant balance sheet changes in 2020 for Georgia Power included:
•an increase of $2.2 billion in total property, plant, and equipment primarily
related to the construction of generation, transmission, and distribution
facilities, including $1.1 billion for Plant Vogtle Units 3 and 4 (net of
pre-tax charges totaling $325 million for estimated probable losses);
•an increase of $1.4 billion in common stockholder's equity primarily due to
capital contributions from Southern Company ;
•an increase of $1.2 billion in long-term debt (including securities due within
one year) primarily due to a net increase in outstanding senior notes and
borrowings from the FFB for construction of Plant Vogtle Units 3 and 4,
partially offset by pollution control revenue bond repurchases; and
•increases of $0.5 billion and $0.3 billion in AROs and regulatory assets
associated with AROs, respectively, primarily due to cost estimate updates for
ash pond closures.
See "Financing Activities - Georgia Power" herein and Notes 2, 5, 6, and 8 to
the financial statements for additional information.
Mississippi Power
Significant balance sheet changes in 2020 for Mississippi Power included:
•a decrease of $247 million in cash and cash equivalents and a decrease of $170
million in outstanding long-term debt (including amounts due within one year)
primarily related to the repayment of senior notes at maturity;
•an increase of $92 million in total property, plant, and equipment primarily
related to the installation of equipment to comply with environmental standards
and the construction of transmission and distribution facilities;
•an increase of $90 million in common stockholder's equity primarily from net
income and capital contributions from Southern Company , partially offset by
dividends paid and a return of capital to Southern Company ;
•a decrease of $65 million in deferred credits related to income taxes due to
amortization and reclassification of certain amounts to other regulatory
liabilities, current for the expected flowback of excess deferred income taxes;
and
•a decrease of $61 million in other regulatory liabilities, deferred primarily
due to a reduction in the property damage reserve primarily associated with
Hurricane Zeta.
See "Financing Activities - Mississippi Power" herein and Notes 2 and 10 to the
financial statements for additional information.
Southern Power
Significant balance sheet changes in 2020 for Southern Power included:
•an increase of $634 million in property, plant, and equipment in service and a
decrease of $388 million in CWIP primarily due to the Skookumchuck and Reading
wind facilities being placed in service and the acquisition of the Beech Ridge
II wind facility;
•a decrease of $618 million in assets held for sale (of which $17 million
related to current assets) due to completion of the sale of Plant Mankato;
•a decrease of $525 million in securities due within one year primarily related
to the maturity of senior notes;
•a decrease of $374 million in notes payable due to net repayments of short-term
bank debt and commercial paper; and
•a decrease of $289 million in accumulated deferred income tax assets primarily
related to the utilization of tax credits in 2020.
See "Financing Activities - Southern Power" herein and Notes 5, 10, and 15 to
the financial statements for additional information.
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Southern Company and Subsidiary Companies 2020 Annual Report
Southern Company Gas
Significant balance sheet changes in 2020 for Southern Company Gas included:
•an increase of $1.1 billion in total property, plant, and equipment primarily
related to the construction of transportation and distribution assets recovered
through base rates and infrastructure investments recovered through replacement
programs;
•an increase of $781 million in long-term debt (including securities due within
one year) due to the issuance of senior notes and mortgage bonds;
•a decrease of $326 million in notes payable due to net repayments of short-term
borrowings;
•an increase of $261 million in common stockholder's equity primarily from net
income and capital contributions from Southern Company , partially offset by
dividends paid to Southern Company ;
•a decrease of $171 million in assets held for sale due to the completed sale of
interests in Pivotal LNG and Atlantic Coast Pipeline; and
•increases of $88 million and $52 million in energy marketing receivables and
payables, respectively, due to increased volumes of natural gas purchased and
sold and higher natural gas prices.
See "Financing Activities - Southern Company Gas " herein and Notes 5 and 15 to
the financial statements for additional information.
Financing Activities
The following table outlines the Registrants' long-term debt financing
activities for the year ended December 31, 2020:
Revenue Other
Bond Revenue Long-Term
Senior Note Issuances and Bond Other Debt
Senior Maturities, Reofferings Maturities, Long-Term Redemptions
Note Redemptions, and of Purchased Redemptions, Debt and
Company Issuances Repurchases Bonds and Repurchases Issuances Maturities(a)
(in millions)
Southern Company parent $ 1,000 $ 600 $ - $ - $ 3,000 $ 1,000
Alabama Power 600 250 87 87 - -
Georgia Power 1,500 950 53 336 848 84
Mississippi Power - 275 34 41 100 -
Southern Power - 825 - - - -
Southern Company Gas 500 - - - 325 -
Other - - - - - 16
Elimination(b) - - - - - (6)
Southern Company $ 3,600 $ 2,900 $ 174 $ 464 $ 4,273 $ 1,094
(a)Includes reductions in finance lease obligations resulting from cash payments
under finance leases and, for Georgia Power, principal amortization payments for
FFB borrowings.
(b)Represents reductions in affiliate finance lease obligations at Georgia
Power, which are eliminated in Southern Company's consolidated financial
statements.
Except as otherwise described herein, the Registrants used the proceeds of debt
issuances for their redemptions and maturities shown in the table above, to
repay short-term indebtedness, and for general corporate purposes, including
working capital. The Subsidiary Registrants also used the proceeds for their
construction programs.
In addition to any financings that may be necessary to meet capital requirements
and contractual obligations, the Registrants plan to continue, when economically
feasible, a program to retire higher-cost securities and replace these
obligations with lower-cost capital if market conditions permit.
Southern Company
During 2020, Southern Company issued approximately 3.3 million shares of common
stock through employee equity compensation plans and received proceeds of
approximately $74 million.
In January 2020, Southern Company issued $1.0 billion aggregate principal amount
of Series 2020A 4.95% Junior Subordinated Notes due January 30, 2080.
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Southern Company and Subsidiary Companies 2020 Annual Report
In March 2020, Southern Company borrowed $250 million pursuant to a short-term
uncommitted bank credit arrangement. In April 2020 and September 2020, Southern
Company repaid $50 million and $200 million, respectively.
Also in March 2020, Southern Company entered into a $75 million short-term
floating rate bank loan bearing interest based on one-month LIBOR, which it
repaid in September 2020.
In April 2020, Southern Company issued $1.0 billion aggregate principal amount
of Series 2020A 3.70% Senior Notes due April 30, 2030.
In May 2020, Southern Company redeemed all $600 million aggregate principal
amount of its Series 2015A 2.750% Senior Notes due June 15, 2020.
In September 2020, Southern Company issued $1.25 billion aggregate principal
amount of Series 2020B 4.00% Fixed-to-Fixed Reset Rate Junior Subordinated Notes
due January 15, 2051 and $750 million aggregate principal amount of Series 2020C
4.20% Junior Subordinated Notes due October 15, 2060.
In October 2020, Southern Company redeemed all of its $1.0 billion aggregate
principal amount outstanding of Series 2015A 6.25% Junior Subordinated Notes due
October 15, 2075.
Subsequent to December 31, 2020, Southern Company borrowed $25 million pursuant
to a short-term uncommitted bank credit arrangement, bearing interest at a rate
agreed upon by Southern Company and the bank from time to time.
Alabama Power
In March 2020, Alabama Power purchased and held approximately $87 million
aggregate principal amount of The Industrial Development Board of the City of
Mobile, Alabama Pollution Control Revenue Bonds (Alabama Power Company Plant
Barry Project), Series 2007-A, which were remarketed to the public in June 2020.
In August 2020, Alabama Power issued $600 million aggregate principal amount of
Series 2020A 1.45% Senior Notes due September 15, 2030.
In October 2020, Alabama Power repaid at maturity $250 million aggregate
principal amount of its Series 2010A 3.375% Senior Notes.
Subsequent to December 31, 2020, Alabama Power received a capital contribution
totaling $600 million from Southern Company .
Georgia Power
In January 2020, Georgia Power issued $700 million aggregate principal amount of
Series 2020A 2.10% Senior Notes due July 30, 2023, $500 million aggregate
principal amount of Series 2020B 3.70% Senior Notes due January 30, 2050, and an
additional $300 million aggregate principal amount of Series 2019B 2.65% Senior
Notes due September 15, 2029.
In February 2020, Georgia Power redeemed all $500 million aggregate principal
amount of its Series 2017C 2.00% Senior Notes due September 8, 2020.
Also in February 2020, Georgia Power purchased and held approximately $28
million, $49 million, and $18 million aggregate principal amounts of Development
Authority of Monroe County (Georgia ) Pollution Control Revenue Bonds (Georgia
Power Company Plant Scherer Project), Second Series 2006, First Series 2012, and
First Series 2013, respectively, which may be remarketed to the public at a
later date.
In March 2020, Georgia Power repaid at maturity $450 million aggregate principal
amount of its Series 2017A 2.00% Senior Notes.
Also in March 2020, Georgia Power purchased and subsequently remarketed to the
public approximately $53 million of pollution control revenue bonds.
Also in March 2020, Georgia Power borrowed $200 million pursuant to a $250
million short-term uncommitted bank credit arrangement. In April 2020, Georgia
Power borrowed the remaining $50 million pursuant to this bank credit
arrangement. In September 2020, Georgia Power repaid the full $250 million.
Also in March 2020, Georgia Power extended one of its $125 million short-term
floating rate bank loans to a long-term term loan, which matures in June 2021.
In June 2020, Georgia Power extended its other $125 million short-term floating
rate bank loan to mature in December 2020. In September 2020, Georgia Power
repaid this $125 million bank loan.
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Southern Company and Subsidiary Companies 2020 Annual Report
In June and December 2020, Georgia Power made additional borrowings under the
FFB Credit Facilities in an aggregate principal amount of $519 million and $329
million, respectively, at an interest rate of 1.652% and 1.737%, respectively,
through the final maturity date of February 20, 2044. The proceeds were used to
reimburse Georgia Power for Eligible Project Costs relating to the construction
of Plant Vogtle Units 3 and 4. During 2020, Georgia Power made principal
amortization payments of $73 million under the FFB Credit Facilities. See Note 8
to the financial statements under "Long-term Debt - DOE Loan Guarantee
Borrowings" for additional information.
In December 2020, Georgia Power purchased and held approximately $89 million
aggregate principal amount of Development Authority of Monroe County (Georgia )
Pollution Control Revenue Bonds (Georgia Power Company Plant Scherer Project),
Second Series 2009, $53 million aggregate principal amount of Development
Authority of Floyd County (Georgia ) Pollution Control Revenue Bonds (Georgia
Power Company Plant Hammond Project), First Series 2010, and $46 million
aggregate principal amounts of Development Authority of Burke County (Georgia )
Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project),
First Series 1996, which may be remarketed to the public at a later date.
Subsequent to December 31, 2020, Georgia Power received a capital contribution
totaling $330 million from Southern Company and called for redemption all $325
million aggregate principal amount of its Series 2016B 2.40% Senior Notes due
April 1, 2021.
Mississippi Power
In February 2020, Mississippi Power entered into $60 million and $15 million
floating rate bank term loans, which mature in December 2021 and January 2022,
respectively, each bearing interest based on one-month LIBOR.
In March 2020, Mississippi Power entered into a $125 million revolving credit
arrangement that matures in March 2023 and borrowed $40 million (short term) and
$25 million (long term) pursuant to the arrangement, each bearing interest based
on one-month LIBOR. In May 2020, Mississippi Power repaid the $40 million
short-term portion.
In March 2020, Mississippi Power repaid at maturity the remaining $275 million
aggregate principal amount of its Series 2018A Floating Rate Senior Notes.
In April 2020, Mississippi Power purchased and held approximately $11 million,
$14 million, and $9 million aggregate principal amount of Mississippi Business
Finance Corporation Solid Waste Disposal Facilities Revenue Bonds, Series 1995
(Mississippi Power Company Project), Solid Waste Disposal Facilities Revenue
Refunding Bonds, Series 1998 (Mississippi Power Company Project), and Revenue
Bonds, Series 1999 (Mississippi Power Company Project), respectively, which were
remarketed to the public in May 2020.
Also in April 2020, Mississippi Power redeemed approximately $7 million
aggregate principal amount of The Industrial Development Board of the City of
Eutaw, Alabama Pollution Control Revenue Refunding Bonds, Series 1992
(Mississippi Power Greene County Plant Project) due December 1, 2020.
Subsequent to December 31, 2020, Mississippi Power received capital
contributions totaling $100 million from Southern Company .
Southern Power
In February 2020, Southern Power repaid its $100 million short-term floating
rate bank loan entered into in December 2019.
In June 2020, Southern Power repaid at maturity $300 million aggregate principal
amount of its Series 2015B 2.375% Senior Notes.
In December 2020, Southern Power repaid at maturity $525 million aggregate
principal amount of its Series 2017A Floating Rate Senior Notes.
Subsequent to December 31, 2020, Southern Power issued $400 million aggregate
principal amount of Series 2021A 0.90% Senior Notes due January 15, 2026. An
amount equal to the net proceeds of the senior notes is being allocated to
finance or refinance, in whole or in part, one or more renewable energy
projects.
Also subsequent to December 31, 2020, Southern Power made a return of capital to
Southern Company totaling $271 million.
Southern Company Gas
In March 2020, Southern Company Gas Capital, as borrower, and Southern Company
Gas , as guarantor, entered into a $150 million short-term floating rate bank
loan bearing interest based on one-month LIBOR. In December 2020, Southern
Company Gas Capital repaid the outstanding balance.
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Southern Company and Subsidiary Companies 2020 Annual Report
Also in March 2020, Southern Company Gas Capital borrowed approximately $95
million pursuant to a short-term uncommitted bank credit arrangement, guaranteed
by Southern Company Gas . In August 2020, Southern Company Gas Capital repaid the
outstanding balance.
In August 2020, Southern Company Gas Capital, as borrower, and Southern Company
Gas , as guarantor, issued $500 million aggregate principal amount of Series
2020A 1.75% Senior Notes due January 15, 2031.
In August 2020 and November 2020, Nicor Gas issued $150 million and $175
million, respectively, aggregate principal amount of first mortgage bonds in a
private placement.
Subsequent to December 31, 2020, Atlanta Gas Light repaid at maturity $30
million aggregate principal amount of 9.1% medium-term notes.
Credit Rating Risk
At December 31, 2020, the Registrants did not have any credit arrangements that
would require material changes in payment schedules or terminations as a result
of a credit rating downgrade.
There are certain contracts that could require collateral, but not accelerated
payment, in the event of a credit rating change of certain Registrants to BBB
and/or Baa2 or below. These contracts are primarily for physical electricity and
natural gas purchases and sales, fuel purchases, fuel transportation and
storage, energy price risk management, transmission, interest rate management,
and, for Georgia Power, construction of new generation at Plant Vogtle Units 3
and 4.
The maximum potential collateral requirements under these contracts at
December 31, 2020 were as follows:
Southern Southern Southern Company
Credit Ratings Company(*) Alabama Power Georgia Power Mississippi Power Power(*) Gas
(in millions)
At BBB and/or Baa2 $ 36 $ 1 $ - $ - $ 35 $ -
At BBB- and/or Baa3 416 2 61 1 355 -
At BB+ and/or Ba1 or
below 1,929 366 958 313 1,201 12
(*)Southern Power has PPAs that could require collateral, but not accelerated
payment, in the event of a downgrade of Southern Power's credit. The PPAs
require credit assurances without stating a specific credit rating. The amount
of collateral required would depend upon actual losses resulting from a credit
downgrade. Southern Power had $105 million of cash collateral posted related to
PPA requirements at December 31, 2020.
The amounts in the previous table for the traditional electric operating
companies and Southern Power include certain agreements that could require
collateral if either Alabama Power or Georgia Power has a credit rating change
to below investment grade. Generally, collateral may be provided by a Southern
Company guaranty, letter of credit, or cash. Additionally, a credit rating
downgrade could impact the ability of the Registrants to access capital markets
and would be likely to impact the cost at which they do so.
Mississippi Power and its largest retail customer, Chevron , have agreements
under which Mississippi Power continues to provide retail service to the Chevron
refinery in Pascagoula, Mississippi through 2038. The agreements grant Chevron a
security interest in the co-generation assets owned by Mississippi Power located
at the refinery that is exercisable upon the occurrence of (i) certain
bankruptcy events or (ii) other events of default coupled with specific
reductions in steam output at the facility and a downgrade of Mississippi
Power's credit rating to below investment grade by two of the three rating
agencies.
On August 27, 2020, Moody's upgraded Mississippi Power's senior unsecured
long-term debt rating to Baa1 from Baa2 and revised its rating outlook to stable
from positive.
On September 25, 2020, Fitch upgraded Mississippi Power's senior unsecured
long-term debt rating to A- from BBB+ and revised its rating outlook to stable
from positive.
Also on September 25, 2020, Fitch revised the ratings outlook of Southern
Company and its subsidiaries (excluding Georgia Power and Mississippi Power) to
stable from negative.
Market Price Risk
The Registrants had no material change in market risk exposure for the year
ended December 31, 2020 when compared to the year ended December 31, 2019. See
Note 14 to the financial statements for an in-depth discussion of the
Registrants' derivatives, as well as Note 1 to the financial statements under
"Financial Instruments" for additional information.
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Southern Company and Subsidiary Companies 2020 Annual Report
Due to cost-based rate regulation and other various cost recovery mechanisms,
the traditional electric operating companies and the natural gas distribution
utilities that sell natural gas directly to end-use customers continue to have
limited exposure to market volatility in interest rates, foreign currency
exchange rates, commodity fuel prices, and prices of electricity. The
traditional electric operating companies and certain of the natural gas
distribution utilities manage fuel-hedging programs implemented per the
guidelines of their respective state PSCs or other applicable state regulatory
agencies to hedge the impact of market fluctuations in natural gas prices for
customers. Mississippi Power also manages wholesale fuel-hedging programs under
agreements with its wholesale customers. Because energy from Southern Power's
facilities is primarily sold under long-term PPAs with tolling agreements and
provisions shifting substantially all of the responsibility for fuel cost to the
counterparties, Southern Power's exposure to market volatility in commodity fuel
prices and prices of electricity is generally limited. However, Southern Power
has been and may continue to be exposed to market volatility in energy-related
commodity prices as a result of uncontracted generating capacity. To mitigate
residual risks relative to movements in electricity prices, the traditional
electric operating companies and Southern Power may enter into physical
fixed-price contracts for the purchase and sale of electricity through the
wholesale electricity market and, to a lesser extent, financial hedge contracts
for natural gas purchases; however, a significant portion of contracts are
priced at market.
Certain of Southern Company Gas' non-regulated operations routinely utilize
various types of derivative instruments to economically hedge certain commodity
price and weather risks inherent in the natural gas industry. These instruments
include a variety of exchange-traded and OTC energy contracts, such as forward
contracts, futures contracts, options contracts, and swap agreements. Southern
Company Gas' gas marketing services and wholesale gas services businesses also
actively manage storage positions through a variety of hedging transactions for
the purpose of managing exposures arising from changing natural gas
prices. These hedging instruments are used to substantially protect economic
margins (as spreads between wholesale and retail natural gas prices widen
between periods) and thereby minimize exposure to declining operating margins.
Some of these economic hedge activities may not qualify, or may not be
designated, for hedge accounting treatment.
The following table provides information related to variable interest rate
exposure on long-term debt (including amounts due within one year) at
December 31, 2020 for the applicable Registrants:
Alabama Georgia Mississippi
At December 31, 2020 Southern Company(*) Power Power Power
(in millions, except percentages)
Long-term variable interest rate exposure $ 3,428 $ 1,079 $ 675 $ 74
Weighted average interest rate on
long-term variable interest rate exposure 0.77 % 0.76 % 0.23 % 0.70 %
Impact on annualized interest expense of
100 basis point change in interest rates $ 34 $ 11 $ 7 $ 1
(*)Includes $1.5 billion of long-term variable interest rate exposure at the
Southern Company parent entity.
The Registrants may enter into interest rate derivatives designated as hedges,
which are intended to mitigate interest rate volatility related to forecasted
debt financings and existing fixed and floating rate obligations. See Note 14 to
the financial statements under "Interest Rate Derivatives" for additional
information.
Southern Power had foreign currency denominated debt of €1.1 billion at
December 31, 2020. Southern Power has mitigated its exposure to foreign currency
exchange rate risk through the use of foreign currency swaps converting all
interest and principal payments to fixed-rate U.S. dollars. See Note 14 to the
financial statements under "Foreign Currency Derivatives" for additional
information.
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Southern Company and Subsidiary Companies 2020 Annual Report
Changes in fair value of energy-related derivative contracts for Southern
Company and Southern Company Gas for the years ended December 31, 2020 and 2019
are provided in the table below. The fair value of energy-related derivative
contracts was not material for the other Registrants. At December 31, 2020 and
2019, substantially all of the traditional electric operating companies' and
certain of the natural gas distribution utilities' energy-related derivative
contracts were designated as regulatory hedges and were related to the
applicable company's fuel-hedging program.
Southern Company
Southern Company(a) Gas(a)
(in millions)
Contracts outstanding at December 31, 2018, assets (liabilities),
net $ (201) $ (167)
Contracts realized or settled 69 26
Current period changes(b) 105 213
Disposition 6 -
Contracts outstanding at December 31, 2019, assets (liabilities),
net $ (21) $ 72
Contracts realized or settled (14) (98)
Current period changes(b) 142 127Contracts outstanding at December 31, 2020, assets (liabilities), net
$ 107 $ 101
(a)Excludes cash collateral held on deposit in broker margin accounts of $28
million, $99 million, and $277 million at December 31, 2020, 2019, and 2018,
respectively, and premium and intrinsic value associated with weather
derivatives of $6 million, $4 million, and $8 million at December 31, 2020,
2019, and 2018, respectively.
(b)The changes in fair value of energy-related derivative contracts are
substantially attributable to both the volume and the price of natural gas.
Current period changes also include the changes in fair value of new contracts
entered into during the period, if any.
The net hedge volumes of energy-related derivative contracts for natural gas
purchased (sold) at December 31, 2020 and 2019 for Southern Company and Southern
Company Gas were as follows:
Southern Company Southern Company Gas
mmBtu Volume (in millions)
At December 31, 2020:
Commodity - Natural gas swaps 262 -
Commodity - Natural gas options 574 523
Total hedge volume 836 523
At December 31, 2019:
Commodity - Natural gas swaps 327 -
Commodity - Natural gas options 262 218
Total hedge volume 589 218
Southern Company Gas' derivative contracts are comprised of both long and short
natural gas positions. A long position is a contract to purchase natural gas,
and a short position is a contract to sell natural gas. The volumes presented
above for Southern Company Gas represent the net of long natural gas positions
of 4.42 billion mmBtu and short natural gas positions of 3.90 billion mmBtu at
December 31, 2020 and the net of long natural gas positions of 4.10 billion
mmBtu and short natural gas positions of 3.88 billion mmBtu at December 31,
2019.
For the Southern Company system, the weighted average swap contract cost per
mmBtu was equal to market prices at December 31, 2020 and was approximately
$0.28 per mmBtu above market prices at December 31, 2019. The change in option
fair value is primarily attributable to the volatility of the market and the
underlying change in the natural gas price. Substantially all of the traditional
electric operating companies' natural gas hedge gains and losses are recovered
through their respective fuel cost recovery clauses.
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Southern Company and Subsidiary Companies 2020 Annual Report
The Registrants use over-the-counter contracts that are not exchange traded but
are fair valued using prices which are market observable, and thus fall into
Level 2 of the fair value hierarchy. In addition, Southern Company Gas uses
exchange-traded market-observable contracts, which are categorized as Level 1,
and contracts that include a combination of observable and unobservable
components, which are categorized as Level 3. See Note 13 to the financial
statements for further discussion of fair value measurements. The maturities of
the energy-related derivative contracts for Southern Company and Southern
Company Gas at December 31, 2020 were as follows:
Fair Value Measurements of Contracts at
December 31, 2020
Total Maturity
Fair Value 2021 2022 - 2023 2024 - 2025
(in millions)
Southern Company
Level 1(a) $ 13 $ 10 $ (11) $ 14
Level 2(b) 66 49 5 12
Level 3 28 9 8 11
Southern Company total(c) $ 107 $ 68 $ 2 $ 37
Southern Company Gas
Level 1(a) $ 13 $ 10 $ (11) $ 14
Level 2(b) 60 43 5 12
Level 3 28 9 8 11
Southern Company Gas total(c) $ 101 $ 62 $ 2 $ 37
(a)Valued using NYMEX futures prices. (b)Level 2 amounts forSouthern Company Gas are valued using basis transactions that represent the cost to transport natural gas from a NYMEX delivery point to the contract delivery point. These transactions are based on quotes obtained either through electronic trading platforms or directly from brokers. (c)Excludes cash collateral of $28 million as well as premium and associated intrinsic value associated with weather derivatives of $6 million at December 31, 2020. The Registrants are exposed to risk in the event of nonperformance by counterparties to energy-related and interest rate derivative contracts, as applicable. The Registrants only enter into agreements and material transactions with counterparties that have investment grade credit ratings byMoody's and S&P, or with counterparties who have posted collateral to cover potential credit exposure. Therefore, the Registrants do not anticipate market risk exposure from nonperformance by the counterparties. For additional information, see Note 1 to the financial statements under "Financial Instruments" and Note 14 to the financial statements.Southern Company performs periodic reviews of its leveraged lease transactions, both domestic and international, and the creditworthiness of the lessees, including a review of the value of the underlying leased assets and the credit ratings of the lessees.Southern Company's domestic lease transactions generally do not have any credit enhancement mechanisms; however, the lessees in its international lease transactions have pledged various deposits as additional security to secure the obligations. The lessees inSouthern Company's international lease transactions are also required to provide additional collateral in the event of a credit downgrade below a certain level. See Notes 1 and 3 to the financial statements under "Leveraged Leases" and "Other Matters -Southern Company ," respectively, for additional information, including recent impairment charges related to certain leveraged lease investments. Southern Company Gas Value at Risk (VaR) VaR is the maximum potential loss in portfolio value over a specified time period that is not expected to be exceeded within a given degree of probability.Southern Company Gas' VaR may not be comparable to that of other companies due to differences in the factors used to calculate VaR.Southern Company Gas' VaR is determined on a 95% confidence interval and a one-day holding period, which means that 95% of the time, the risk of loss in a day from a portfolio of positions is expected to be less than or equal to the amount of VaR calculated. The open exposure ofSouthern Company Gas is managed in accordance with established policies that limit market risk and require daily reporting of potential financial exposure to senior management. BecauseSouthern Company Gas generally manages physical gas assets and economically protects its positions by hedging in the II-73 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)Southern Company and Subsidiary Companies 2020 Annual Report futures markets,Southern Company Gas' open exposure is generally mitigated.Southern Company Gas employs daily risk testing, using both VaR and stress testing, to evaluate the risk of its positions.Southern Company Gas actively monitors open commodity positions and the resulting VaR and maintains a relatively small risk exposure as total buy volume is close to sell volume, with minimal open natural gas price risk. Based on a 95% confidence interval and employing a one-day holding period, SouthStar's portfolio of positions for all periods presented was immaterial.Southern Company Gas' wholesale gas services segment had the following VaRs at December 31: 2020 2019 2018 (in millions) Period end(*) $ 1.3 $ 2.6 $ 6.4 Average 2.5 3.4 3.7 High(*) 4.6 7.0 11.7 Low 1.2 2.1 1.2 (*)The VaR at December 31, 2018 reflects significant natural gas price increases in Sequent's key markets driven by an industry-wide lower-than-normal natural gas storage inventory position and colder-than-normal weather in the middle of fourth quarter 2018. As weather and natural gas prices moderated subsequent to December 31, 2018, VaR declined. Credit RiskSouthern Company (except as discussed herein), the traditional electric operating companies, and Southern Power are not exposed to any concentrations of credit risk.Southern Company Gas' exposure to concentrations of credit risk is discussed herein. Southern Company Gas Gas Distribution Operations Concentration of credit risk occurs atAtlanta Gas Light for amounts billed for services and other costs to its customers, which consist of the 16 Marketers inGeorgia . The credit risk exposure to the Marketers varies seasonally, with the lowest exposure in the non-peak summer months and the highest exposure in the peak winter months. Marketers are responsible for the retail sale of natural gas to end-use customers inGeorgia . The provisions ofAtlanta Gas Light's tariff allowAtlanta Gas Light to obtain credit security support in an amount equal to a minimum of two times a Marketer's highest month's estimated bill fromAtlanta Gas Light . For 2020, the four largest Marketers based on customer count, which includes SouthStar, accounted for 21% ofSouthern Company Gas' adjusted operating margin and 25% of adjusted operating margin forSouthern Company Gas' gas distribution operations segment. Several factors are designed to mitigateSouthern Company Gas' risks from the increased concentration of credit that has resulted from deregulation. In addition to the security support described above,Atlanta Gas Light bills intrastate delivery service to Marketers in advance rather than in arrears.Atlanta Gas Light accepts credit support in the form of cash deposits, letters of credit/surety bonds from acceptable issuers, and corporate guarantees from investment-grade entities.Southern Company Gas reviews the adequacy of credit support coverage, credit rating profiles of credit support providers, and payment status of each Marketer.Southern Company Gas believes that adequate policies and procedures are in place to properly quantify, manage, and report onAtlanta Gas Light's credit risk exposure to Marketers.Atlanta Gas Light also faces potential credit risk in connection with assignments of interstate pipeline transportation and storage capacity to Marketers. AlthoughAtlanta Gas Light assigns this capacity to Marketers, in the event that a Marketer fails to pay the interstate pipelines for the capacity, the interstate pipelines would likely seek repayment fromAtlanta Gas Light . Wholesale Gas ServicesSouthern Company Gas has established credit policies to determine and monitor the creditworthiness of counterparties, including requirements to post collateral or other credit security, as well as the quality of pledged collateral.Southern Company Gas also utilizes netting agreements whenever possible to mitigate exposure to counterparty credit risk. When more than one derivative transaction with the same counterparty is outstanding and a legally enforceable netting agreement exists with that counterparty, the "net" mark-to-market exposure represents a reasonable measure ofSouthern Company Gas' credit risk with that counterparty. Netting agreements also enableSouthern Company Gas to net certain assets and liabilities by counterparty across product lines and against cash collateral, provided the netting and cash collateral agreements include such provisions. While the amounts due from, or owed to, counterparties are settled net, they are recorded on a gross basis on the balance sheet as energy marketing receivables and energy marketing payables. II-74 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)Southern Company and Subsidiary Companies 2020 Annual ReportSouthern Company Gas may require counterparties to pledge additional collateral when deemed necessary. Collateral or credit security is most often in the form of cash or letters of credit from an investment-grade financial institution but may also include cash orU.S. government securities held by a trustee.Southern Company Gas conducts credit evaluations and obtains appropriate internal approvals for a counterparty's line of credit before any transaction with the counterparty is executed. In most cases, the counterparty must have an investment grade rating, which includes a minimum long-term debt rating of Baa3 fromMoody's and BBB- from S&P. Generally,Southern Company Gas requires credit enhancements by way of a guaranty, cash deposit, or letter of credit for transaction counterparties that do not have investment grade ratings. Certain ofSouthern Company Gas' derivative instruments contain credit-risk-related or other contingent features that could increase the payments for collateral it posts in the normal course of business when its financial instruments are in net liability positions. At December 31, 2020, for agreements with such features,Southern Company Gas' derivative instruments with liability fair values were immaterial andSouthern Company Gas had no collateral posted with derivatives counterparties to satisfy these arrangements.Southern Company Gas has a concentration of credit risk as measured by its 30-day receivable exposure plus forward exposure. At December 31, 2020, the top 20 counterparties ofSouthern Company Gas' wholesale gas services segment represented approximately 58%, or $234 million, of its total counterparty exposure and had a weighted average S&P equivalent credit rating of A-, all of which is consistent with the prior year. The S&P equivalent credit rating is determined by a process of converting the lower of the S&P orMoody's ratings to an internal rating ranging from 9 to 1, with 9 being equivalent toAAA /Aaa by S&P andMoody's , respectively, and 1 being D / Default by S&P andMoody's , respectively. A counterparty that does not have an external rating is assigned an internal rating based on the strength of the financial ratios of that counterparty. To arrive at the weighted average credit rating, each counterparty is assigned an internal ratio, which is multiplied by their credit exposure and summed for all counterparties. The sum is divided by the aggregate total counterparties' exposures, and this numeric value is then converted to a S&P equivalent. The following table provides credit risk information related toSouthern Company Gas' third-party natural gas contracts receivable and payable positions at December 31: Gross Receivables Gross Payables 2020 2019 2020 2019 (in millions) (in millions) Netting agreements in place: Counterparty is investment grade $ 265 $ 238 $ 104 $ 127 Counterparty is non-investment grade 3 1 46 43 Counterparty has no external rating 235 175 342 272 No netting agreements in place: Counterparty is investment grade 13 14 2 - Amount recorded in balance sheets $ 516 $ 428 $
494 $ 442
Gas Marketing ServicesSouthern Company Gas obtains credit scores for its firm residential and small commercial customers using a national credit reporting agency, enrolling only those customers that meet or exceedSouthern Company Gas' credit threshold.Southern Company Gas considers potential interruptible and large commercial customers based on reviews of publicly available financial statements and commercially available credit reports. Prior to entering into a physical transaction,Southern Company Gas also assigns physical wholesale counterparties an internal credit rating and credit limit based on the counterparties'Moody's , S&P, and Fitch ratings, commercially available credit reports, and audited financial statements. II-75 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
The Southern Company and Subsidiary Companies:
Report of Independent Registered Public Accounting Firm II- 77Consolidated Statements of Income for the Years Ended December 31, 2020, 2019, and 2018
II- 81
Consolidated Statements of Comprehensive Income for the Years Ended December 31,
2020, 2019, and 2018 II- 82
Consolidated Statements of Cash Flows for the Years Ended December 31,
2020,
2019, and 2018 II- 83
Consolidated Balance Sheets at December 31, 2020 and 2019 II- 84
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
2020, 2019, and 2018 II- 86
Alabama Power:
Report of Independent Registered Public Accounting Firm II- 87Statements of Income for the Years Ended December 31, 2020, 2019, and 2018
II- 89
Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019, and 2018
II- 90
Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018
II- 91
Balance Sheets at December 31, 2020 and 2019 II- 92
Statements of Common Stockholder's Equity for the Years Ended December 31,
2020, 2019, and 2018 II- 94
Georgia Power:
Report of Independent Registered Public Accounting Firm II- 95Statements of Income for the Years Ended December 31, 2020, 2019, and 2018
II- 98
Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019, and 2018
II- 99
Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018
II- 100
Balance Sheets at December 31, 2020 and 2019 II- 101
Statements of Common Stockholder's Equity for the Years Ended December 31,
2020, 2019, and 2018 II- 103
Mississippi Power:
Report of Independent Registered Public Accounting Firm II- 104Statements of Income for the Years Ended December 31, 2020, 2019, and 2018
II- 106
Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019, and 2018
II- 107
Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018
II- 108
Balance Sheets at December 31, 2020 and 2019 II- 109
Statements of Common Stockholder's Equity for the Years Ended December 31,
2020, 2019, and 2018 II- 111
Southern Power and Subsidiary Companies:
Report of Independent Registered Public Accounting Firm II- 112Consolidated Statements of Income for the Years Ended December 31, 2020, 2019, and 2018
II- 114
Consolidated Statements of Comprehensive Income for the Years Ended December 31,
2020, 2019, and 2018 II- 115
Consolidated Statements of Cash Flows for the Years Ended December 31,
2020,
2019, and 2018 II- 116 Consolidated Balance Sheets at December 31, 2020 and 2019 II- 117
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
2020, 2019, and 2018 II- 119
Southern Company Gas and Subsidiary Companies:
Report of Independent Registered Public Accounting Firm II- 120Consolidated Statements of Income for the Years Ended December 31, 2020, 2019, and 2018
II- 125
Consolidated Statements of Comprehensive Income for the Years Ended December 31,
2020, 2019, and 2018 II- 126
Consolidated Statements of Cash Flows for the Years Ended December 31,
2020,
2019, and 2018 II- 127 Consolidated Balance Sheets at December 31, 2020 and 2019 II- 128
Consolidated Statements of Common Stockholder's Equity for the Years Ended December 31, 2020, 2019, and 2018
II- 130
Combined Notes to Financial Statements II- 131
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of The Southern Company and
Subsidiary Companies
Opinions on the Financial Statements and Internal Control over Financial
Reporting
We have audited the accompanying consolidated balance sheets of The Southern
Company and subsidiary companies (Southern Company ) as of December 31, 2020 and
2019, the related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2020, and the related notes (collectively referred to as the
"financial statements"). We also have audited Southern Company's internal
control over financial reporting as of December 31, 2020, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Southern Company as of
December 31, 2020 and 2019, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2020, in conformity
with accounting principles generally accepted in the United States of America .
Also, in our opinion, Southern Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2020,
based on criteria established in Internal Control - Integrated Framework (2013)
issued by COSO.
Basis for Opinions
Southern Company's management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management's Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on these
financial statements and an opinion on Southern Company's internal control over
financial reporting based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States )
(PCAOB) and are required to be independent with respect to Southern Company in
accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing
procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures to respond
to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the financial statements. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
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Critical Audit Matters
The critical audit matters communicated below are matters arising from the
current-period audit of the financial statements that were communicated or
required to be communicated to the Audit Committee of Southern Company's Board
of Directors and that (1) relate to accounts or disclosures that are material to
the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of critical audit matters
does not alter in any way our opinion on the financial statements, taken as a
whole, and we are not, by communicating the critical audit matters below,
providing separate opinions on the critical audit matters or on the accounts or
disclosures to which they relate.
Impact of Rate Regulation on the Financial Statements - Refer to Note 1 (Summary
of Significant Accounting Policies - Regulatory Assets and Liabilities) and Note
2 (Regulatory Matters) to the financial statements
Critical Audit Matter Description
Southern Company's traditional electric operating companies and natural gas
distribution utilities (the "regulated utility subsidiaries"), which represent
approximately 89% of Southern Company's consolidated operating revenues for the
year ended December 31, 2020 and 85% of its consolidated total assets at
December 31, 2020, are subject to rate regulation by their respective state
Public Service Commissions or other applicable state regulatory agencies and
wholesale regulation by the Federal Energy Regulatory Commission (collectively,
the "Commissions"). Management has determined that the regulated utility
subsidiaries meet the requirements under accounting principles generally
accepted in the United States of America to utilize specialized rules to account
for the effects of rate regulation in the preparation of its financial
statements. Accounting for the economics of rate regulation impacts multiple
financial statement line items and disclosures, including, but not limited to,
property, plant, and equipment; other regulatory assets; other regulatory
liabilities; other cost of removal obligations; deferred charges and credits
related to income taxes; under and over recovered regulatory clause revenues;
operating revenues; operations and maintenance expenses; and depreciation and
amortization.
The Commissions set the rates the regulated utility subsidiaries are permitted
to charge customers. Rates are determined and approved in regulatory proceedings
based on an analysis of the applicable regulated utility subsidiary's costs to
provide utility service and a return on, and recovery of, its investment in the
utility business. Current and future regulatory decisions can have an impact on
the recovery of costs, the rate of return earned on investments, and the timing
and amount of assets to be recovered by rates. The Commissions' regulation of
rates is premised on the full recovery of prudently incurred costs and a
reasonable rate of return on invested capital. While Southern Company's
regulated utility subsidiaries expect to recover costs from customers through
regulated rates, there is a risk that the Commissions will not approve: (1) full
recovery of the costs of providing utility service, or (2) full recovery of all
amounts invested in the utility business and a reasonable return on that
investment.
We identified the impact of rate regulation as a critical audit matter due to
the significant judgments made by management to support its assertions about
impacted account balances and disclosures (e.g., asset retirement costs,
property damage reserves, and net book value of retired assets) and the high
degree of subjectivity involved in assessing the potential impact of future
regulatory orders on the financial statements. Management judgments include
assessing the likelihood of (1) recovery in future rates of incurred costs, (2)
a disallowance of part of the cost of recently completed plant or plant under
construction, and/or (3) a refund to customers. Given that management's
accounting judgments are based on assumptions about the outcome of future
decisions by the Commissions, auditing these judgments required specialized
knowledge of accounting for rate regulation and the rate setting process due to
its inherent complexities and significant auditor judgment to evaluate
management estimates and the subjectivity of audit evidence.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the uncertainty of future decisions by the
Commissions included the following, among others:
•We tested the effectiveness of management's controls over the evaluation of the
likelihood of (1) the recovery in future rates of costs incurred as property,
plant, and equipment and deferred as regulatory assets, and (2) a refund or a
future reduction in rates that should be reported as regulatory liabilities. We
also tested the effectiveness of management's controls over the initial
recognition of amounts as property, plant, and equipment; regulatory assets or
liabilities; and the monitoring and evaluation of regulatory developments that
may affect the likelihood of recovering costs in future rates or of a future
reduction in rates.
•We read relevant regulatory orders issued by the Commissions for the regulated
utility subsidiaries, regulatory statutes, interpretations, procedural
memorandums, filings made by intervenors, and other publicly available
information to assess the likelihood of recovery in future rates or of a future
reduction in rates based on precedents of the Commissions' treatment of similar
costs under similar circumstances. We evaluated the external information and
compared it to management's recorded regulatory asset and liability balances for
completeness.
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•For regulatory matters in process, we inspected filings with the Commissions by
Southern Company's regulated utility subsidiaries and other interested parties
that may impact the regulated utility subsidiaries' future rates for any
evidence that might contradict management's assertions.
•We evaluated regulatory filings for any evidence that intervenors are
challenging full recovery of the cost of any capital projects. We tested
selected costs included in the capitalized project costs for completeness and
accuracy.
•We obtained representation from management regarding probability of recovery
for regulatory assets or refund or future reduction in rates for regulatory
liabilities to assess management's assertion that amounts are probable of
recovery, refund, or a future reduction in rates.
•We evaluated Southern Company's disclosures related to the impacts of rate
regulation, including the balances recorded and regulatory developments.
Disclosure of Uncertainties - Plant Vogtle Units 3 and 4 Construction - Refer to
Note 2 (Regulatory Matters - Georgia Power - Nuclear Construction) to the
financial statements
Critical Audit Matter Description
As discussed in Note 2 to the financial statements, the ultimate recovery of
Georgia Power Company's (Georgia Power) investment in the construction of Plant
Vogtle Units 3 and 4 is subject to multiple uncertainties. Such uncertainties
include the potential impact of future decisions by Georgia Power's regulators
(particularly the Georgia Public Service Commission ), actions by the co-owners
of the Vogtle project, and litigation or other legal proceedings involving the
project. In addition, Georgia Power's ability to meet its cost and schedule
forecasts could impact its capacity to fully recover its investment in the
project. While the project is not subject to a cost cap, Georgia Power's cost
and schedule forecasts are subject to numerous uncertainties which could impact
cost recovery, including challenges with management of contractors and vendors;
subcontractor performance; supervision of craft labor and related craft labor
productivity, particularly in the installation of electrical, mechanical, and
instrumentation and controls commodities, ability to attract and retain craft
labor, and/or related cost escalation; procurement, fabrication, delivery,
assembly, installation, system turnover, and the initial testing and start-up,
including any required engineering changes or any remediation related thereto,
of plant systems, structures, or components (some of which are based on new
technology that only within the last few years began initial operation in the
global nuclear industry at this scale), any of which may require additional
labor and/or materials; or other issues that could arise and change the
projected schedule and estimated cost. In addition, the continuing effects of
the COVID-19 pandemic could further disrupt or delay construction, testing,
supervisory, and support activities at Plant Vogtle Units 3 and 4. The ultimate
recovery of Georgia Power's investment in Plant Vogtle Units 3 and 4 is subject
to the outcome of future assessments by management as well as Georgia Public
Service Commission decisions in future regulatory proceedings.
Management has recorded charges to income, including a total of $325 million in
2020, when it has determined that it is likely to incur costs for which it will
not seek recovery or which it has concluded are probable of disallowance for
ratemaking purposes. In addition, management has disclosed the status, risks,
and uncertainties associated with Plant Vogtle Units 3 and 4, including (1) the
status of construction; (2) the status of regulatory proceedings; (3) the status
of legal actions or issues involving the co-owners of the project; and (4) other
matters which could impact the ultimate recoverability of Georgia Power's
investment in the project. We identified as a critical audit matter the
evaluation of Georgia Power's identification and disclosure of events and
uncertainties that could impact the ultimate cost recovery of its investment in
the construction of Plant Vogtle Units 3 and 4. This critical audit matter
involved significant audit effort requiring specialized industry and
construction expertise, extensive knowledge of rate regulation, and difficult
and subjective judgments.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to Georgia Power's identification and disclosure of
events and uncertainties that could impact the ultimate cost recovery of its
investment in the construction of Plant Vogtle Units 3 and 4 included the
following, among others:
•We tested the effectiveness of internal controls over the on-going evaluation,
monitoring, and disclosure of matters related to the construction and ultimate
cost recovery of Plant Vogtle Units 3 and 4.
•We involved construction specialists to assist in our evaluation of Georgia
Power's processes for on-going evaluation and monitoring of the construction
schedule and to assess the disclosures of the uncertainties impacting the
ultimate cost recovery of its investment in the construction of Plant Vogtle
Units 3 and 4.
•We attended meetings with Georgia Power and Southern Company officials, project
managers (including contractors), independent regulatory monitors, and co-owners
of the project to evaluate and monitor construction status and identify cost and
schedule challenges.
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•We read reports of external independent monitors employed by the Georgia Public
Service Commission to monitor the status of construction at Plant Vogtle Units 3
and 4 to evaluate the completeness of Georgia Power's disclosure of the
uncertainties impacting the ultimate cost recovery of its investment in the
construction of Plant Vogtle Units 3 and 4.
•We inquired of Georgia Power and Southern Company officials and project
managers regarding the status of construction, the construction schedule, and
cost forecasts to assess the financial statement disclosures with respect to
project status and potential risks and uncertainties to the achievement of such
forecasts.
•We inspected regulatory filings and transcripts of Georgia Public Service
Commission hearings regarding the construction of Plant Vogtle Units 3 and 4 to
identify potential challenges to the recovery of Georgia Power's construction
costs and to evaluate the disclosures with respect to such uncertainties.
•We inquired of Georgia Power and Southern Company management and internal and
external legal counsel regarding any potential legal actions or issues arising
from project construction or issues involving the co-owners of the project.
•We monitored the status of reviews by the Nuclear Regulatory Commission to
identify potential impediments to the licensing and commercial operation of the
project.
•We compared the financial statement disclosures relating to this matter to the
information gathered through the conduct of all our procedures to evaluate
whether there were omissions relating to significant facts or uncertainties
regarding the status of construction or other factors which could impact the
ultimate cost recovery of Plant Vogtle Units 3 and 4.
•We obtained representation from management regarding disclosure of all matters
related to the cost and/or status of the construction of Plant Vogtle Units 3
and 4, including matters related to a co-owner or regulatory development, that
could impact the recovery of the related costs.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
February 17, 2021
We have served as Southern Company's auditor since 2002.
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CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2020, 2019, and 2018
2020 2019 2018
(in millions)
Operating Revenues:
Retail electric revenues $ 13,643 $ 14,084 $ 15,222
Wholesale electric revenues 1,945 2,152 2,516
Other electric revenues 672 636 664
Natural gas revenues 3,434 3,792 3,854
Other revenues 681 755 1,239
Total operating revenues 20,375 21,419 23,495
Operating Expenses:
Fuel 2,967 3,622 4,637
Purchased power 799 816 971
Cost of natural gas 972 1,319 1,539
Cost of other sales 327 435 806
Other operations and maintenance 5,413 5,624 5,926
Depreciation and amortization 3,518 3,038 3,131
Taxes other than income taxes 1,234 1,230 1,315
Estimated loss on Plant Vogtle Units 3 and 4 325 - 1,060
Impairment charges - 168 210
(Gain) loss on dispositions, net (65) (2,569) (291)
Total operating expenses 15,490 13,683 19,304
Operating Income 4,885 7,736 4,191
Other Income and (Expense):
Allowance for equity funds used during construction 149 128 138
Earnings from equity method investments 153 162 148
Interest expense, net of amounts capitalized (1,821) (1,736) (1,842)
Impairment of leveraged leases (206) - -
Other income (expense), net 336 252 114
Total other income and (expense) (1,389) (1,194) (1,442)
Earnings Before Income Taxes 3,496 6,542 2,749
Income taxes 393 1,798 449
Consolidated Net Income 3,103 4,744 2,300
Dividends on preferred stock of subsidiaries 15 15 16
Net income (loss) attributable to noncontrolling
interests (31) (10) 58
Consolidated Net Income Attributable to Southern
Company $ 3,119 $ 4,739 $ 2,226
Common Stock Data:
Earnings per share -
Basic $ 2.95 $ 4.53 $ 2.18
Diluted 2.93 4.50 2.17
Average number of shares of common stock outstanding -
(in millions)
Basic 1,058 1,046 1,020
Diluted 1,065 1,054 1,025
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2020, 2019, and 2018 Southern Company and Subsidiary Companies 2020 Annual Report
2020 2019 2018
(in millions)
Consolidated Net Income $ 3,103 $ 4,744 $ 2,300
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of
$3, $(39), and $(16), respectively 10 (115) (47)
Reclassification adjustment for amounts included in net income,
net of tax of $(13), $19, and $24, respectively (40) 57 72 Pension and other postretirement benefit plans: Benefit plan net gain (loss), net of tax of $(17), $(31), and $(2), respectively (55) (64) (5)
Reclassification adjustment for amounts included in net income,
net of tax of $3, $1, and $5, respectively 10 4 6 Total other comprehensive income (loss) (75) (118) 26 Dividends on preferred stock of subsidiaries 15 15 16
Comprehensive income (loss) attributable to noncontrolling interests
(31) (10) 58
Consolidated Comprehensive Income Attributable to Southern Company
$ 3,044 $ 4,621 $ 2,252
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2020, 2019, and 2018 Southern Company and Subsidiary Companies 2020 Annual Report
2020 2019 2018
(in millions)
Operating Activities:
Consolidated net income $ 3,103 $ 4,744 $ 2,300
Adjustments to reconcile consolidated net income
to net cash provided from operating activities -
Depreciation and amortization, total 3,905 3,331 3,549
Deferred income taxes (241) 611 89
Utilization of federal investment tax credits 341 757 5
Allowance for equity funds used during construction (149) (128) (138)
Pension, postretirement, and other employee benefits (259) (204) (103)
Pension and postretirement funding (2) (1,136) (4)
Settlement of asset retirement obligations (442) (328) (244)
Storm damage accruals 325 168 74
Stock based compensation expense 113 107 125
Estimated loss on Plant Vogtle Units 3 and 4 325 - 1,060
Impairment charges 206 168 210
(Gain) loss on dispositions, net (66) (2,588) (301)
Other, net (74) 115 47
Changes in certain current assets and liabilities -
-Receivables (222) 630 (426)
-Fossil fuel for generation (29) (120) 123
-Materials and supplies (157) (17) (176)
-Other current assets (132) 132 98
-Accounts payable (27) (693) 291
-Accrued taxes 242 117 267
-Retail fuel cost over recovery 96 62 36
-Customer refunds (236) 126 67
-Other current liabilities 76 (73) (4)
Net cash provided from operating activities 6,696 5,781 6,945
Investing Activities:
Business acquisitions, net of cash acquired (81) (50) (65)
Property additions (7,441) (7,555) (8,001)
Nuclear decommissioning trust fund purchases (877) (888) (1,117)
Nuclear decommissioning trust fund sales 871 882 1,111
Proceeds from dispositions and asset sales 1,049 5,122 2,956
Cost of removal, net of salvage (361) (393) (388)
Change in construction payables, net 37 (169) 50
Investments in unconsolidated subsidiaries (80) (148) (114)
Payments pursuant to LTSAs (211) (234) (186)
Other investing activities 64 41 (6)
Net cash used for investing activities (7,030) (3,392) (5,760)
Financing Activities:
Increase (decrease) in notes payable, net (1,096) 640 (774)
Proceeds -
Long-term debt 8,047 5,220 2,478
Common stock 74 844 1,090
Short-term borrowings 615 350 3,150
Redemptions and repurchases -
Long-term debt (4,458) (4,347) (5,533)
Preferred and preference stock - - (33)
Short-term borrowings (840) (1,850) (1,900)
Distributions to noncontrolling interests (271) (256) (153)
Capital contributions from noncontrolling interests 363 196 2,551
Payment of common stock dividends (2,685) (2,570) (2,425)
Other financing activities (325) (157) (264)
Net cash used for financing activities (576) (1,930) (1,813)
Net Change in Cash, Cash Equivalents, and Restricted Cash (910)
459 (628)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year
1,978 1,519 2,147
Cash, Cash Equivalents, and Restricted Cash at End of Year $ 1,068
$ 1,978 $ 1,519
Supplemental Cash Flow Information:
Cash paid during the period for -
Interest (net of $81, $74, and $72 capitalized, respectively) $ 1,683 $ 1,651 $ 1,794
Income taxes (net of refunds) 64 276 172
Noncash transactions - Accrued property additions at year-end 989
932 1,103
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
At December 31, 2020 and 2019
Southern Company and Subsidiary Companies 2020 Annual Report
Assets 2020 2019
(in millions)
Current Assets:
Cash and cash equivalents $ 1,065 $ 1,975
Receivables -
Customer accounts 1,753 1,614
Energy marketing 516 428
Unbilled revenues 672 599
Other accounts and notes 512 817
Accumulated provision for uncollectible accounts (118) (49)
Materials and supplies 1,478 1,388
Fossil fuel for generation 550 521
Natural gas for sale 460 479
Prepaid expenses 276 314
Assets from risk management activities, net of collateral 147 183
Regulatory assets - asset retirement obligations 214 287
Other regulatory assets 810 885
Assets held for sale 60 188
Other current assets 222 188
Total current assets 8,617 9,817
Property, Plant, and Equipment:
In service 110,516 105,114
Less: Accumulated depreciation 32,397 30,765
Plant in service, net of depreciation 78,119 74,349
Nuclear fuel, at amortized cost 818 851
Construction work in progress 8,697 7,880
Total property, plant, and equipment 87,634 83,080
Other Property and Investments:
Goodwill 5,280 5,280
Nuclear decommissioning trusts, at fair value 2,303 2,036
Equity investments in unconsolidated subsidiaries 1,362 1,303
Other intangible assets, net of amortization of $328 and $280, respectively
487 536
Leveraged leases 556 788
Miscellaneous property and investments 398 391
Total other property and investments 10,386 10,334
Deferred Charges and Other Assets:
Operating lease right-of-use assets, net of amortization 1,802 1,800
Deferred charges related to income taxes 796 798
Unamortized loss on reacquired debt 280 300
Regulatory assets - asset retirement obligations, deferred 4,934 4,094
Other regulatory assets, deferred 7,198 6,805
Assets held for sale, deferred - 601
Other deferred charges and assets 1,288 1,071
Total deferred charges and other assets 16,298 15,469
Total Assets $ 122,935 $ 118,700
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
At December 31, 2020 and 2019
Southern Company and Subsidiary Companies 2020 Annual Report
Liabilities and Stockholders' Equity 2020 2019
(in millions)
Current Liabilities:
Securities due within one year $ 3,507 $ 2,989
Notes payable 609 2,055 Energy marketing trade payables 494 442 Accounts payable 2,312 2,115 Customer deposits 487 496 Accrued taxes - Accrued income taxes 130 - Other accrued taxes 699 659 Accrued interest 513 474 Accrued compensation 1,025 992 Asset retirement obligations 585 504 Other regulatory liabilities 509 756 Liabilities held for sale - 5 Operating lease obligations 241 229 Other current liabilities 968 830 Total current liabilities 12,079 12,546 Long-Term Debt 45,073 41,798 Deferred Credits and Other Liabilities: Accumulated deferred income taxes 8,175 7,888 Deferred credits related to income taxes 5,767 6,078 Accumulated deferred ITCs 2,235 2,291 Employee benefit obligations 2,213 1,814 Operating lease obligations, deferred 1,611 1,615 Asset retirement obligations, deferred 10,099 9,282 Accrued environmental remediation 216 234 Other cost of removal obligations 2,211 2,239 Other regulatory liabilities, deferred 251 256 Other deferred credits and liabilities 480 609 Total deferred credits and other liabilities 33,258 32,306 Total Liabilities 90,410 86,650 Redeemable Preferred Stock of Subsidiaries: Cumulative preferred stock
$100 par or stated value - 4.20% to 4.92%
(Authorized - 10 million shares; Outstanding - 0.5 million shares)
48 48
$1 par value - 5.00% (Authorized - 28 million shares; Outstanding - 10 million shares)
243 243
Total redeemable preferred stock of subsidiaries (annual dividend requirement - $15 million)
291 291
Common Stockholders' Equity: Common stock, par value $5 per share (Authorized - 1.5 billion shares)
5,268 5,257
(Issued - 1.1 billion shares; Treasury - 1.0 million shares)
Paid-in capital 11,834 11,734 Treasury, at cost (46) (42) Retained earnings 11,311 10,877 Accumulated other comprehensive loss (395) (321) Total common stockholders' equity 27,972 27,505 Noncontrolling interests 4,262 4,254 Total Stockholders' Equity (See accompanying statements) 32,234 31,759 Total Liabilities and Stockholders' Equity $ 122,935 $ 118,700 Commitments and Contingent Matters (See notes)
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 2020, 2019, and 2018 Southern Company and Subsidiary Companies 2020 Annual Report
Southern Company Common Stockholders' Equity
Accumulated
Number of Common Shares Common Stock Other
Comprehensive
Paid-In Retained Income Noncontrolling
Issued Treasury Par Value Capital Treasury Earnings (Loss) Interests Total
(in millions)
Balance at December 31, 2017 1,009 (1) $ 5,038 $ 10,469 $ (36) $ 8,885 $ (189) $ 1,361 $ 25,528
Consolidated net income - - - - - 2,226 - 58 2,284
Other comprehensive income - - - - - - 26 - 26
Stock issued 26 - 126 964 - - - - 1,090
Stock-based compensation - - - 84 - - - - 84
Cash dividends of $2.3800 per
share - - - - - (2,425) - - (2,425)
Contributions from
noncontrolling interests - - - - - - - 1,372 1,372
Distributions to
noncontrolling interests - - - - - - - (164) (164)
Sale of noncontrolling interests - - - (417) - - - 1,690 1,273
Other - - - (6) (2) 20 (40) (1) (29)
Balance at December 31, 2018 1,035 (1) 5,164 11,094 (38) 8,706 (203) 4,316 29,039
Consolidated net income (loss) - - - - - 4,739 - (10) 4,729
Other comprehensive income (loss) - - - - - - (118) - (118)
Issuance of equity units(*) - - - (198) - - - - (198)
Stock issued 19 - 93 751 - - - - 844
Stock-based compensation - - - 66 - - - - 66
Cash dividends of $2.4600 per
share - - - - - (2,570) - - (2,570)
Contributions from
noncontrolling interests - - - - - - - 276 276
Distributions to
noncontrolling interests - - - - - - - (327) (327)
Other - - - 21 (4) 2 - (1) 18
Balance at December 31, 2019 1,054 (1) 5,257 11,734 (42) 10,877 (321) 4,254 31,759
Consolidated net income (loss) - - - - - 3,119 - (31) 3,088
Other comprehensive income (loss) - - - - - - (75) - (75)
Stock issued 4 - 11 63 - - - - 74
Stock-based compensation - - - 44 - - - - 44
Cash dividends of $2.5400 per
share - - - - - (2,685) - - (2,685)
Contributions from
noncontrolling interests - - - - - - - 307 307
Distributions to
noncontrolling interests - - - - - - - (271) (271)
Purchase of membership interests
from noncontrolling interests - - - 5 - - - (65) (60)
Sale of noncontrolling interests - - - (2) - - - 67 65
Other - - - (10) (4) - 1 1 (12)
Balance at December 31, 2020 1,058 (1) $ 5,268 $ 11,834 $ (46) $ 11,311 $ (395) $ 4,262 $ 32,234
(*)See Note 8 under "Equity Units" for additional information. The accompanying notes are an integral part of these consolidated financial statements.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Alabama Power Company
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Alabama Power Company
(Alabama Power) (a wholly-owned subsidiary of The Southern Company) as of
December 31, 2020 and 2019, the related statements of income, comprehensive
income, common stockholder's equity, and cash flows for each of the three years
in the period ended December 31, 2020, and the related notes (collectively
referred to as the "financial statements"). In our opinion, the financial
statements present fairly, in all material respects, the financial position of
Alabama Power as of December 31, 2020 and 2019, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2020, in conformity with accounting principles generally accepted
in the United States of America.
Basis for Opinion
These financial statements are the responsibility of Alabama Power's management.
Our responsibility is to express an opinion on Alabama Power's financial
statements based on our audits. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to Alabama Power in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Alabama Power is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of Alabama Power's
internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that
our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the
current-period audit of the financial statements that was communicated or
required to be communicated to the Audit Committee of Southern Company's Board
of Directors and that (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of critical audit matters
does not alter in any way our opinion on the financial statements, taken as a
whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts or
disclosures to which it relates.
Impact of Rate Regulation on the Financial Statements - Refer to Note 1 (Summary
of Significant Accounting Policies - Regulatory Assets and Liabilities) and Note
2 (Regulatory Matters - Alabama Power) to the financial statements
Critical Audit Matter Description
Alabama Power is subject to retail rate regulation by the Alabama Public Service
Commission and wholesale regulation by the Federal Energy Regulatory Commission
(collectively, the "Commissions"). Management has determined that it meets the
requirements under accounting principles generally accepted in the United States
of America to utilize specialized rules to account for the effects of rate
regulation in the preparation of its financial statements. Accounting for the
economics of rate regulation impacts multiple financial statement line items and
disclosures, including, but not limited to, property, plant, and equipment;
other regulatory assets; other regulatory liabilities; other cost of removal
obligations; deferred charges and credits related to income taxes; under and
over recovered regulatory clause revenues; operating revenues; operations and
maintenance expenses; and depreciation and amortization.
The Commissions set the rates Alabama Power is permitted to charge customers.
Rates are determined and approved in regulatory proceedings based on an analysis
of Alabama Power's costs to provide utility service and a return on, and
recovery of, its investment in the utility business. Current and future
regulatory decisions can have an impact on the recovery of costs, the rate of
return earned on investments, and the timing and amount of assets to be
recovered by rates. The Commissions' regulation of rates is premised on the full
recovery of prudently incurred costs and a reasonable rate of return on invested
capital. While Alabama Power expects to recover costs from customers through
regulated rates, there is a risk that the Commissions will not approve: (1)
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full recovery of the costs of providing utility service, or (2) full recovery of
all amounts invested in the utility business and a reasonable return on that
investment.
We identified the impact of rate regulation as a critical audit matter due to
the significant judgments made by management to support its assertions about
impacted account balances and disclosures (e.g., asset retirement costs and the
net book value of retired assets) and the high degree of subjectivity involved
in assessing the potential impact of future regulatory orders on the financial
statements. Management judgments include assessing the likelihood of (1)
recovery in future rates of incurred costs, (2) a disallowance of part of the
cost of recently completed plant or plant under construction, and/or (3) a
refund to customers. Given that management's accounting judgments are based on
assumptions about the outcome of future decisions by the Commissions, auditing
these judgments required specialized knowledge of accounting for rate regulation
and the rate setting process due to its inherent complexities and significant
auditor judgment to evaluate management estimates and the subjectivity of audit
evidence.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the uncertainty of future decisions by the
Commissions included the following, among others:
•We tested the effectiveness of management's controls over the evaluation of the
likelihood of (1) the recovery in future rates of costs incurred as property,
plant, and equipment and deferred as regulatory assets, and (2) a refund or a
future reduction in rates that should be reported as regulatory liabilities. We
also tested the effectiveness of management's controls over the initial
recognition of amounts as property, plant, and equipment; regulatory assets or
liabilities; and the monitoring and evaluation of regulatory developments that
may affect the likelihood of recovering costs in future rates or of a future
reduction in rates.
•We read relevant regulatory orders issued by the Commissions for Alabama Power,
regulatory statutes, interpretations, procedural memorandums, filings made by
intervenors, and other publicly available information to assess the likelihood
of recovery in future rates or of a future reduction in rates based on
precedents of the Commissions' treatment of similar costs under similar
circumstances. We evaluated the external information and compared it to
management's recorded regulatory asset and liability balances for completeness.
•For regulatory matters in process, we inspected filings with the Commissions by
Alabama Power and other interested parties that may impact Alabama Power's
future rates for any evidence that might contradict management's assertions.
•We evaluated regulatory filings for any evidence that intervenors are
challenging full recovery of the cost of any capital projects. We tested
selected costs included in the capitalized project costs for completeness and
accuracy.
•We obtained representation from management regarding probability of recovery
for regulatory assets or refund or future reduction in rates for regulatory
liabilities to assess management's assertion that amounts are probable of
recovery, refund, or a future reduction in rates.
•We evaluated Alabama Power's disclosures related to the impacts of rate
regulation, including the balances recorded and regulatory developments.
/s/ Deloitte & Touche LLP
Birmingham, Alabama
February 17, 2021
We have served as Alabama Power's auditor since 2002.
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STATEMENTS OF INCOME For the Years Ended December 31, 2020, 2019, and 2018 Alabama Power Company 2020 Annual Report
2020 2019 2018
(in millions)
Operating Revenues:
Retail revenues $ 5,213 $ 5,501 $ 5,367
Wholesale revenues, non-affiliates 269 258 279
Wholesale revenues, affiliates 46 81 119 Other revenues 302 285 267 Total operating revenues 5,830 6,125 6,032 Operating Expenses: Fuel 970 1,112 1,301 Purchased power, non-affiliates 191 203
216
Purchased power, affiliates 128 200
216
Other operations and maintenance 1,619 1,821 1,669 Depreciation and amortization 812 793 764 Taxes other than income taxes 416 403 389 Total operating expenses 4,136 4,532 4,555 Operating Income 1,694 1,593 1,477 Other Income and (Expense): Allowance for equity funds used during construction 46 52
62
Interest expense, net of amounts capitalized (338) (336)
(323)
Other income (expense), net 100 46
20
Total other income and (expense) (192) (238)
(241)
Earnings Before Income Taxes 1,502 1,355 1,236 Income taxes 337 270 291 Net Income 1,165 1,085 945 Dividends on Preferred Stock 15 15
15
Net Income After Dividends on Preferred Stock $ 1,150 $ 1,070
$ 930
The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2020, 2019, and 2018 Alabama Power Company 2020 Annual Report
2020 2019 2018
(in millions)
Net Income $ 1,165 $ 1,085 $ 945
Other comprehensive income (loss):
Qualifying hedges:
Reclassification adjustment for amounts included in net income,
net of tax of $2, $2, and $2, respectively 4 4 4 Total other comprehensive income (loss) 4 4 4 Comprehensive Income $ 1,169 $ 1,089 $ 949
The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2020, 2019, and 2018 Alabama Power Company 2020 Annual Report
2020 2019 2018
(in millions)
Operating Activities:
Net income $ 1,165 $ 1,085 $ 945
Adjustments to reconcile net income
to net cash provided from operating activities -
Depreciation and amortization, total 963 951 917
Deferred income taxes 78 197 174
Allowance for equity funds used during construction (46) (52) (62)
Pension and postretirement funding (2) (362) (4)
Settlement of asset retirement obligations (219) (127) (55)
Natural disaster reserve accruals 112 138 16
Other deferred charges - affiliated - (42) -
Other, net (38) (91) (17)
Changes in certain current assets and liabilities -
-Receivables (49) 9 (149)
-Materials and supplies (47) 23 (82)
-Other current assets (66) (89) 28
-Accounts payable (90) (41) 24
-Accrued taxes 84 49 10
-Accrued compensation (32) (14) 8
-Retail fuel cost over recovery (31) 47 -
-Customer refunds (12) 30 114
-Other current liabilities (28) 68 14
Net cash provided from operating activities 1,742 1,779 1,881
Investing Activities:
Property additions (1,970) (1,757) (2,158)
Nuclear decommissioning trust fund purchases (268) (261) (279)
Nuclear decommissioning trust fund sales 267 260 278
Cost of removal net of salvage (98) (103) (130)
Change in construction payables (34) (71) 26
Other investing activities (19) (31) (26)
Net cash used for investing activities (2,122) (1,963) (2,289)
Financing Activities:
Proceeds -
Senior notes 600 600 500
Pollution control revenue bonds 87 - 120
Capital contributions from parent company 653 1,240 511
Redemptions and repurchases -
Senior notes (250) (200) -
Pollution control revenue bonds (87) - (120)
Payment of common stock dividends (957) (844) (801)
Other financing activities (30) (31) (33)
Net cash provided from financing activities 16 765 177
Net Change in Cash, Cash Equivalents, and Restricted Cash (364)
581 (231)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year
894 313 544
Cash, Cash Equivalents, and Restricted Cash at End of Year $ 530
$ 894 $ 313
Supplemental Cash Flow Information:
Cash paid during the period for -
Interest (net of $15, $19, and $22 capitalized, respectively) $ 321 $ 311 $ 284
Income taxes (net of refunds) 187 26 106
Noncash transactions - Accrued property additions at year-end 166
200 272
The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS
At December 31, 2020 and 2019
Alabama Power Company 2020 Annual Report
Assets 2020 2019
(in millions)
Current Assets:
Cash and cash equivalents $ 530 $ 894
Receivables -
Customer accounts 429 425
Unbilled revenues 152 134
Affiliated 31 37
Other accounts and notes 66 72
Accumulated provision for uncollectible accounts (43) (22)
Fossil fuel stock 235 212
Materials and supplies 546 512
Prepaid expenses 42 50
Other regulatory assets 226 242
Other current assets 33 30
Total current assets 2,247 2,586
Property, Plant, and Equipment:
In service 31,816 30,023
Less: Accumulated provision for depreciation 10,009
9,540
Plant in service, net of depreciation 21,807
20,483
Nuclear fuel, at amortized cost 270
296
Construction work in progress 866
890
Total property, plant, and equipment 22,943
21,669
Other Property and Investments: Nuclear decommissioning trusts, at fair value 1,157
1,023
Equity investments in unconsolidated subsidiaries 63
66
Miscellaneous property and investments 131
128
Total other property and investments 1,351
1,217
Deferred Charges and Other Assets: Operating lease right-of-use assets, net of amortization 151
132
Deferred charges related to income taxes 235
244
Regulatory assets - asset retirement obligations 1,441
1,019
Other regulatory assets, deferred 2,162
2,016
Other deferred charges and assets 273
269
Total deferred charges and other assets 4,262 3,680 Total Assets $ 30,803 $ 29,152
The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS
At December 31, 2020 and 2019
Alabama Power Company 2020 Annual Report
Liabilities and Stockholder's Equity 2020 2019
(in millions)
Current Liabilities:
Securities due within one year $ 311 $ 251
Accounts payable -
Affiliated 316 316
Other 545 514
Customer deposits 104 100
Accrued taxes 152 78
Accrued interest 90 92
Accrued compensation 212 216
Asset retirement obligations 254 195
Other regulatory liabilities 108 193
Other current liabilities 107 105
Total current liabilities 2,199 2,060
Long-Term Debt 8,558 8,270
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 3,273 3,260
Deferred credits related to income taxes 2,016 1,960
Accumulated deferred ITCs 94 100
Employee benefit obligations 214 206
Operating lease obligations 119 107
Asset retirement obligations, deferred 3,720 3,345
Other cost of removal obligations 335 412
Other regulatory liabilities, deferred 124 146
Other deferred credits and liabilities 50 40
Total deferred credits and other liabilities 9,945 9,576
Total Liabilities 20,702 19,906
Redeemable Preferred Stock:
Cumulative redeemable preferred stock
$100 par or stated value - 4.20% to 4.92%
(Authorized - 3.9 million shares; Outstanding - 0.5 million shares)
48 48
$1 par value - 5.00%
(Authorized - 27.5 million shares; Outstanding - 10 million shares: $25 stated value)
243 243
Total redeemable preferred stock (annual dividend requirement - $15 million)
291 291
Common Stockholder's Equity:
Common stock, par value $40 per share
(Authorized - 40 million shares; Outstanding - 31 million shares) 1,222 1,222
Paid-in capital 5,413 4,755
Retained earnings 3,194 3,001
Accumulated other comprehensive loss (19) (23)
Total common stockholder's equity (See accompanying statements) 9,810
8,955
Total Liabilities and Stockholder's Equity $ 30,803 $ 29,152
Commitments and Contingent Matters (See notes)
The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF COMMON STOCKHOLDER'S EQUITY For the Years Ended December 31, 2020, 2019, and 2018 Alabama Power Company 2020 Annual Report
Number of Accumulated
Common Other
Shares Common Paid-In Retained Comprehensive
Issued Stock Capital Earnings Income (Loss) Total
(in millions)
Balance at December 31, 2017 31 $ 1,222 $ 2,986 $ 2,647 $ (26) $ 6,829
Net income after dividends on
preferred stock - - - 930 - 930
Capital contributions from
parent company - - 522 - - 522
Other comprehensive income - - - - 4 4
Cash dividends on common stock - - - (801) - (801)
Other - - - (1) (6) (7)
Balance at December 31, 2018 31 1,222 3,508 2,775 (28) 7,477
Net income after dividends on
preferred stock - - - 1,070 - 1,070
Capital contributions from
parent company - - 1,247 - - 1,247
Other comprehensive income - - - - 4 4
Cash dividends on common stock - - - (844) - (844)
Other - - - - 1 1
Balance at December 31, 2019 31 1,222 4,755 3,001 (23) 8,955
Net income after dividends on
preferred stock - - - 1,150 - 1,150
Capital contributions from
parent company - - 658 - - 658
Other comprehensive income - - - - 4 4
Cash dividends on common stock - - - (957) - (957)
Balance at December 31, 2020 31 $ 1,222 $ 5,413 $ 3,194 $ (19) $ 9,810
The accompanying notes are an integral part of these financial statements.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholder and the Board of Directors of Georgia Power Company
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Georgia Power Company
(Georgia Power) (a wholly-owned subsidiary of The Southern Company) as of
December 31, 2020 and 2019, the related statements of income, comprehensive
income, common stockholder's equity, and cash flows for each of the three years
in the period ended December 31, 2020, and the related notes (collectively
referred to as the "financial statements"). In our opinion, the financial
statements present fairly, in all material respects, the financial position of
Georgia Power as of December 31, 2020 and 2019, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2020, in conformity with accounting principles generally accepted
in the United States of America.
Basis for Opinion
These financial statements are the responsibility of Georgia Power's management.
Our responsibility is to express an opinion on Georgia Power's financial
statements based on our audits. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to Georgia Power in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Georgia Power is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of Georgia Power's
internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that
our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the
current-period audit of the financial statements that were communicated or
required to be communicated to the Audit Committee of Southern Company's Board
of Directors and that (1) relate to accounts or disclosures that are material to
the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of critical audit matters
does not alter in any way our opinion on the financial statements, taken as a
whole, and we are not, by communicating the critical audit matters below,
providing separate opinions on the critical audit matters or on the accounts or
disclosures to which they relate.
Impact of Rate Regulation on the Financial Statements - Refer to Note 1 (Summary
of Significant Accounting Policies - Regulatory Assets and Liabilities) and Note
2 (Regulatory Matters - Georgia Power) to the financial statements
Critical Audit Matter Description
Georgia Power is subject to retail rate regulation by the Georgia Public Service
Commission and wholesale regulation by the Federal Energy Regulatory Commission
(collectively, the "Commissions"). Management has determined that it meets the
requirements under accounting principles generally accepted in the United States
of America to utilize specialized rules to account for the effects of rate
regulation in the preparation of its financial statements. Accounting for the
economics of rate regulation impacts multiple financial statement line items and
disclosures, including, but not limited to, property, plant, and equipment;
other regulatory assets; other regulatory liabilities; other cost of removal
obligations; deferred charges and credits related to income taxes; under and
over recovered regulatory clause revenues; operating revenues; operations and
maintenance expenses; and depreciation and amortization.
The Commissions set the rates Georgia Power is permitted to charge customers.
Rates are determined and approved in regulatory proceedings based on an analysis
of Georgia Power's costs to provide utility service and a return on, and
recovery of, its investment in the utility business. Current and future
regulatory decisions can have an impact on the recovery of costs, the rate of
return earned on investments, and the timing and amount of assets to be
recovered by rates. The Commissions' regulation of rates is premised on the full
recovery of prudently incurred costs and a reasonable rate of return on invested
capital. While Georgia Power expects to recover costs from customers through
regulated rates, there is a risk that the Commissions will not approve: (1)
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full recovery of the costs of providing utility service, or (2) full recovery of
all amounts invested in the utility business and a reasonable return on that
investment.
We identified the impact of rate regulation as a critical audit matter due to
the significant judgments made by management to support its assertions about
impacted account balances and disclosures (e.g., asset retirement costs,
property damage reserves, and net book value of retired assets) and the high
degree of subjectivity involved in assessing the potential impact of future
regulatory orders on the financial statements. Management judgments include
assessing the likelihood of (1) recovery in future rates of incurred costs, (2)
a disallowance of part of the cost of recently completed plant or plant under
construction, and/or (3) a refund to customers. Given that management's
accounting judgments are based on assumptions about the outcome of future
decisions by the Commissions, auditing these judgments required specialized
knowledge of accounting for rate regulation and the rate setting process due to
its inherent complexities and significant auditor judgment to evaluate
management estimates and the subjectivity of audit evidence.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the uncertainty of future decisions by the
Commissions included the following, among others:
•We tested the effectiveness of management's controls over the evaluation of the
likelihood of (1) the recovery in future rates of costs incurred as property,
plant, and equipment and deferred as regulatory assets, and (2) a refund or a
future reduction in rates that should be reported as regulatory liabilities. We
also tested the effectiveness of management's controls over the initial
recognition of amounts as property, plant, and equipment; regulatory assets or
liabilities; and the monitoring and evaluation of regulatory developments that
may affect the likelihood of recovering costs in future rates or of a future
reduction in rates.
•We read relevant regulatory orders issued by the Commissions for Georgia Power,
regulatory statutes, interpretations, procedural memorandums, filings made by
intervenors, and other publicly available information to assess the likelihood
of recovery in future rates or of a future reduction in rates based on
precedents of the Commissions' treatment of similar costs under similar
circumstances. We evaluated the external information and compared it to
management's recorded regulatory asset and liability balances for completeness.
•For regulatory matters in process, we inspected filings with the Commissions by
Georgia Power and other interested parties that may impact Georgia Power's
future rates for any evidence that might contradict management's assertions.
•We evaluated regulatory filings for any evidence that intervenors are
challenging full recovery of the cost of any capital projects. We tested
selected costs included in the capitalized project costs for completeness and
accuracy.
•We obtained representation from management regarding probability of recovery
for regulatory assets or refund or future reduction in rates for regulatory
liabilities to assess management's assertion that amounts are probable of
recovery, refund, or a future reduction in rates.
•We evaluated Georgia Power's disclosures related to the impacts of rate
regulation, including the balances recorded and regulatory developments.
Disclosure of Uncertainties - Plant Vogtle Units 3 and 4 Construction - Refer to
Note 2 (Regulatory Matters - Georgia Power - Nuclear Construction) to the
financial statements
Critical Audit Matter Description
As discussed in Note 2 to the financial statements, the ultimate recovery of
Georgia Power Company's (Georgia Power) investment in the construction of Plant
Vogtle Units 3 and 4 is subject to multiple uncertainties. Such uncertainties
include the potential impact of future decisions by Georgia Power's regulators
(particularly the Georgia Public Service Commission), actions by the co-owners
of the Vogtle project, and litigation or other legal proceedings involving the
project. In addition, Georgia Power's ability to meet its cost and schedule
forecasts could impact its capacity to fully recover its investment in the
project. While the project is not subject to a cost cap, Georgia Power's cost
and schedule forecasts are subject to numerous uncertainties which could impact
cost recovery, including challenges with management of contractors and vendors;
subcontractor performance; supervision of craft labor and related craft labor
productivity, particularly in the installation of electrical, mechanical, and
instrumentation and controls commodities, ability to attract and retain craft
labor, and/or related cost escalation; procurement, fabrication, delivery,
assembly, installation, system turnover, and the initial testing and start-up,
including any required engineering changes or any remediation related thereto,
of plant systems, structures, or components (some of which are based on new
technology that only within the last few years began initial operation in the
global nuclear industry at this scale), any of which may require additional
labor and/or materials; or other issues that could arise and change the
projected schedule and estimated cost. In addition, the continuing effects of
the COVID-19 pandemic could further disrupt or delay construction, testing,
supervisory, and support activities at Plant Vogtle Units 3 and 4. The ultimate
recovery of Georgia Power's investment in Plant
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Vogtle Units 3 and 4 is subject to the outcome of future assessments by
management as well as Georgia Public Service Commission decisions in future
regulatory proceedings.
Management has recorded charges to income, including a total of $325 million in
2020, when it has determined that it is likely to incur costs for which it will
not seek recovery or which it cannot conclude are probable of recovery through
the ratemaking process. In addition, management has disclosed the status, risks,
and uncertainties associated with Plant Vogtle Units 3 and 4, including (1) the
status of construction; (2) the status of regulatory proceedings; (3) the status
of legal actions or issues involving the co-owners of the project; and (4) other
matters which could impact the ultimate recoverability of Georgia Power's
investment in the project. We identified as a critical audit matter the
evaluation of Georgia Power's identification and disclosure of events and
uncertainties that could impact the ultimate cost recovery of its investment in
the construction of Plant Vogtle Units 3 and 4. This critical audit matter
involved significant audit effort requiring specialized industry and
construction expertise, extensive knowledge of rate regulation, and difficult
and subjective judgments.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to Georgia Power's identification and disclosure of
events and uncertainties that could impact the ultimate cost recovery of its
investment in the construction of Plant Vogtle Units 3 and 4 included the
following, among others:
•We tested the effectiveness of internal controls over the on-going evaluation,
monitoring, and disclosure of matters related to the construction and ultimate
cost recovery of Plant Vogtle Units 3 and 4.
•We involved construction specialists to assist in our evaluation of Georgia
Power's processes for on-going evaluation and monitoring of the construction
schedule and to assess the disclosures of the uncertainties impacting the
ultimate cost recovery of its investment in the construction of Plant Vogtle
Units 3 and 4.
•We attended meetings with Georgia Power and Southern Company officials, project
managers (including contractors), independent regulatory monitors, and co-owners
of the project to evaluate and monitor construction status and identify cost and
schedule challenges.
•We read reports of external independent monitors employed by the Georgia Public
Service Commission to monitor the status of construction at Plant Vogtle Units 3
and 4 to evaluate the completeness of Georgia Power's disclosure of the
uncertainties impacting the ultimate cost recovery of its investment in the
construction of Plant Vogtle Units 3 and 4.
•We inquired of Georgia Power and Southern Company officials and project
managers regarding the status of construction, the construction schedule, and
cost forecasts to assess the financial statement disclosures with respect to
project status and potential risks and uncertainties to the achievement of such
forecasts.
•We inspected regulatory filings and transcripts of Georgia Public Service
Commission hearings regarding the construction of Plant Vogtle Units 3 and 4 to
identify potential challenges to the recovery of Georgia Power's construction
costs and to evaluate the disclosures with respect to such uncertainties.
•We inquired of Georgia Power and Southern Company management and internal and
external legal counsel regarding any potential legal actions or issues arising
from project construction or issues involving the co-owners of the project.
•We monitored the status of reviews by the Nuclear Regulatory Commission to
identify potential impediments to the licensing and commercial operation of the
project.
•We compared the financial statement disclosures relating to this matter to the
information gathered through the conduct of all our procedures to evaluate
whether there were omissions relating to significant facts or uncertainties
regarding the status of construction or other factors which could impact the
ultimate cost recovery of Plant Vogtle Units 3 and 4.
•We obtained representation from management regarding disclosure of all matters
related to the cost and/or status of the construction of Plant Vogtle Units 3
and 4, including matters related to a co-owner or regulatory development, that
could impact the recovery of the related costs.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
February 17, 2021
We have served as Georgia Power's auditor since 2002.
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STATEMENTS OF INCOME For the Years Ended December 31, 2020, 2019, and 2018 Georgia Power Company 2020 Annual Report
2020 2019 2018
(in millions)
Operating Revenues:
Retail revenues $ 7,609 $ 7,707 $ 7,752
Wholesale revenues 115 140 187
Other revenues 585 561 481
Total operating revenues 8,309 8,408 8,420
Operating Expenses:
Fuel 1,141 1,444 1,698
Purchased power, non-affiliates 540 521 430
Purchased power, affiliates 509 575
723
Other operations and maintenance 1,953 1,972
1,860
Depreciation and amortization 1,425 981
923
Taxes other than income taxes 444 454
437
Estimated loss on Plant Vogtle Units 3 and 4 325 - 1,060 Total operating expenses 6,337 5,947 7,131 Operating Income 1,972 2,461 1,289 Other Income and (Expense):
Interest expense, net of amounts capitalized (425) (409)
(397)
Other income (expense), net 180 140
115
Total other income and (expense) (245) (269)
(282)
Earnings Before Income Taxes 1,727 2,192 1,007 Income taxes 152 472 214 Net Income $ 1,575 $ 1,720 $ 793
The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2020, 2019, and 2018 Georgia Power Company 2020 Annual Report
2020 2019 2018
(in millions)
Net Income $ 1,575 $ 1,720 $ 793
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $(1), $(15), and
$-, respectively (2) (44) -
Reclassification adjustment for amounts included in net income,
net of tax of $2, $1, and $1, respectively 6 2 3 Total other comprehensive income (loss) 4 (42) 3 Comprehensive Income $ 1,579 $ 1,678 $ 796
The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2020, 2019, and 2018 Georgia Power Company 2020 Annual Report
2020 2019 2018
(in millions)
Operating Activities:
Net income $ 1,575 $ 1,720 $ 793
Adjustments to reconcile net income
to net cash provided from operating activities -
Depreciation and amortization, total 1,607 1,193 1,142
Deferred income taxes (273) 179 (260)
Allowance for equity funds used during construction (91) (68) (69)
Pension, postretirement, and other employee benefits (137) (146) (75)
Pension and postretirement funding - (200) -
Settlement of asset retirement obligations (185) (151) (116)
Storm damage accruals 213 30 30
Retail fuel cost over recovery - long-term (73) 73 -
Other deferred charges - affiliated - (108) -
Estimated loss on Plant Vogtle Units 3 and 4 325 - 1,060
Other, net 14 50 18
Changes in certain current assets and liabilities -
-Receivables (114) 177 8
-Fossil fuel stock (6) (41) 83
-Materials and supplies (91) (4) (19)
-Prepaid income taxes - 102 152
-Other current assets (48) (15) (24)
-Accounts payable 59 (92) 95
-Accrued taxes 55 58 58
-Retail fuel cost over recovery 113 - -
-Customer refunds (223) 116 (69)
-Other current liabilities 64 34 (38)
Net cash provided from operating activities 2,784 2,907 2,769
Investing Activities:
Property additions (3,445) (3,510) (3,116)
Nuclear decommissioning trust fund purchases (609) (628) (839)
Nuclear decommissioning trust fund sales 604 622 833
Cost of removal, net of salvage (143) (186) (107)
Change in construction payables, net of joint owner portion 16
(122) 68
Payments pursuant to LTSAs (86) (81) (54)
Proceeds from dispositions and asset sales 153 14 138
Other investing activities 7 6 (32)
Net cash used for investing activities (3,503) (3,885) (3,109)
Financing Activities:
Increase (decrease) in notes payable, net (55) (179) 294
Proceeds -
FFB loan 848 1,218 -
Senior notes 1,500 750 -
Pollution control revenue bonds issuances and remarketings 53 584 108
Capital contributions from parent company 1,392 634 2,985
Short-term borrowings 250 250 -
Redemptions and repurchases -
Senior notes (950) (500) (1,500)
Pollution control revenue bonds (336) (223) (469)
Short-term borrowings (375) - (150)
FFB loan (73) - -
Other long-term debt - - (100)
Payment of common stock dividends (1,542) (1,576) (1,396)
Premiums on redemption and repurchases of senior notes - - (152)
Other financing activities (36) (40) (20)
Net cash provided from (used for) financing activities 676 918 (400)
Net Change in Cash, Cash Equivalents, and Restricted Cash (43) (60) (740)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year
52 112 852
Cash, Cash Equivalents, and Restricted Cash at End of Year $ 9
$ 52 $ 112
Supplemental Cash Flow Information:
Cash paid during the period for -
Interest (net of $47, $35, and $26 capitalized, respectively) $ 380 $ 373 $ 408
Income taxes (net of refunds) 373 110 300
Noncash transactions - Accrued property additions at year-end 553
560 683
The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS
At December 31, 2020 and 2019
Georgia Power Company 2020 Annual Report
Assets 2020 2019
(in millions)
Current Assets:
Cash and cash equivalents $ 9 $ 52
Receivables -
Customer accounts 621 533
Unbilled revenues 233 203
Joint owner accounts 123 136
Affiliated 21 21
Other accounts and notes 67 209
Accumulated provision for uncollectible accounts (26) (2)
Fossil fuel stock 278 272
Materials and supplies 592 501
Prepaid expenses 54 63
Regulatory assets - storm damage 213 213
Regulatory assets - asset retirement obligations 166 254 Other regulatory assets 248 263 Other current assets 89 77 Total current assets 2,688 2,795 Property, Plant, and Equipment: In service 39,682
38,137
Less: Accumulated provision for depreciation 12,251
11,753
Plant in service, net of depreciation 27,431
26,384
Nuclear fuel, at amortized cost 548
555
Construction work in progress 6,857
5,650
Total property, plant, and equipment 34,836
32,589
Other Property and Investments: Nuclear decommissioning trusts, at fair value 1,145
1,013
Equity investments in unconsolidated subsidiaries 51
52
Miscellaneous property and investments 63
64
Total other property and investments 1,259
1,129
Deferred Charges and Other Assets: Operating lease right-of-use assets, net of amortization 1,308
1,428
Deferred charges related to income taxes 527
519
Regulatory assets - asset retirement obligations, deferred 3,291
2,865
Other regulatory assets, deferred 2,692
2,716
Other deferred charges and assets 479
500
Total deferred charges and other assets 8,297 8,028 Total Assets $ 47,080 $ 44,541
The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS
At December 31, 2020 and 2019
Georgia Power Company 2020 Annual Report
Liabilities and Stockholder's Equity 2020 2019
(in millions)
Current Liabilities:
Securities due within one year $ 542 $ 1,025
Notes payable 60 365
Accounts payable -
Affiliated 597 512
Other 753 711
Customer deposits 276 283
Accrued taxes 407 407
Accrued interest 130 118
Accrued compensation 233 233
Operating lease obligations 151 144
Asset retirement obligations 287 265
Over recovered fuel clause revenues 113 -
Other regulatory liabilities 228 447
Other current liabilities 254 187
Total current liabilities 4,031 4,697
Long-Term Debt 12,428 10,791
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 3,272 3,257
Deferred credits related to income taxes 2,588 2,862
Accumulated deferred ITCs 273 255
Employee benefit obligations 586 540
Operating lease obligations, deferred 1,156 1,282
Asset retirement obligations, deferred 5,978 5,519
Other deferred credits and liabilities 267 273
Total deferred credits and other liabilities 14,120 13,988
Total Liabilities 30,579 29,476
Common Stockholder's Equity:
Common stock, without par value
(Authorized - 20 million shares; Outstanding - 9 million shares) 398 398
Paid-in capital 12,361 10,962
Retained earnings 3,789 3,756
Accumulated other comprehensive loss (47) (51)
Total common stockholder's equity (See accompanying statements) 16,501
15,065
Total Liabilities and Stockholder's Equity $ 47,080 $ 44,541
Commitments and Contingent Matters (See notes)
The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF COMMON STOCKHOLDER'S EQUITY For the Years Ended December 31, 2020, 2019, and 2018 Georgia Power Company 2020 Annual Report
Accumulated Other
Number of Common Paid-In Retained Comprehensive
Shares Issued Common Stock Capital Earnings Income (Loss) Total
(in millions)
Balance at December 31, 2017 9 $ 398 $ 7,328 $ 4,215 $ (10) $ 11,931
Net income - - - 793 - 793
Capital contributions from
parent company - - 2,994 - - 2,994
Other comprehensive income - - - - 3 3
Cash dividends on common stock - - - (1,396) - (1,396)
Other - - - - (2) (2)
Balance at December 31, 2018 9 398
10,322 3,612 (9) 14,323
Net income - - - 1,720 - 1,720
Capital contributions from
parent company - - 640 - - 640
Other comprehensive income
(loss) - - - - (42) (42)
Cash dividends on common stock - - - (1,576) - (1,576)
Balance at December 31, 2019 9 398 10,962 3,756 (51) 15,065 Net income - - - 1,575 - 1,575 Capital contributions from parent company - - 1,399 - - 1,399 Other comprehensive income - - - - 4 4 Cash dividends on common stock - - - (1,542) -
(1,542)
Balance at December 31, 2020 9 $ 398 $ 12,361 $ 3,789 $ (47) $ 16,501
The accompanying notes are an integral part of these financial statements.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholder and the Board of Directors of Mississippi Power Company
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Mississippi Power Company
(Mississippi Power) (a wholly-owned subsidiary of The Southern Company) as of
December 31, 2020 and 2019, the related statements of income, comprehensive
income, common stockholder's equity, and cash flows for each of the three years
in the period ended December 31, 2020, and the related notes (collectively
referred to as the "financial statements"). In our opinion, the financial
statements present fairly, in all material respects, the financial position of
Mississippi Power as of December 31, 2020 and 2019, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2020, in conformity with accounting principles generally accepted
in the United States of America.
Basis for Opinion
These financial statements are the responsibility of Mississippi Power's
management. Our responsibility is to express an opinion on Mississippi Power's
financial statements based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to Mississippi Power in
accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Mississippi Power is not required
to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of Mississippi Power's
internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that
our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the
current-period audit of the financial statements that was communicated or
required to be communicated to the Audit Committee of Southern Company's Board
of Directors and that (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of critical audit matters
does not alter in any way our opinion on the financial statements, taken as a
whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts or
disclosures to which it relates.
Impact of Rate Regulation on the Financial Statements - Refer to Note 1 (Summary
of Significant Accounting Policies - Regulatory Assets and Liabilities) and Note
2 (Regulatory Matters - Mississippi Power) to the financial statements
Critical Audit Matter Description
Mississippi Power is subject to retail rate regulation by the Mississippi Public
Service Commission and wholesale regulation by the Federal Energy Regulatory
Commission (collectively, the "Commissions"). Management has determined that it
meets the requirements under accounting principles generally accepted in the
United States of America to utilize specialized rules to account for the effects
of rate regulation in the preparation of its financial statements. Accounting
for the economics of rate regulation impacts multiple financial statement line
items and disclosures, including, but not limited to, property, plant, and
equipment; other regulatory assets; other regulatory liabilities; regulatory
assets - asset retirement obligations; other cost of removal obligations;
deferred charges and credits related to income taxes; under and over recovered
regulatory clause revenues; operating revenues; operations and maintenance
expenses; and depreciation and amortization.
The Commissions set the rates Mississippi Power is permitted to charge
customers. Rates are determined and approved in regulatory proceedings based on
an analysis of Mississippi Power's costs to provide utility service and a return
on, and recovery of, its investment in the utility business. Current and future
regulatory decisions can have an impact on the recovery of costs, the rate of
return earned on investments, and the timing and amount of assets to be
recovered by rates. The Commissions' regulation of rates is premised on the full
recovery of prudently incurred costs and a reasonable rate of return on invested
capital. While Mississippi Power expects to recover costs from customers through
regulated rates, there is a risk that the Commissions will not
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approve: (1) full recovery of the costs of providing utility service, or (2)
full recovery of all amounts invested in the utility business and a reasonable
return on that investment.
We identified the impact of rate regulation as a critical audit matter due to
the significant judgments made by management to support its assertions about
impacted account balances and disclosures (e.g., asset retirement costs) and the
high degree of subjectivity involved in assessing the potential impact of future
regulatory orders on the financial statements. Management judgments include
assessing the likelihood of (1) recovery in future rates of incurred costs, (2)
a disallowance of part of the cost of recently completed plant, and/or (3) a
refund to customers. Given that management's accounting judgments are based on
assumptions about the outcome of future decisions by the Commissions, auditing
these judgments required specialized knowledge of accounting for rate regulation
and the rate setting process due to its inherent complexities and significant
auditor judgment to evaluate management estimates and the subjectivity of audit
evidence.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the uncertainty of future decisions by the
Commissions included the following, among others:
•We read relevant regulatory orders issued by the Commissions for Mississippi
Power, regulatory statutes, interpretations, procedural memorandums, filings
made by intervenors, and other publicly available information to assess the
likelihood of recovery in future rates or of a future reduction in rates based
on precedents of the Commissions' treatment of similar costs under similar
circumstances. We evaluated the external information and compared it to
management's recorded regulatory asset and liability balances for completeness.
•For regulatory matters in process, we inspected filings with the Commissions by
Mississippi Power and other interested parties that may impact Mississippi
Power's future rates for any evidence that might contradict management's
assertions.
•We evaluated regulatory filings for any evidence that intervenors are
challenging full recovery of the cost of any capital projects. We tested
selected costs included in the capitalized project costs for completeness and
accuracy.
•We obtained representation from management regarding probability of recovery
for regulatory assets or refund or future reduction in rates for regulatory
liabilities to assess management's assertion that amounts are probable of
recovery, refund, or a future reduction in rates.
•We evaluated Mississippi Power's disclosures related to the impacts of rate
regulation, including the balances recorded and regulatory developments.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
February 17, 2021
We have served as Mississippi Power's auditor since 2002.
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STATEMENTS OF INCOME For the Years Ended December 31, 2020, 2019, and 2018 Mississippi Power Company 2020 Annual Report
2020 2019 2018
(in millions)
Operating Revenues:
Retail revenues $ 821 $ 877 $ 889
Wholesale revenues, non-affiliates 215 237 263
Wholesale revenues, affiliates 111 132 91 Other revenues 25 18 22 Total operating revenues 1,172 1,264 1,265 Operating Expenses: Fuel 350 407 405 Purchased power 22 20 41 Other operations and maintenance 284 307 350 Depreciation and amortization 183 192 169 Taxes other than income taxes 124 113 107 Total operating expenses 963 1,039 1,072 Operating Income 209 225 193 Other Income and (Expense):
Interest expense, net of amounts capitalized (60) (69) (76) Other income (expense), net
17 13 17
Total other income and (expense) (43) (56)
(59)
Earnings Before Income Taxes 166 169 134 Income taxes (benefit) 14 30 (102) Net Income 152 139 236 Dividends on Preferred Stock - -
1
Net Income After Dividends on Preferred Stock $ 152 $ 139 $ 235
The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF COMPREHENSIVE INCOME (LOSS) For the Years Ended December 31, 2020, 2019, and 2018 Mississippi Power Company 2020 Annual Report
2020 2019 2018
(in millions)
Net Income $ 152 $ 139 $ 236
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $-, $-, and $(1),
respectively - - (1)
Reclassification adjustment for amounts included in net income,
net of tax of $-, $-, and $-, respectively 1 1 1 Total other comprehensive income (loss) 1 1 - Comprehensive Income $ 153 $ 140 $ 236
The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2020, 2019, and 2018 Mississippi Power Company 2020 Annual Report
2020 2019 2018
(in millions)
Operating Activities:
Net income $ 152 $ 139 $ 236
Adjustments to reconcile net income
to net cash provided from operating activities -
Depreciation and amortization, total 191 197 177
Deferred income taxes (4) 37 475
Pension and postretirement funding -
(54) -
Settlement of asset retirement obligations (22)
(35) (35)
Other, net (1) 35 51 Changes in certain current assets and liabilities - -Receivables (7) 6 (19) -Prepaid income taxes (3) 12 (12) -Other current assets (28) (8) (10) -Accounts payable 20 3 15 -Accrued taxes 10 11 (46) -Over recovered regulatory clause revenues 5
16 14
-Other current liabilities (15) (20) (42) Net cash provided from operating activities 298 339 804 Investing Activities: Property additions (274) (202) (188) Payments pursuant to LTSAs (28) (23) (29) Other investing activities (21) (38) (15) Net cash used for investing activities (323) (263) (232) Financing Activities: Increase (decrease) in notes payable, net 25 - (4) Proceeds - Capital contributions from parent company 85 51 15 Senior notes - - 600 Short-term borrowings 40 - 300 Pollution control revenue bonds 34 43 - Other long-term debt 100 - - Redemptions - Preferred stock - - (33) Pollution control revenue bonds (41) - (43) Short-term borrowings (40) - (300) Senior notes (275) (25) (155) Other long-term debt - - (900) Return of capital to parent company (74)
(150) -
Payment of common stock dividends (74) - - Other financing activities (2) (2) (7) Net cash used for financing activities (222) (83) (527) Net Change in Cash, Cash Equivalents, and Restricted Cash (247) (7) 45 Cash, Cash Equivalents, and Restricted Cash at Beginning of Year 286 293 248 Cash, Cash Equivalents, and Restricted Cash at End of Year $ 39 $ 286 $ 293 Supplemental Cash Flow Information: Cash paid (received) during the period for - Interest (net of $-, $(1), and $- capitalized, respectively) $ 63 $ 71 $ 80 Income taxes (net of refunds) 28
(27) (525)
Noncash transactions - Accrued property additions at year-end 34
35 35
The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS
At December 31, 2020 and 2019
Mississippi Power Company 2020 Annual Report
Assets 2020 2019
(in millions)
Current Assets:
Cash and cash equivalents $ 39 $ 286
Receivables -
Customer accounts 34 35
Unbilled revenues 38 39
Affiliated 32 27
Other accounts and notes 32 26
Fossil fuel stock 24 26
Materials and supplies 65 61
Other regulatory assets 60 99
Other current assets 20 10
Total current assets 344 609
Property, Plant, and Equipment:
In service 5,011 4,857
Less: Accumulated provision for depreciation 1,545 1,463
Plant in service, net of depreciation 3,466 3,394
Construction work in progress 146 126
Total property, plant, and equipment 3,612 3,520
Other Property and Investments 151 131
Deferred Charges and Other Assets:
Deferred charges related to income taxes 32 32
Regulatory assets - asset retirement obligations 201 210
Other regulatory assets, deferred 388 360
Accumulated deferred income taxes 129 139
Other deferred charges and assets 55 34
Total deferred charges and other assets 805 775
Total Assets $ 4,912 $ 5,035
The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS
At December 31, 2020 and 2019
Mississippi Power Company 2020 Annual Report
Liabilities and Stockholder's Equity 2020 2019
(in millions)
Current Liabilities:
Securities due within one year $ 406 $ 281
Notes payable 25 -
Accounts payable -
Affiliated 63 76
Other 109 75
Accrued taxes 114 105
Accrued interest 15 15
Accrued compensation 34 35
Asset retirement obligations 27 33
Over recovered regulatory clause liabilities 34 29
Other regulatory liabilities 49 21
Other current liabilities 40 64
Total current liabilities 916 734
Long-Term Debt 1,013 1,308
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 447 424
Deferred credits related to income taxes 287
352
Employee benefit obligations 113
99
Asset retirement obligations, deferred 150
157
Other cost of removal obligations 194
189
Other regulatory liabilities, deferred 15
76
Other deferred credits and liabilities 35
44
Total deferred credits and other liabilities 1,241
1,341
Total Liabilities 3,170
3,383
Common Stockholder's Equity: Common stock, without par value (Authorized and outstanding - 1 million shares) 38 38 Paid-in capital 4,460 4,449 Accumulated deficit (2,754) (2,832) Accumulated other comprehensive loss (2)
(3)
Total common stockholder's equity (See accompanying statements) 1,742
1,652
Total Liabilities and Stockholder's Equity $ 4,912 $ 5,035 Commitments and Contingent Matters (See notes)
The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF COMMON STOCKHOLDER'S EQUITY For the Years Ended December 31, 2020, 2019, and 2018 Mississippi Power Company 2020 Annual Report
Retained Earnings Accumulated Other
Number of Common Common Paid-In (Accumulated Comprehensive
Shares Issued Stock Capital Deficit) Income (Loss) Total
(in millions)
Balance at December 31, 2017 1 $ 38 $ 4,529 $ (3,205) $ (4) $ 1,358
Net income after dividends on
preferred stock - - - 235 - 235
Capital contributions from
parent company - - 17 - - 17
Other - - - (1) - (1)
Balance at December 31, 2018 1 38 4,546 (2,971) (4) 1,609
Net income after dividends on
preferred stock - - - 139 - 139
Return of capital to parent
company - - (150) - - (150)
Capital contributions from
parent company - - 53 - - 53
Other comprehensive income
(loss) - - - - 1 1
Balance at December 31, 2019 1 38 4,449 (2,832) (3) 1,652
Net income after dividends on
preferred stock - - - 152 - 152
Return of capital to parent
company - - (74) - - (74)
Capital contributions from
parent company - - 86 - - 86
Other comprehensive income - - - - 1 1
Cash dividends on common stock - - - (74) - (74)
Other - - (1) - - (1)
Balance at December 31, 2020 1 $ 38 $ 4,460 $ (2,754) $ (2) $ 1,742
The accompanying notes are an integral part of these financial statements.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholder and the Board of Directors of Southern Power Company and
Subsidiary Companies
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Southern Power
Company and subsidiary companies (Southern Power) (a wholly-owned subsidiary of
The Southern Company) as of December 31, 2020 and 2019, the related consolidated
statements of income, comprehensive income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2020, and the
related notes (collectively referred to as the "financial statements"). In our
opinion, the financial statements present fairly, in all material respects, the
financial position of Southern Power as of December 31, 2020 and 2019, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2020, in conformity with accounting principles
generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of Southern Power's
management. Our responsibility is to express an opinion on Southern Power's
financial statements based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to Southern Power in
accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Southern Power is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of Southern Power's
internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that
our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the
current-period audit of the financial statements that was communicated or
required to be communicated to the Audit Committee of Southern Company's Board
of Directors and that (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of critical audit matters
does not alter in any way our opinion on the financial statements, taken as a
whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts or
disclosures to which is relates.
Income/Loss Allocation to Noncontrolling Interests - Refer to Notes 1 and 7 to
the financial statements
Critical Audit Matter Description
Southern Power has entered into a number of tax equity partnership arrangements,
wherein they agree to sell 100% of a class of membership interests (e.g. Class
A) in an entity to a noncontrolling investor in exchange for cash contributions,
while retaining control of the entity through a separate class of membership
interests (e.g. Class B). The agreements for these partnerships give different
rights and priorities to their owners in terms of cash distributions, tax
attribute allocations, and partnership income or loss allocations. These
provisions make the conventional equity method of accounting where an investor
applies its "percentage ownership interest" to the investee's net income under
generally accepted accounting principles to determine the investor's share of
earnings or losses difficult to apply. Therefore, Southern Power uses the
Hypothetical Liquidation at Book Value (HLBV) accounting method to account for
these partnership arrangements. The HLBV accounting method calculates each
partner's share of income or loss based on the change in net equity the partner
can legally claim at the end of the reporting period compared to the beginning
of the reporting period. The application of the HLBV accounting method by
Southern Power required significant consideration of the allocations between
Southern Power and the noncontrolling investors over the life of the agreement
and the liquidation provisions of the agreement to determine the appropriate
allocation of income or loss between the parties.
The determination of the appropriate amount of allocated partnership income or
loss to noncontrolling interests using the HLBV accounting method required
increased audit effort and specialized skill and knowledge, including evaluation
of the terms of the agreement and consideration of the appropriateness of the
HLBV model based on the provisions of the agreement.
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How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures included the following, among others:
•For agreements that result in potentially material allocations of partnership
income or loss, we read the agreements to understand the liquidation provisions
and the provisions governing the allocation of benefits.
•With the assistance of our income tax and HLBV modeling specialists, we
evaluated the HLBV models utilized by management to determine whether the models
accurately reflect the allocation of income or loss and tax attributes in
accordance with the liquidation provisions and allocation terms defined in the
agreements, as well as whether the inputs in the models are accurate and
complete.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
February 17, 2021
We have served as Southern Power's auditor since 2002.
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CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2020, 2019, and 2018 Southern Power Company and Subsidiary Companies 2020 Annual Report
2020 2019 2018
(in millions)
Operating Revenues:
Wholesale revenues, non-affiliates $ 1,355 $ 1,528 $ 1,757
Wholesale revenues, affiliates 364 398 435
Other revenues 14 12 13
Total operating revenues 1,733 1,938 2,205
Operating Expenses:
Fuel 470 577 699
Purchased power 74 108 176
Other operations and maintenance 353 359 395
Depreciation and amortization 494 479 493
Taxes other than income taxes 39 40 46
Asset impairment - 3 156
(Gain) loss on dispositions, net (39) (23) (2)
Total operating expenses 1,391 1,543 1,963
Operating Income 342 395 242
Other Income and (Expense):
Interest expense, net of amounts capitalized (151) (169) (183)
Other income (expense), net 19 47 23
Total other income and (expense) (132) (122) (160)
Earnings Before Income Taxes 210 273 82
Income taxes (benefit) 3 (56) (164)
Net Income 207 329 246
Net income (loss) attributable to noncontrolling
interests (31) (10) 59
Net Income Attributable to Southern Power $ 238 $ 339 $ 187
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2020, 2019, and 2018 Southern Power Company and Subsidiary Companies 2020 Annual Report
2020 2019 2018
(in millions)
Net Income $ 207 $ 329 $ 246
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $12, $(22), and
$(17), respectively 33 (66) (51)
Reclassification adjustment for amounts included in net income,
net of tax of $(22), $14, and $19, respectively (65) 41 58 Pension and other postretirement benefit plans: Benefit plan net gain (loss), net of tax of $(4), $(6), and $2, respectively (12) (17) 5
Reclassification adjustment for amounts included in net income,
net of tax of $1, $-, and $-, respectively 2 - 2 Total other comprehensive income (loss) (42) (42) 14 Comprehensive income (loss) attributable to noncontrolling interests (31) (10) 59
Comprehensive Income Attributable to Southern Power $ 196 $ 297 $ 201
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2020, 2019, and 2018 Southern Power Company and Subsidiary Companies 2020 Annual Report
2020 2019 2018
(in millions)
Operating Activities:
Net income $ 207 $ 329 $ 246
Adjustments to reconcile net income
to net cash provided from operating activities -
Depreciation and amortization, total 519 505 524
Deferred income taxes (25) (74) (244)
Utilization of federal investment tax credits 340 734 5
Amortization of investment tax credits (59) (151) (58)
Income taxes receivable, non-current (20) 25 42
Pension and postretirement funding - (24) -
Asset impairment - 3 156
(Gain) loss on dispositions, net (39) (24) (3)
Other, net (5) (9) (4)
Changes in certain current assets and liabilities -
-Receivables (4) 72 (20)
-Prepaid income taxes 20 39 25
-Other current assets (30) (8) (26)
-Accrued taxes 11 6 7
-Other current liabilities (14) (38) (19)
Net cash provided from operating activities 901 1,385 631
Investing Activities:
Business acquisitions, net of cash acquired (81) (50) (65)
Property additions (223) (489) (315)
Investment in unconsolidated subsidiaries - (116) -
Proceeds from dispositions and asset sales 666 572 203
Payments pursuant to LTSAs (76) (104) (75)
Other investing activities 88 20 25
Net cash provided from (used for) investing activities 374 (167) (227)
Financing Activities:
Increase (decrease) in notes payable, net (274) 449 (105)
Proceeds -
Short-term borrowings - 100 200
Capital contributions from parent company 6 64 2
Redemptions -
Senior notes (825) (600) (350)
Other long-term debt - - (420)
Short-term borrowings (100) (100) (100)
Return of capital to parent company - (755) (1,650)
Distributions to noncontrolling interests (271) (256) (153)
Capital contributions from noncontrolling interests 363 196 2,551
Purchase of membership interests from noncontrolling interests
(60) - -
Payment of common stock dividends (201) (206) (312)
Other financing activities (10) (12) (26)
Net cash used for financing activities (1,372) (1,120) (363)
Net Change in Cash, Cash Equivalents, and Restricted Cash (97) 98 41
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year
279 181 140
Cash, Cash Equivalents, and Restricted Cash at End of Year $ 182
$ 279 $ 181
Supplemental Cash Flow Information:
Cash paid (received) during the period for -
Interest (net of $11, $15, and $17 capitalized,
respectively) $ 147 $ 167 $ 173
Income taxes (net of refunds and investment tax credits) (283) (664) 79
Noncash transactions - Accrued property additions at year-end
89 57 31
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
At December 31, 2020 and 2019
Southern Power Company and Subsidiary Companies 2020 Annual Report
Assets 2020 2019
(in millions)
Current Assets:
Cash and cash equivalents $ 182 $ 279
Receivables -
Customer accounts 125 107
Affiliated 37 30
Other 27 73
Materials and supplies 157 191
Prepaid income taxes 11 36
Other current assets 36 43
Total current assets 575 759
Property, Plant, and Equipment:
In service 13,904 13,270
Less: Accumulated provision for depreciation 2,842 2,464
Plant in service, net of depreciation 11,062 10,806
Construction work in progress 127 515
Total property, plant, and equipment 11,189 11,321
Other Property and Investments:
Intangible assets, net of amortization of $89 and $69, respectively
302 322
Equity investments in unconsolidated subsidiaries 19 28
Total other property and investments 321 350
Deferred Charges and Other Assets:
Operating lease right-of-use assets, net of amortization 415 369
Prepaid LTSAs 155 128
Accumulated deferred income taxes 262 551
Income taxes receivable, non-current 25 5
Assets held for sale - 601
Other deferred charges and assets 293 216
Total deferred charges and other assets 1,150 1,870
Total Assets $ 13,235 $ 14,300
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
At December 31, 2020 and 2019
Southern Power Company and Subsidiary Companies 2020 Annual Report
Liabilities and Stockholders' Equity 2020 2019
(in millions)
Current Liabilities: Securities due within one year $ 299 $ 824 Notes payable 175 549 Accounts payable - Affiliated 65 56 Other 92 85 Accrued taxes 30 26 Accrued interest 32 32 Other current liabilities 132 132 Total current liabilities 825 1,704 Long-Term Debt 3,393 3,574 Deferred Credits and Other Liabilities: Accumulated deferred income taxes 123 115 Accumulated deferred ITCs 1,672 1,731 Operating lease obligations 426 376 Other deferred credits and liabilities 165
178
Total deferred credits and other liabilities 2,386
2,400
Total Liabilities 6,604
7,678
Common Stockholder's Equity: Common stock, par value $0.01 per share
(Authorized - 1.0 million shares; Outstanding - 1,000 shares) -
-
Paid-in capital 914 909
Retained earnings 1,522 1,485
Accumulated other comprehensive income (loss) (67) (26)
Total common stockholder's equity 2,369
2,368
Noncontrolling Interests 4,262
4,254
Total Stockholders' Equity (See accompanying statements) 6,631
6,622
Total Liabilities and Stockholders' Equity $ 13,235 $ 14,300 Commitments and Contingent Matters (See notes)
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 2020, 2019, and 2018 Southern Power Company and Subsidiary Companies 2020 Annual Report
Number of
Common
Shares Paid-In Retained Accumulated Other Total Common Noncontrolling
Issued Common Stock Capital Earnings Comprehensive Income
Stockholder's Equity Interests Total
(in millions)
Balance at December 31,
2017 - $ - $ 3,662 $ 1,478 $ (2) $ 5,138 $ 1,360 $ 6,498
Net income - - - 187 - 187 59 246
Return of capital to parent
company - - (1,650) - - (1,650) - (1,650)
Capital contributions from
parent
company - - 2 - - 2 - 2
Other comprehensive income - - - - 14 14 - 14
Cash dividends on common
stock - - - (312) - (312) - (312)
Capital contributions from
noncontrolling interests - - - - - - 1,372 1,372
Distributions to
noncontrolling
interests - - - - - - (164) (164)
Sale of noncontrolling
interests(*) - - (417) - - (417) 1,690 1,273
Other - - 3 (1) 4 6 (1) 5
Balance at December 31,
2018 - - 1,600 1,352 16 2,968 4,316 7,284
Net income (loss) - - - 339 - 339 (10) 329
Return of capital to parent
company - - (755) - - (755) - (755)
Capital contributions from
parent
company - - 64 - - 64 - 64
Other comprehensive income
(loss) - - - - (42) (42) - (42)
Cash dividends on common
stock - - - (206) - (206) - (206)
Capital contributions from
noncontrolling interests - - - - - - 276 276
Distributions to
noncontrolling
interests - - - - - - (327) (327)
Other - - - - - - (1) (1)
Balance at December 31,
2019 - - 909 1,485 (26) 2,368 4,254 6,622
Net income (loss) - - - 238 - 238 (31) 207
Capital contributions from
parent
company - - 2 - - 2 - 2
Other comprehensive income
(loss) - - - - (42) (42) - (42)
Cash dividends on common
stock - - - (201) - (201) - (201)
Capital contributions from
noncontrolling interests - - - - - - 307 307
Distributions to
noncontrolling
interests - - - - - - (271) (271)
Purchase of membership
interests
from noncontrolling
interests - - 5 - - 5 (65) (60)
Sale of noncontrolling interests(*) - - (2) - - (2) 67 65 Other - - - - 1 1 1 2 Balance at December 31, 2020 - $ - $ 914 $ 1,522 $ (67) $ 2,369 $ 4,262 $ 6,631
(*)See Note 15 under "Southern Power" for additional information. The accompanying notes are an integral part of these consolidated financial statements.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholder and the Board of Directors of Southern Company Gas and
Subsidiary Companies
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Southern Company
Gas and subsidiary companies (Southern Company Gas) (a wholly-owned subsidiary
of The Southern Company) as of December 31, 2020 and 2019, the related
consolidated statements of income, comprehensive income, common stockholder's
equity, and cash flows for each of the three years in the period ended
December 31, 2020, and the related notes (collectively referred to as the
"financial statements"). In our opinion, the financial statements present
fairly, in all material respects, the financial position of Southern Company Gas
as of December 31, 2020 and 2019, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2020, in
conformity with accounting principles generally accepted in the United States of
America.
We did not audit the financial statements of Southern Natural Gas Company,
L.L.C. (SNG), Southern Company Gas' investment which is accounted for by the use
of the equity method. The accompanying consolidated financial statements of
Southern Company Gas include its equity investment in SNG of $1,167 million and
$1,137 million as of December 31, 2020 and December 31, 2019, respectively, and
its earnings from its equity method investment in SNG of $129 million, $141
million, and $131 million for the years ended December 31, 2020, 2019, and 2018,
respectively. Those statements were audited by other auditors whose reports
(which express unqualified opinions on SNG's financial statements and contain an
emphasis of matter paragraph calling attention to SNG's significant transactions
with related parties) have been furnished to us, and our opinion, insofar as it
relates to the amounts included for SNG, is based solely on the reports of the
other auditors.
Basis for Opinion
These financial statements are the responsibility of Southern Company Gas'
management. Our responsibility is to express an opinion on Southern Company Gas'
financial statements based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to Southern Company Gas
in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Southern Company Gas is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. As part of our audits, we are required to
obtain an understanding of internal control over financial reporting but not for
the purpose of expressing an opinion on the effectiveness of Southern Company
Gas' internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that
our audits and the reports of the other auditors provide a reasonable basis for
our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the
current-period audit of the financial statements that were communicated or
required to be communicated to the Audit Committee of Southern Company's Board
of Directors and that (1) relate to accounts or disclosures that are material to
the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of critical audit matters
does not alter in any way our opinion on the financial statements, taken as a
whole, and we are not, by communicating the critical audit matters below,
providing separate opinions on the critical audit matters or on the accounts or
disclosures to which they relate.
Impact of Rate Regulation on the Financial Statements - Refer to Note 1 (Summary
of Significant Accounting Policies - Regulatory Assets and Liabilities) and Note
2 (Regulatory Matters - Southern Company Gas) to the financial statements
Critical Audit Matter Description
Southern Company Gas' natural gas distribution utilities (the "regulated utility
subsidiaries"), which represent approximately 86% of Southern Company Gas'
consolidated revenues, are subject to rate regulation in Georgia, Illinois,
Tennessee, and Virginia by their respective state Public Service Commission or
other applicable state regulatory agencies (collectively, the "Commissions").
Management has determined it meets the requirements under accounting principles
generally accepted in the United States of America to prepare its financial
statements applying the specialized rules to account for the effects of
regulation. Accounting for the economics of rate regulation impacts multiple
financial statement line items and disclosures, including, but not limited to,
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property, plant, and equipment; other regulatory assets; other regulatory
liabilities; other cost of removal obligations; deferred charges and credits
related to income taxes; operating revenues; other operations and maintenance
expenses; and depreciation and amortization.
The Commissions set the rates the regulated utility subsidiaries are permitted
to charge customers. Rates are determined and approved in regulatory proceedings
based on an analysis of the applicable regulated utility subsidiary's costs to
provide utility service and a return on, and recovery of, its investment in the
utility business. Current and future regulatory decisions can have an impact on
the recovery of costs, the rate of return earned on investments, and the timing
and amount of assets to be recovered by rates. The Commissions' regulation of
rates is premised on the full recovery of prudently incurred costs and a
reasonable rate of return on invested capital. While Southern Company Gas'
regulated utility subsidiaries expect to recover costs from customers through
regulated rates, there is a risk that the Commissions will not approve: (1) full
recovery of the costs of providing utility service, or (2) full recovery of all
amounts invested in the utility business and a reasonable return on that
investment.
We identified the impact of rate regulation as a critical audit matter due to
the significant judgments made by management to support its assertions about
impacted account balances and disclosures and the high degree of subjectivity
involved in assessing the impact of future regulatory orders on the financial
statements. Management judgments include assessing the likelihood of (1)
recovery in future rates of incurred costs, (2) a disallowance of part of the
cost of recently completed plant or plant under construction, and/or (3) a
refund to customers. Given that management's accounting judgments are based on
assumptions about the outcome of future decisions by the Commissions, auditing
these judgments required specialized knowledge of accounting for rate regulation
and the rate setting process due to its inherent complexities and significant
auditor judgment to evaluate management estimates and the subjectivity of audit
evidence.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the uncertainty of future decisions by the
Commissions included the following, among others:
•We tested the effectiveness of management's controls over the evaluation of the
likelihood of (1) the recovery in future rates of costs incurred as property,
plant, and equipment and deferred as regulatory assets, and (2) a refund or a
future reduction in rates that should be reported as regulatory liabilities. We
also tested the effectiveness of management's controls over the initial
recognition of amounts as property, plant, and equipment; regulatory assets or
liabilities; and the monitoring and evaluation of regulatory developments that
may affect the likelihood of recovering costs in future rates or of a future
reduction in rates.
•We read relevant regulatory orders issued by the Commissions for Southern
Company Gas' regulated utility subsidiaries in Georgia, Illinois, Tennessee, and
Virginia, regulatory statutes, interpretations, procedural memorandums, filings
made by intervenors, and other publicly available information to assess the
likelihood of recovery in future rates or of a future reduction in rates based
on precedents of the Commissions' treatment of similar costs under similar
circumstances. We evaluated the external information and compared it to
management's recorded regulatory asset and liability balances for completeness.
•For regulatory matters in process, we inspected filings with the Commissions by
the regulated utility subsidiaries and other interested parties that may impact
the regulated utility subsidiaries' future rates for any evidence that might
contradict management's assertions.
•We evaluated regulatory filings for any evidence that intervenors are
challenging full recovery of the cost of any capital projects. We tested
selected costs included in the capitalized project costs for completeness and
accuracy.
•We obtained representation from management regarding probability of recovery
for regulatory assets or refund or future reduction in rates for regulatory
liabilities to assess management's assertion that amounts are probable of
recovery or a future reduction in rates.
•We evaluated Southern Company Gas' disclosures related to the impacts of rate
regulation, including the balances recorded and regulatory developments.
Derivatives - Refer to Note 1 (Summary of Significant Accounting Policies) and
Note 14 (Derivatives) to the financial statements
Critical Audit Matter Description
Southern Company Gas is exposed to market risks, including commodity price risk,
interest rate risk, weather risk, and occasionally foreign currency exchange
rate risk and enters into contracts to manage the volatility attributable to
these exposures. The majority of these contracts are over-the-counter wholesale
contracts for the purchase or sale of natural gas or consist of contracts which
do not include asset management agreements, financial optionality, or potential
embedded derivatives. Typically, these physical and financial contracts are not
complex in structure and the valuation inputs are directly obtained from an
observable source. However, determining whether a contract meets the definition
of a derivative instrument, contains an embedded derivative requiring
bifurcation, or qualifies for hedge accounting treatment is complex and requires
significant
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judgment. In addition, the treatment of a single contract may vary from period
to period depending upon accounting elections, changes in Southern Company Gas'
assessment of the likelihood of future hedged transactions, or new
interpretations of accounting guidance. As a result, judgment is required in
determining the appropriate accounting each period. Accounting for derivatives
impacts multiple financial statement line items and disclosures, such as assets
and liabilities from risk management activities; other deferred charges and
assets; other deferred credits and liabilities; natural gas revenues; and cost
of natural gas.
We identified the evaluation and monitoring of contracts with more complex terms
as a critical audit matter and specifically, whether these types of contracts
meet the definition of a derivative instrument, contain an embedded derivative
requiring bifurcation, or qualify for hedge accounting treatment. Auditing these
contracts is especially challenging due to the complexity of the accounting
requirements, requiring the specialized knowledge of such accounting.
How the Critical Audit Matter Was Addressed in the Audit
With the assistance of our energy transacting specialists, our audit procedures
related to these contracts included the following, among others:
•We tested the effectiveness of management's controls over approval and
assessment of contracts and contract amendments that require additional levels
of management review to assess deals on a frequent basis and to evaluate
contracts meeting Southern Company Gas' criteria by accounting and the
appropriate level of management for proper classification between derivative or
accrual accounting.
•We tested, on a sample basis, contracts and contract amendments (derivative and
non-derivative) with a focus on those with more complex terms by independently
evaluating the accounting treatment and comparing to the conclusions reached by
management.
•We evaluated Southern Company Gas' disclosures related to derivatives for
completeness and accuracy based on the results of our audit procedures and the
accounting requirements for such instruments.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
February 17, 2021
We have served as Southern Company Gas' auditor since 2016.
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Report of Independent Registered Public Accounting Firm
Board of Directors and Members
Southern Natural Gas Company, L.L.C.
Houston, Texas
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Southern Natural
Gas Company, L.L.C. (the "Company") as of December 31, 2020 and 2019, the
related consolidated statements of income, members' equity, and cash flows for
each of the three years in the period ended December 31, 2020, and the related
notes (collectively referred to as the "consolidated financial statements"). In
our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2020
and 2019, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2020, in conformity with accounting
principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the Company's
consolidated financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board
(United States) ("PCAOB") and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in
accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. As part of our audits we are required to
obtain an understanding of internal control over financial reporting but not for
the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated
financial statements. We believe that our audits provide a reasonable basis for
our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the
current period audit of the consolidated financial statements that was
communicated or required to be communicated to the audit committee and that: (1)
relates to accounts or disclosures that are material to the consolidated
financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of the critical audit matter does not alter
in any way our opinion on the consolidated financial statements, taken as a
whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts or
disclosures to which it relates.
Postretirement Benefit Obligation
At December 31, 2020, the Company's postretirement benefit obligation was $23
million and the Company's plan assets were $69 million, resulting in a net asset
position of $46 million. As described in Note 5 of the consolidated financial
statements, the postretirement benefit obligation is primarily based on
actuarial calculations, which include various significant assumptions.
We identified the Company's estimate of the postretirement benefit obligation as
a critical audit matter. Auditing the postretirement benefit obligation required
complex auditor judgment due to the highly judgmental nature of the actuarial
assumptions used in the calculation, which include the discount rate, the
mortality rate, and the expected return on plan assets. These assumptions had a
significant effect on the postretirement benefit obligation calculation.
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The primary procedures we performed to address this critical audit matter
included:
•Comparing the actuarial assumptions used by management with historical trends
and evaluating the change in the postretirement benefit obligation from prior
year due to the change in service cost, interest cost, contributions, benefit
payments, and actuarial gains and losses.
•Evaluating the appropriateness of management's methodology for determining the
discount rate that reflects the maturity and duration of the benefit payments.
•Evaluating the reasonableness of mortality rate by assessing whether the
information was consistent with publicly available information, and whether any
market data adjusted for entity-specific factors were applied.
•Evaluating the expected return on plan assets by assessing whether management's
assumptions were consistent with a range of returns for a portfolio of
comparative investments that was determined based on publicly available
information.
Emphasis of Matter - Significant Transactions with Related Parties
As discussed in Note 6 to the consolidated financial statements, the Company has
entered into significant transactions with related parties.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2018.
Houston, Texas
February 8, 2021
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CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2020, 2019, and 2018 Southern Company Gas and Subsidiary Companies 2020 Annual Report
2020 2019 2018
(in millions)
Operating Revenues:Natural gas revenues (includes revenue taxes of
$107, $117, and $114, respectively) $ 3,431 $3,793 $ 3,874
Alternative revenue programs 3 (1) (20)
Other revenues - - 55
Total operating revenues 3,434 3,792 3,909
Operating Expenses:
Cost of natural gas 972 1,319 1,539
Cost of other sales - - 12
Other operations and maintenance 966 888 981
Depreciation and amortization 500 487 500
Taxes other than income taxes 206 213 211
Impairment charges - 115 42
(Gain) loss on dispositions, net (22) - (291)
Total operating expenses 2,622 3,022 2,994
Operating Income 812 770 915
Other Income and (Expense):
Earnings from equity method investments 141 157 148
Interest expense, net of amounts capitalized (231) (232) (228)
Other income (expense), net 41 20 1
Total other income and (expense) (49) (55) (79)
Earnings Before Income Taxes 763
715 836
Income taxes 173 130 464
Net Income $ 590 $ 585 $ 372
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2020, 2019, and 2018 Southern Company Gas and Subsidiary Companies 2020 Annual Report
2020 2019 2018
(in millions)
Net Income $ 590 $ 585 $ 372
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $(8), $(2), and
$2, respectively (21) (5) 5
Reclassification adjustment for amounts included in net income,
net of tax of $3, $-, and $(1), respectively 7 2 (1) Pension and other postretirement benefit plans: Benefit plan net gain (loss), net of tax of $(3), $(14), and $-, respectively (15) (16) -
Reclassification adjustment for amounts included in net income,
net of tax of $-, $-, and $3, respectively - - (2) Total other comprehensive income (loss) (29) (19) 2 Comprehensive Income $ 561 $ 566 $ 374
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2020, 2019, and 2018 Southern Company Gas and Subsidiary Companies 2020 Annual Report
2020 2019 2018
(in millions)
Operating Activities:
Consolidated net income $ 590 $ 585 $ 372
Adjustments to reconcile net income to net cash
provided from operating activities -
Depreciation and amortization, total 500 487 500
Deferred income taxes 56 213 (1)
Pension and postretirement funding - (145) -
Impairment charges - 115 42
(Gain) loss on dispositions, net (22) - (291)
Mark-to-market adjustments 61 (56) (19)
Other, net (29) (55) (24)
Changes in certain current assets and liabilities -
-Receivables (93) 467 (218)
-Natural gas for sale 18 44 49
-Prepaid income taxes 19 40 (42)
-Other current assets (10) 31 4
-Accounts payable 103 (520) 372
-Accrued taxes 13 (69) 10
-Accrued compensation 7 1 32
-Other current liabilities (6) (71) (22)
Net cash provided from operating activities 1,207 1,067 764
Investing Activities:
Property additions (1,471) (1,408) (1,388)
Cost of removal, net of salvage (100) (82) (96)
Change in construction payables, net 20 24 (37)
Investments in unconsolidated subsidiaries (79) (31) (110)
Returned investment in unconsolidated subsidiaries 13 67 20
Proceeds from dispositions and asset sales 211 32 2,609
Other investing activities (11) 12 -
Net cash provided from (used for) investing activities (1,417) (1,386) 998
Financing Activities:
Increase (decrease) in notes payable, net (326) - (868)
Proceeds -
First mortgage bonds 325 300 300
Capital contributions from parent company 216 821 24
Senior notes 500 - -
Redemptions and repurchases -
Gas facility revenue bonds - - (200)
First mortgage bonds - (50) -
Senior notes - (300) (155)
Return of capital to parent company - - (400)
Payment of common stock dividends (533) (471) (468)
Other financing activities (2) (2) (3)
Net cash provided from (used for) financing activities 180 298 (1,770)
Net Change in Cash, Cash Equivalents, and Restricted Cash (30) (21) (8)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year
49 70 78
Cash, Cash Equivalents, and Restricted Cash at End of Year
$ 19 $ 49 $ 70
Supplemental Cash Flow Information:
Cash paid (received) during the period for -
Interest (net of $7, $6, and $7 capitalized,
respectively) $ 232 $ 251 $ 249
Income taxes (net of refunds) 25 (41) 524
Noncash transactions - Accrued property additions at year-end
142 122 97
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
At December 31, 2020 and 2019
Southern Company Gas and Subsidiary Companies 2020 Annual Report
Assets 2020 2019
(in millions)
Current Assets:
Cash and cash equivalents $ 17 $ 46
Receivables -
Energy marketing 516 428
Customer accounts 353 323
Unbilled revenues 219 183
Affiliated 4 5
Other accounts and notes 51 114
Accumulated provision for uncollectible accounts (40) (18)
Natural gas for sale 460 479
Prepaid expenses 48 65
Assets from risk management activities, net of collateral 118 177
Other regulatory assets 102 92
Assets held for sale - 171
Other current assets 38 41
Total current assets 1,886 2,106
Property, Plant, and Equipment:
In service 17,611 16,344
Less: Accumulated depreciation 4,821 4,650
Plant in service, net of depreciation 12,790 11,694
Construction work in progress 648 613
Total property, plant, and equipment 13,438 12,307
Other Property and Investments:
Goodwill 5,015 5,015
Equity investments in unconsolidated subsidiaries 1,290 1,251
Other intangible assets, net of amortization of $195 and $176, respectively
51 70
Miscellaneous property and investments 19 20
Total other property and investments 6,375 6,356
Deferred Charges and Other Assets:
Operating lease right-of-use assets, net of amortization 81 93
Other regulatory assets, deferred 615 618
Other deferred charges and assets 235 207
Total deferred charges and other assets 931 918
Total Assets $ 22,630 $ 21,687
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
At December 31, 2020 and 2019
Southern Company Gas and Subsidiary Companies 2020 Annual Report
Liabilities and Stockholder's Equity 2020 2019
(in millions)
Current Liabilities:
Securities due within one year $ 333 $ -
Notes payable 324 650
Energy marketing trade payables 494 442
Accounts payable -
Affiliated 56 41
Other 373 315
Customer deposits 90 96
Accrued taxes 83 71
Accrued interest 58 52
Accrued compensation 106 100
Other regulatory liabilities 122 94
Other current liabilities 150 149
Total current liabilities 2,189 2,010
Long-term Debt 6,293 5,845
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 1,265 1,219
Deferred credits related to income taxes 847 874
Employee benefit obligations 283 265
Operating lease obligations 67 78
Other cost of removal obligations 1,649 1,606
Accrued environmental remediation 216 233
Other deferred credits and liabilities 54 51
Total deferred credits and other liabilities 4,381 4,326
Total Liabilities 12,863 12,181
Common Stockholder's Equity:
Common stock, par value $0.01 per share
(Authorized - 100 million shares; Outstanding - 100 shares) Paid-in capital
9,930 9,697
Accumulated deficit (141) (198)
Accumulated other comprehensive income (loss) (22) 7
Total common stockholder's equity (See accompanying statements) 9,767 9,506 Total Liabilities and Stockholder's Equity
$ 22,630 $ 21,687
Commitments and Contingent Matters (See notes)
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY For the Years Ended December 31, 2020, 2019, and 2018 Southern Company Gas and Subsidiary Companies 2020 Annual Report
Accumulated
Number of Retained Earnings Other
Common Shares Paid-In (Accumulated Comprehensive Income
Issued Common Stock Capital Deficit) (Loss) Total
(in millions)
Balance at December 31, 2017 - $ - $ 9,214 $ (212) $ 20 $ 9,022
Net income - - - 372 - 372
Return of capital to parent
company - - (400) - - (400)
Capital contributions from
parent company - - 42 - - 42
Other comprehensive income - - - - 2 2
Cash dividends on common stock - - - (468) - (468)
Other - - - (4) 4 -
Balance at December 31, 2018 - - 8,856 (312) 26 8,570
Net income - - - 585 - 585
Capital contributions from
parent company - - 841 - - 841
Other comprehensive income
(loss) - - - - (19) (19)
Cash dividends on common stock - - - (471) - (471)
Balance at December 31, 2019 - - 9,697 (198) 7 9,506
Net income - - - 590 - 590
Capital contributions from
parent company - - 233 - - 233
Other comprehensive income
(loss) - - - - (29) (29)
Cash dividends on common stock - - - (533) - (533)
Balance at December 31, 2020 - $ - $ 9,930 $ (141) $ (22) $ 9,767
The accompanying notes are an integral part of these consolidated financial statements.
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COMBINED NOTES TO FINANCIAL STATEMENTS
Southern Company and Subsidiary Companies 2020 Annual Report
Notes to the Financial Statements
for
The Southern Company and Subsidiary Companies
Alabama Power Company
Georgia Power Company
Mississippi Power Company
Southern Power Company and Subsidiary Companies
Southern Company Gas and Subsidiary Companies
Index to the Combined Notes to Financial Statements
Note Page
1 Summary of Significant Accounting Policies II- 132
2 Regulatory Matters II- 148
3 Contingencies, Commitments, and Guarantees II- 170
4 Revenue from Contracts with Customers II- 179
5 Property, Plant, and Equipment II- 183
6 Asset Retirement Obligations II- 187
7 Consolidated Entities and Equity Method Investments II- 190
8 Financing II- 193
9 Leases II- 201
10 Income Taxes II- 208
11 Retirement Benefits II- 216
12 Stock Compensation II- 243
13 Fair Value Measurements II- 246
14 Derivatives II- 255
15 Acquisitions and Dispositions II- 265
16 Segment and Related Information II- 270
Index to Applicable Notes to Financial Statements by Registrant
The following notes to the financial statements are a combined presentation;
however, information contained herein relating to any individual Registrant is
filed by such Registrant on its own behalf and each Registrant makes no
representation as to information related to the other Registrants. The list
below indicates the Registrants to which each note applies.
Registrant Applicable Notes
Southern Company 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16
Alabama Power 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15
Georgia Power 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14
Mississippi Power 1, 2, 3, 4, 5, 6, 8, 9, 10, 11, 12, 13, 14
Southern Power 1, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15
Southern Company Gas 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Southern Company is the parent company of three traditional electric operating
companies, as well as Southern Power, Southern Company Gas, SCS, Southern Linc,
Southern Holdings, Southern Nuclear, PowerSecure, and other direct and indirect
subsidiaries. The traditional electric operating companies - Alabama Power,
Georgia Power, and Mississippi Power - are vertically integrated utilities
providing electric service in three Southeastern states. In January 2019,
Southern Company completed the sale of Gulf Power (another traditional electric
operating company through December 31, 2018) to NextEra Energy. Southern Power
develops, constructs, acquires, owns, and manages power generation assets,
including renewable energy and battery energy storage projects, and sells
electricity at market-based rates in the wholesale market. Southern Company Gas
distributes natural gas through natural gas distribution utilities, including
Nicor Gas (Illinois), Atlanta Gas Light (Georgia), Virginia Natural Gas, and
Chattanooga Gas (Tennessee). In 2018, Southern Company Gas sold its other
natural gas utilities - Elizabethtown Gas (New Jersey), Florida City Gas, and
Elkton Gas (Maryland). Southern Company Gas is also involved in several other
complementary businesses including gas pipeline investments, wholesale gas
services, and gas marketing services. SCS, the system service company, provides,
at cost, specialized services to Southern Company and its subsidiary companies.
Southern Linc provides digital wireless communications for use by Southern
Company and its subsidiary companies and also markets these services to the
public and provides fiber optics services within the Southeast. Southern
Holdings is an intermediate holding company subsidiary, primarily for Southern
Company's leveraged lease and other investments. Southern Nuclear operates and
provides services to the Southern Company system's nuclear power plants,
including Alabama Power's Plant Farley and Georgia Power's Plant Hatch and Plant
Vogtle Units 1 and 2, and is currently managing construction and start-up of
Plant Vogtle Units 3 and 4, which are co-owned by Georgia Power. PowerSecure
provides energy solutions to electric utilities and their customers in the areas
of distributed generation, energy storage and renewables, and energy efficiency.
See Note 15 for information regarding disposition activities, including Southern
Company's sale of Gulf Power.
The Registrants' financial statements reflect investments in subsidiaries on a
consolidated basis. Intercompany transactions have been eliminated in
consolidation. The equity method is used for investments in entities in which a
Registrant has significant influence but does not have control and for VIEs
where a Registrant has an equity investment but is not the primary beneficiary.
Southern Power has controlling ownership in certain legal entities for which the
contractual provisions represent profit-sharing arrangements because the
allocations of cash distributions and tax benefits are not based on fixed
ownership percentages. For these arrangements, the noncontrolling interest is
accounted for under a balance sheet approach utilizing the HLBV method. The HLBV
method calculates each partner's share of income based on the change in net
equity the partner can legally claim in a HLBV at the end of the period compared
to the beginning of the period. See "Variable Interest Entities" herein and Note
7 for additional information.
The traditional electric operating companies, Southern Power, certain
subsidiaries of Southern Company Gas, and certain other subsidiaries are subject
to regulation by the FERC, and the traditional electric operating companies and
the natural gas distribution utilities are also subject to regulation by their
respective state PSCs or other applicable state regulatory agencies. As such,
the respective financial statements of the applicable Registrants reflect the
effects of rate regulation in accordance with GAAP and comply with the
accounting policies and practices prescribed by relevant state PSCs or other
applicable state regulatory agencies.
The preparation of financial statements in conformity with GAAP requires the use
of estimates, and the actual results may differ from those estimates. Certain
prior years' data presented in the financial statements have been reclassified
to conform to the current year presentation. These reclassifications had no
impact on the Registrants' results of operations, financial position, or cash
flows.
At December 31, 2020 and/or 2019, Southern Company, Southern Power, and Southern
Company Gas each had assets and liabilities held for sale on their balance
sheets. Unless otherwise noted, the disclosures herein related to specific asset
and liability balances at December 31, 2020 and 2019 exclude assets and
liabilities held for sale. See Note 15 under "Assets Held for Sale" for
additional information including major classes of assets and liabilities
classified as held for sale by Southern Company, Southern Power, and Southern
Company Gas.
Recently Adopted Accounting Standards
Effective January 1, 2019, the Registrants adopted ASU No. 2016-02, Leases
(Topic 842) (ASU 2016-02). ASU 2016-02 required lessees to recognize on the
balance sheet a lease liability and a right-of-use asset for all leases. ASU
2016-02 also changed the recognition, measurement, and presentation of expense
associated with leases and provided clarification regarding the identification
of certain components of contracts that would represent a lease. Lessor
accounting was relatively unchanged and there was no change to the accounting
for existing leveraged leases. See Note 9 for additional information and related
disclosures.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
Affiliate Transactions
The traditional electric operating companies, Southern Power, and Southern
Company Gas have agreements with SCS under which certain of the following
services are rendered to them at direct or allocated cost: general executive and
advisory, general and design engineering, operations, purchasing, accounting,
finance, treasury, legal, tax, information technology, marketing, auditing,
insurance and pension administration, human resources, systems and procedures,
digital wireless communications, cellular tower space, and other services with
respect to business and operations, construction management, and Southern
Company power pool transactions. These costs are primarily included in other
operations and maintenance expenses or capitalized to property, plant, and
equipment. Costs for these services from SCS in 2020, 2019, and 2018 were as
follows:
Alabama Georgia Mississippi Southern
Power Power Power Power Southern Company Gas
(in millions)
2020 $ 478 $ 639 $ 149 $ 87 $ 237
2019 527 704 118 90 183
2018 508 653 104 98 194
Alabama Power and Georgia Power also have agreements with Southern Nuclear under
which Southern Nuclear renders the following nuclear-related services at cost:
general executive and advisory services; general operations, management, and
technical services; administrative services including procurement, accounting,
employee relations, systems, and procedures services; strategic planning and
budgeting services; other services with respect to business and operations; and,
for Georgia Power, construction management. These costs are primarily included
in other operations and maintenance expenses or capitalized to property, plant,
and equipment. Costs for these services in 2020, 2019, and 2018 amounted to $262
million, $256 million, and $247 million, respectively, for Alabama Power and
$883 million, $760 million, and $780 million, respectively, for Georgia Power.
See Note 2 under "Georgia Power - Nuclear Construction" for additional
information regarding Southern Nuclear's construction management of Plant Vogtle
Units 3 and 4 for Georgia Power.
Cost allocation methodologies used by SCS and Southern Nuclear prior to the
repeal of the Public Utility Holding Company Act of 1935, as amended, were
approved by the SEC. Subsequently, additional cost allocation methodologies have
been reported to the FERC and management believes they are reasonable. The FERC
permits services to be rendered at cost by system service companies.
Alabama Power's and Georgia Power's power purchases from affiliates through the
Southern Company power pool are included in purchased power, affiliates on their
respective statements of income. Mississippi Power's and Southern Power's power
purchases from affiliates through the Southern Company power pool are included
in purchased power on their respective statements of income and were as follows:
Mississippi Southern
Power Power
(in millions)
2020 $ 4 $ 8
2019 3 14
2018 15 41
Georgia Power has entered into several PPAs with Southern Power for capacity and
energy. Georgia Power's total expenses associated with these PPAs were $141
million, $177 million, and $216 million in 2020, 2019, and 2018, respectively.
Southern Power's total revenues from all PPAs with Georgia Power, included in
wholesale revenue affiliates on Southern Power's consolidated statements of
income, were $139 million, $174 million, and $215 million for 2020, 2019, and
2018, respectively. Included within these revenues were affiliate PPAs accounted
for as operating leases, which totaled $115 million, $116 million, and $65
million for 2020, 2019, and 2018, respectively. See Note 9 for additional
information.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
SCS (as agent for Alabama Power, Georgia Power, and Southern Power) and Southern
Company Gas have long-term interstate natural gas transportation agreements with
SNG that are governed by the terms and conditions of SNG's natural gas tariff
and are subject to FERC regulation. See Note 7 under "Southern Company Gas -
Equity Method Investments" for additional information. Transportation costs
under these agreements in 2020, 2019, and 2018 were as follows:
Alabama Georgia Southern
Power Power Power Southern Company Gas
(in millions)
2020 $ 15 $ 108 $ 29 $ 29
2019 17 99 28 31
2018 8 101 25 32
In 2018, SNG purchased the natural gas lateral pipeline serving Plant McDonough
Units 4 through 6 from Georgia Power at net book value, as approved by the
Georgia PSC. In January 2020, SNG paid Georgia Power $142 million, which
included $71 million contributed to SNG by Southern Company Gas for its
proportionate share. During the interim period, Georgia Power received a
discounted shipping rate to reflect the deferred consideration and SNG
constructed an extension to the pipeline.
SCS, as agent for the traditional electric operating companies and Southern
Power, has agreements with certain subsidiaries of Southern Company Gas to
purchase natural gas. Natural gas purchases made under these agreements were
immaterial for Alabama Power and Mississippi Power and as follows for Georgia
Power and Southern Power in 2020, 2019, and 2018:
Georgia Southern
Power Power
(in millions)
2020 $ - $ 26
2019 4 64
2018 21 119
Alabama Power and Mississippi Power jointly own Plant Greene County. The
companies have an agreement under which Alabama Power operates Plant Greene
County and Mississippi Power reimburses Alabama Power for its proportionate
share of non-fuel operations and maintenance expenses, which totaled $9 million,
$9 million, and $8 million in 2020, 2019, and 2018, respectively. See Note 5
under "Joint Ownership Agreements" for additional information.
The traditional electric operating companies each have agreements with Gulf
Power. Alabama Power previously made transmission system upgrades to ensure firm
delivery of energy under a non-affiliate PPA from the Central Alabama Generating
Station, and, under a related tariff, received $11 million from Gulf Power in
2018. Gulf Power owns a 25% portion of Plant Scherer Unit 3. Georgia Power
operates Plant Scherer Unit 3 and Gulf Power reimburses Georgia Power for its
25% proportionate share of the related non-fuel expenses, which totaled $8
million in 2018. Gulf Power also owns a 50% portion of Plant Daniel Units 1 and
2. Mississippi Power operates Plant Daniel and Gulf Power reimburses Mississippi
Power for its proportionate share of all associated non-fuel operations and
maintenance expenses, which totaled $31 million in 2018. See Note 5 under "Joint
Ownership Agreements" and Note 15 under "Southern Company" and "Alabama Power"
for additional information.
Alabama Power and Georgia Power each have agreements with PowerSecure for
equipment purchases and/or services related to utility infrastructure
construction, distributed energy, and energy efficiency projects. Alabama
Power's costs for these services were immaterial for 2020 and totaled $7 million
and $24 million in 2019 and 2018, respectively. Georgia Power's costs for these
equipment purchases and services totaled approximately $11 million in 2020 and
were immaterial for the other periods presented.
See Note 7 under "SEGCO" for information regarding Alabama Power's and Georgia
Power's equity method investment in SEGCO and related affiliate purchased power
costs, as well as Alabama Power's gas pipeline ownership agreement with SEGCO.
Southern Power has several agreements with SCS for transmission services, which
are billed to Southern Power based on the Southern Company Open Access
Transmission Tariff as filed with the FERC. Transmission services purchased by
Southern Power from SCS totaled $15 million, $15 million, and $12 million for
2020, 2019, and 2018, respectively, and were charged to other operations and
maintenance expenses in Southern Power's consolidated statements of income.
The traditional electric operating companies and Southern Power may jointly
enter into various types of wholesale energy, natural gas, and certain other
contracts, either directly or through SCS as agent. Each participating company
may be jointly and severally liable for the obligations incurred under these
agreements. See Note 14 under "Contingent Features" for additional information.
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Southern Power and the traditional electric operating companies generally settle
amounts related to the above transactions on a monthly basis in the month
following the performance of such services or the purchase or sale of
electricity. See "Revenues - Southern Power" herein for additional information.
The traditional electric operating companies, Southern Power, and Southern
Company Gas provide incidental services to and receive such services from other
Southern Company subsidiaries which are generally minor in duration and amount.
Except as described herein, the traditional electric operating companies,
Southern Power, and Southern Company Gas neither provided nor received any
material services to or from affiliates in any year presented.
Regulatory Assets and Liabilities
The traditional electric operating companies and the natural gas distribution
utilities are subject to accounting requirements for the effects of rate
regulation. Regulatory assets represent probable future revenues associated with
certain costs that are expected to be recovered from customers through the
ratemaking process. Regulatory liabilities represent costs recovered that are
expected to be incurred in the future or probable future reductions in revenues
associated with amounts that are expected to be credited to customers through
the ratemaking process.
In the event that a portion of a traditional electric operating company's or a
natural gas distribution utility's operations is no longer subject to applicable
accounting rules for rate regulation, such company would be required to write
off to income or reclassify to AOCI related regulatory assets and liabilities
that are not specifically recoverable through regulated rates. In addition, the
traditional electric operating company or the natural gas distribution utility
would be required to determine if any impairment to other assets, including
plant, exists and write down the assets, if impaired, to their fair values. All
regulatory assets and liabilities are to be reflected in rates. See Note 2 for
additional information including details of regulatory assets and liabilities
reflected in the balance sheets for Southern Company, the traditional electric
operating companies, and Southern Company Gas.
Revenues
The Registrants generate revenues from a variety of sources which are accounted
for under various revenue accounting guidance, including revenue from contracts
with customers, lease, derivative, and regulatory accounting. See Notes 4, 9,
and 14 for additional information.
Traditional Electric Operating Companies
The majority of the revenues of the traditional electric operating companies are
generated from contracts with retail electric customers. These revenues,
generated from the integrated service to deliver electricity when and if called
upon by the customer, are recognized as a single performance obligation
satisfied over time, at a tariff rate, and as electricity is delivered to the
customer during the month. Unbilled revenues related to retail sales are accrued
at the end of each fiscal period. Retail rates may include provisions to adjust
revenues for fluctuations in fuel costs, fuel hedging, the energy component of
purchased power costs, and certain other costs. Revenues are adjusted for
differences between these actual costs and amounts billed in current regulated
rates. Under or over recovered regulatory clause revenues are recorded in the
balance sheets and are recovered from or returned to customers, respectively,
through adjustments to the billing factors. See Note 2 for additional
information regarding regulatory matters of the traditional electric operating
companies.
Wholesale capacity revenues from PPAs are recognized in amounts billable under
the contract terms. Energy and other revenues are generally recognized as
services are provided. The contracts for capacity and energy in a wholesale PPA
have multiple performance obligations where the contract's total transaction
price is allocated to each performance obligation based on the standalone
selling price. The standalone selling price is primarily determined by the price
charged to customers for the specific goods or services transferred with the
performance obligations. Generally, the traditional electric operating companies
recognize revenue as the performance obligations are satisfied over time as
electricity is delivered to the customer or as generation capacity is available
to the customer.
For both retail and wholesale revenues, the traditional electric operating
companies have elected to recognize revenue for their sales of electricity and
capacity using the invoice practical expedient as they generally have a right to
consideration in an amount that corresponds directly with the value to the
customer of the performance completed to date and that may be invoiced. Payment
for goods and services rendered is typically due in the subsequent month
following satisfaction of the Registrants' performance obligation.
Southern Power
Southern Power sells capacity and energy at rates specified under contractual
terms in long-term PPAs. These PPAs are accounted for as operating leases,
non-derivatives, or normal sale derivatives. Capacity revenues from PPAs
classified as operating leases
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are recognized on a straight-line basis over the term of the agreement. Energy
revenues are recognized in the period the energy is delivered.
Southern Power's non-lease contracts commonly include capacity and energy which
are considered separate performance obligations. In these contracts, the total
transaction price is allocated to each performance obligation based on the
standalone selling price. The standalone selling price is primarily determined
by the price charged to customers for the specific goods or services transferred
with the performance obligations. Generally, Southern Power recognizes revenue
as the performance obligations are satisfied over time, as electricity is
delivered to the customer or as generation capacity is made available to the
customer.
Southern Power generally has a right to consideration in an amount that
corresponds directly with the value to the customer of the performance completed
to date and may recognize revenue in the amount to which the entity has a right
to invoice. Payment for goods and services rendered is typically due in the
subsequent month following satisfaction of Southern Power's performance
obligation.
When multiple contracts exist with the same counterparty, the revenues from each
contract are accounted for as separate arrangements.
Southern Power may also enter into contracts to sell short-term capacity in the
wholesale electricity markets. These sales are generally classified as
mark-to-market derivatives and net unrealized gains and losses on such contracts
are recorded in wholesale revenues. See Note 14 and "Financial Instruments"
herein for additional information.
Southern Company Gas
Gas Distribution Operations
Southern Company Gas records revenues when goods or services are provided to
customers. Those revenues are based on rates approved by the state regulatory
agencies of the natural gas distribution utilities. Atlanta Gas Light operates
in a deregulated natural gas market whereby Marketers, rather than a traditional
utility, sell natural gas to end-use customers in Georgia and handle customer
billing functions. As required by the Georgia PSC, Atlanta Gas Light bills
Marketers in equal monthly installments for each residential, commercial, and
industrial end-use customer's distribution costs as well as for capacity costs
utilizing a seasonal rate design for the calculation of each residential end-use
customer's annual straight-fixed-variable charge, which reflects the historic
volumetric usage pattern for the entire residential class.
The majority of the revenues of Southern Company Gas are generated from
contracts with natural gas distribution customers. Revenues from this integrated
service to deliver gas when and if called upon by the customer are recognized as
a single performance obligation satisfied over time and are recognized at a
tariff rate as gas is delivered to the customer during the month.
The standalone selling price is primarily determined by the price charged to
customers for the specific goods or services transferred with the performance
obligations. Generally, Southern Company Gas recognizes revenue as the
performance obligations are satisfied over time as natural gas is delivered to
the customer. The performance obligations related to wholesale gas services are
satisfied, and revenue is recognized, at a point in time when natural gas is
delivered to the customer.
Southern Company Gas has elected to recognize revenue for sales of gas using the
invoice practical expedient as it generally has a right to consideration in an
amount that corresponds directly with the value to the customer of the
performance completed to date and that may be invoiced. Payment for goods and
services rendered is typically due in the subsequent month following
satisfaction of Southern Company Gas' performance obligation.
With the exception of Atlanta Gas Light, the natural gas distribution utilities
have rate structures that include volumetric rate designs that allow the
opportunity to recover certain costs based on gas usage. Revenues from sales and
transportation services are recognized in the same period in which the related
volumes are delivered to customers. Revenues from residential and certain
commercial and industrial customers are recognized on the basis of scheduled
meter readings. Additionally, unbilled revenues are recognized for estimated
deliveries of gas not yet billed to these customers, from the last bill date to
the end of the accounting period. For other commercial and industrial customers
and for all wholesale customers, revenues are based on actual deliveries through
the end of the period.
The tariffs for several of the natural gas distribution utilities include
provisions which allow for the recognition of certain revenues prior to the time
such revenues are billed to customers. These provisions are referred to as
alternative revenue programs
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and provide for the recognition of certain revenues prior to billing, as long as
the amounts recognized will be collected from customers within 24 months of
recognition. These programs are as follows:
•Weather normalization adjustments - reduce customer bills when winter weather
is colder than normal and increase customer bills when weather is warmer than
normal and are included in the tariffs for Virginia Natural Gas, Chattanooga
Gas, and, prior to its sale, Elizabethtown Gas;
•Revenue normalization mechanisms - mitigate the impact of conservation and
declining customer usage and are contained in the tariffs for Virginia Natural
Gas, Chattanooga Gas, Nicor Gas (effective November 1, 2019), and, prior to its
sale, Elkton Gas; and
•Revenue true-up adjustment - included within the provisions of the GRAM program
in which Atlanta Gas Light participates as a short-term alternative to formal
rate case filings, the revenue true-up feature provides for a positive (or
negative) adjustment to record revenue in the amount of any variance to budgeted
revenues, which are submitted and approved annually as a requirement of
GRAM. Such adjustments are reflected in customer billings in a subsequent
program year.
Wholesale Gas Services
Southern Company Gas nets revenues from energy and risk management activities
with the associated costs. Profits from sales between segments are eliminated
and are recognized as goods or services sold to end-use customers. Southern
Company Gas records transactions that qualify as derivatives at fair value with
changes in fair value recognized in earnings in the period of change and
characterized as unrealized gains or losses. Gains and losses on derivatives
held for energy trading purposes are presented on a net basis in revenue.
Gas Marketing Services
Southern Company Gas recognizes revenues from natural gas sales and
transportation services in the same period in which the related volumes are
delivered to customers and recognizes sales revenues from residential and
certain commercial and industrial customers on the basis of scheduled meter
readings. Southern Company Gas also recognizes unbilled revenues for estimated
deliveries of gas not yet billed to these customers from the most recent meter
reading date to the end of the accounting period. For other commercial and
industrial customers and for all wholesale customers, revenues are based on
actual deliveries during the period.
Southern Company Gas recognizes revenues on 12-month utility-bill management
contracts as the lesser of cumulative earned or cumulative billed amounts.
Concentration of Credit Risk
Southern Company Gas' wholesale gas services business has a concentration of
credit risk for services it provides to its counterparties. This credit risk is
generally concentrated in 20 of its counterparties and is measured by 30-day
receivable exposure plus forward exposure. Counterparty credit risk is evaluated
using a S&P equivalent credit rating, which is determined by a process of
converting the lower of the S&P or Moody's rating to an internal rating ranging
from 9 to 1, with 9 being equivalent to AAA/Aaa by S&P and Moody's,
respectively, and 1 being equivalent to D/Default by S&P and Moody's,
respectively. A counterparty that does not have an external rating is assigned
an internal rating based on the strength of its financial ratios. As of
December 31, 2020, the top 20 counterparties represented 58%, or $234 million,
of the total counterparty exposure and had a weighted average S&P equivalent
rating of A-.
Concentration of credit risk occurs at Atlanta Gas Light for amounts billed for
services and other costs to its customers, which consist of 16 Marketers in
Georgia (including SouthStar). The credit risk exposure to the Marketers varies
seasonally, with the lowest exposure in the non-peak summer months and the
highest exposure in the peak winter months. Marketers are responsible for the
retail sale of natural gas to end-use customers in Georgia. The functions of the
retail sale of gas include the purchase and sale of natural gas, customer
service, billings, and collections. The provisions of Atlanta Gas Light's tariff
allow Atlanta Gas Light to obtain credit security support in an amount equal to
a minimum of two times a Marketer's highest month's estimated bill from Atlanta
Gas Light.
Concentration of Revenue
Southern Company, Alabama Power, Georgia Power, Mississippi Power (with the
exception of its full requirements cost-based MRA electric tariffs described
below), and Southern Company Gas each have a diversified base of customers and
no single customer or industry comprises 10% or more of each company's revenues.
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Mississippi Power provides service under long-term contracts with rural electric
cooperative associations and a municipality located in southeastern Mississippi
under full requirements cost-based MRA electric tariffs, which are subject to
regulation by the FERC. The contracts with these wholesale customers represented
15.3% of Mississippi Power's total operating revenues in 2020 and are generally
subject to 10-year rolling cancellation notices. Historically, these wholesale
customers have acted as a group and any changes in contractual relationships for
one customer are likely to be followed by the other wholesale customers.
Significant portions of Southern Power's revenues have been derived from certain
customers pursuant to PPAs. The following table shows the percentage of total
revenues for Southern Power's top three customers for each of the years
presented:
2020 2019 2018
Southern California Edison 9.4 % 6.8 % 6.2 %
Georgia Power 8.0 % 9.0 % 9.8 %Duke Energy Corporation 6.7 % N/A 6.8 % Morgan Stanley Capital Group N/A 4.9 % N/A
Fuel Costs
Fuel costs for the traditional electric operating companies and Southern Power
are expensed as the fuel is used. Fuel expense generally includes fuel
transportation costs and the cost of purchased emissions allowances as they are
used. For Alabama Power and Georgia Power, fuel expense also includes the
amortization of the cost of nuclear fuel. For the traditional electric operating
companies, fuel costs also include gains and/or losses from fuel-hedging
programs as approved by their respective state PSCs.
Cost of Natural Gas
Excluding Atlanta Gas Light, which does not sell natural gas to end-use
customers, Southern Company Gas charges its utility customers for natural gas
consumed using natural gas cost recovery mechanisms set by the applicable state
regulatory agencies. Under these mechanisms, all prudently-incurred natural gas
costs are passed through to customers without markup, subject to regulatory
review. Southern Company Gas defers or accrues the difference between the actual
cost of natural gas and the amount of commodity revenue earned in a given period
such that no operating income is recognized related to these costs. The deferred
or accrued amount is either billed or refunded to customers prospectively
through adjustments to the commodity rate. Deferred and accrued natural gas
costs are included in the balance sheets as regulatory assets and regulatory
liabilities, respectively.
Southern Company Gas' gas marketing services' customers are charged for actual
or estimated natural gas consumed. Within cost of natural gas, Southern Company
Gas also includes costs of lost and unaccounted for gas, adjustments to reduce
the value of inventories to market value, and gains and losses associated with
certain derivatives.
Income Taxes
The Registrants use the liability method of accounting for deferred income taxes
and provide deferred income taxes for all significant income tax temporary
differences. In accordance with regulatory requirements, deferred federal ITCs
for the traditional electric operating companies are deferred and amortized over
the average life of the related property, with such amortization normally
applied as a credit to reduce depreciation and amortization in the statements of
income. Southern Power's and the natural gas distribution utilities' deferred
federal ITCs, as well as certain state ITCs for Nicor Gas, are deferred and
amortized to income tax expense over the life of the respective asset.
Under current tax law, certain projects at Southern Power related to the
construction of renewable facilities are eligible for federal ITCs. Southern
Power estimates eligible costs which, as they relate to acquisitions, may not be
finalized until the allocation of the purchase price to assets has been
finalized. Southern Power applies the deferred method to ITCs, whereby the ITCs
are recorded as a deferred credit and amortized to income tax expense over the
life of the respective asset. Furthermore, the tax basis of the asset is reduced
by 50% of the ITCs received, resulting in a net deferred tax asset. Southern
Power has elected to recognize the tax benefit of this basis difference as a
reduction to income tax expense in the year in which the plant reaches
commercial operation. State ITCs are recognized as an income tax benefit in the
period in which the credits are generated. In addition, certain projects are
eligible for federal and state PTCs, which are recognized as an income tax
benefit based on KWH production.
Federal ITCs and PTCs, as well as state ITCs and other state tax credits
available to reduce income taxes payable, were not fully utilized in 2020 and
will be carried forward and utilized in future years. In addition, Southern
Company is expected to have various state net operating loss (NOL) carryforwards
for certain of its subsidiaries, including Mississippi Power and Southern Power,
which would result in income tax benefits in the future, if utilized. See Note
10 under "Current and Deferred Income Taxes - Tax Credit Carryforwards" and " -
Net Operating Loss Carryforwards" for additional information.
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The Registrants recognize tax positions that are "more likely than not" of being
sustained upon examination by the appropriate taxing authorities. See Note 10
under "Unrecognized Tax Benefits" for additional information.
Other Taxes
Taxes imposed on and collected from customers on behalf of governmental agencies
are presented net on the Registrants' statements of income and are excluded from
the transaction price in determining the revenue related to contracts with a
customer.
Southern Company Gas is taxed on its gas revenues by various governmental
authorities, but is allowed to recover these taxes from its customers. Revenue
taxes imposed on the natural gas distribution utilities are recorded at the
amount charged to customers, which may include a small administrative fee, as
operating revenues, and the related taxes imposed on Southern Company Gas are
recorded as operating expenses on the statements of income. Revenue taxes
included in operating expenses were $104 million, $114 million, and $111 million
in 2020, 2019, and 2018, respectively.
Allowance for Funds Used During Construction and Interest Capitalized
The traditional electric operating companies and the natural gas distribution
utilities record AFUDC, which represents the estimated debt and equity costs of
capital funds that are necessary to finance the construction of new regulated
facilities. While cash is not realized currently, AFUDC increases the revenue
requirement and is recovered over the service life of the asset through a higher
rate base and higher depreciation. The equity component of AFUDC is not taxable.
Interest related to financing the construction of new facilities at Southern
Power and new facilities not included in the traditional electric operating
companies' and Southern Company Gas' regulated rates is capitalized in
accordance with standard interest capitalization requirements.
Total AFUDC and interest capitalized for the Registrants in 2020, 2019, and 2018
was as follows:
Alabama Georgia Mississippi Southern
Southern Company Power Power(*) Power Power Southern Company Gas
(in millions)
2020 $ 230 $ 61 $ 138 $ 1 $ 11 $ 18
2019 202 71 103 - 15 13
2018 210 84 94 - 17 14
(*)See Note 2 under "Georgia Power - Nuclear Construction" for information on
the inclusion of a portion of construction costs related to Plant Vogtle Units 3
and 4 in Georgia Power's rate base.
The average AFUDC composite rates for 2020, 2019, and 2018 for the traditional
electric operating companies and the natural gas distribution utilities were as
follows:
2020 2019 2018
Alabama Power 8.1 % 8.4 % 8.3 %
Georgia Power(*) 6.9 % 6.9 % 7.3 %
Mississippi Power 5.4 % 7.3 % 3.3 %
Southern Company Gas:
Atlanta Gas Light 7.7 % 7.8 % 7.9 %
Chattanooga Gas 7.1 % 7.1 % 7.4 %
Nicor Gas 0.7 % 2.3 % 2.1 %
(*)Excludes AFUDC related to the construction of Plant Vogtle Units 3 and 4. See
Note 2 under "Georgia Power - Nuclear Construction" for additional information.
Impairment of Long-Lived Assets
The Registrants evaluate long-lived assets and finite-lived intangible assets
for impairment when events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable. The determination of
whether an impairment has occurred is based on either a specific regulatory
disallowance, a sales transaction price that is less than the asset group's
carrying value, or an estimate of undiscounted future cash flows attributable to
the asset group, as compared with the carrying value of the assets. If an
impairment has occurred, the amount of the impairment recognized is determined
by either the amount of regulatory disallowance or by estimating the fair value
of the assets and recording a loss if the carrying value is greater than the
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fair value. For assets identified as held for sale, the carrying value is
compared to the estimated fair value less the cost to sell in order to determine
if an impairment loss is required. Until the assets are disposed of, their
estimated fair value is re-evaluated when circumstances or events change. See
Note 3 under "Other Matters - Southern Company" and " - Southern Company Gas"
and Note 15 under "Southern Company," "Southern Power," and "Southern Company
Gas - Sale of Pivotal LNG and Atlantic Coast Pipeline" for information regarding
impairment charges recorded during the periods presented.
Goodwill and Other Intangible Assets and Liabilities
Southern Power's intangible assets consist primarily of certain PPAs acquired,
which are amortized over the term of the respective PPA. Southern Company Gas'
goodwill and other intangible assets and liabilities primarily relate to its
2016 acquisition by Southern Company. In addition to these items, Southern
Company's goodwill and other intangible assets also relate to its 2016
acquisition of PowerSecure.
Goodwill is not amortized, but is subject to an annual impairment test during
the fourth quarter of each year, or more frequently if impairment indicators
arise, as discussed below. Southern Company and Southern Company Gas each
evaluated its goodwill in the fourth quarter 2020 and determined no impairment
was required. If the impacts of the COVID-19 pandemic and related responses,
including supply chain disruptions, reduced labor availability and/or
productivity, and reduced economic activity, become significant to the operating
results of PowerSecure and its businesses, a portion of its $263 million of
goodwill may become impaired. The ultimate outcome of this matter cannot be
determined at this time.
A goodwill impairment charge of $32 million was recorded in the second quarter
2019 in contemplation of the July 2019 sale of PowerSecure's utility
infrastructure services business. In the third quarter 2019, impairment charges
of $2 million and $3 million were recorded to goodwill and other intangible
assets, net, respectively, in contemplation of the December 2019 sale of
PowerSecure's lighting business. See Note 15 under "Southern Company" for
additional information.
At December 31, 2020 and 2019, goodwill was as follows:
Goodwill
(in millions)
Southern Company $ 5,280
Southern Company Gas:
Gas distribution operations $ 4,034
Gas marketing services 981
Southern Company Gas total $ 5,015
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At December 31, 2020 At December 31, 2019
Other Other
Gross Carrying Accumulated Intangible Gross Carrying Accumulated Intangible
Amount Amortization Assets, Net Amount Amortization Assets, Net
(in millions) (in millions)
Southern Company
Other intangible assets subject
to amortization:
Customer relationships $ 212 $ (135) $ 77 $ 212 $ (116) $ 96
Trade names 64 (31) 33 64 (25) 39
Storage and transportation
contracts 64 (64) - 64 (62) 2
PPA fair value adjustments 390 (89) 301 390 (69) 321
Other 10 (9) 1 11 (8) 3
Total other intangible assets
subject to amortization $ 740 $ (328) $ 412 $ 741 $ (280) $ 461
Other intangible assets not
subject to amortization:
Federal Communications Commission
licenses 75 - 75 75 - 75
Total other intangible assets $ 815 $ (328) $
487 $ 816 $ (280) $ 536
Southern Power
Other intangible assets subject
to amortization:
PPA fair value adjustments $ 390 $ (89) $ 301 $ 390 $ (69) $ 321
Southern Company Gas
Other intangible assets subject
to amortization:
Gas marketing services
Customer relationships $ 156 $ (119) $ 37 $ 156 $ (104) $ 52
Trade names 26 (12) 14 26 (10) 16
Wholesale gas services
Storage and transportation
contracts 64 (64) - 64 (62) 2
Total other intangible assets
subject to amortization $ 246 $ (195) $ 51 $ 246 $ (176) $ 70
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Amortization associated with other intangible assets in 2020, 2019, and 2018 was
as follows:
2020 2019 2018
(in millions)
Southern Company(a) $ 49 $ 61 $ 89
Southern Power(b) 20 19 25
Southern Company Gas:
Gas marketing services $ 17 $ 23 $ 32
Wholesale gas services(b) 2 8 20
Southern Company Gas total $ 19 $ 31 $ 52
(a)Includes $22 million, $27 million, and $45 million in 2020, 2019, and 2018,
respectively, recorded as a reduction to operating revenues.
(b)Recorded as a reduction to operating revenues.
At December 31, 2020, the estimated amortization associated with other
intangible assets for the next five years is as follows:
2021 2022 2023 2024 2025
(in millions)Southern Company $ 43 $ 39 $ 37 $ 35 $ 32 Southern Power
20 20 20 20 20
Southern Company Gas 14 11 9 7 6
Intangible liabilities of $91 million recorded under acquisition accounting for
transportation contracts at Southern Company Gas were fully amortized as of
December 31, 2019.
Acquisition Accounting
At the time of an acquisition, management will assess whether acquired assets
and activities meet the definition of a business. For acquisitions that meet the
definition of a business, operating results from the date of acquisition are
included in the acquiring entity's financial statements. The purchase price,
including any contingent consideration, is allocated based on the fair value of
the identifiable assets acquired and liabilities assumed (including any
intangible assets). Assets acquired that do not meet the definition of a
business are accounted for as an asset acquisition. The purchase price of each
asset acquisition is allocated based on the relative fair value of assets
acquired.
Determining the fair value of assets acquired and liabilities assumed requires
management judgment and management may engage independent valuation experts to
assist in this process. Fair values are determined by using market participant
assumptions and typically include the timing and amounts of future cash flows,
incurred construction costs, the nature of acquired contracts, discount rates,
power market prices, and expected asset lives. Any due diligence or transition
costs incurred for potential or successful acquisitions are expensed as
incurred.
Historically, contingent consideration primarily relates to fixed amounts due to
the seller once an acquired construction project is placed in service. For
contingent consideration with variable payments, management fair values the
arrangement with any changes recorded in the statements of income. See Note 13
for additional fair value information.
Development Costs
For Southern Power, development costs are capitalized once a project is probable
of completion, primarily based on a review of its economics and operational
feasibility, as well as the status of power off-take agreements and regulatory
approvals, if applicable. Southern Power's capitalized development costs are
included in CWIP on the balance sheets. All of Southern Power's development
costs incurred prior to the determination that a project is probable of
completion are expensed as incurred and included in other operations and
maintenance expense in the statements of income. If it is determined that a
project is no longer probable of completion, any of Southern Power's capitalized
development costs are expensed and included in other operations and maintenance
expense in the statements of income.
Long-Term Service Agreements
The traditional electric operating companies and Southern Power have entered
into LTSAs for the purpose of securing maintenance support for certain of their
generating facilities. The LTSAs cover all planned inspections on the covered
equipment,
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Southern Company and Subsidiary Companies 2020 Annual Report
which generally includes the cost of all labor and materials. The LTSAs also
obligate the counterparties to cover the costs of unplanned maintenance on the
covered equipment subject to limits and scope specified in each contract.
Payments made under the LTSAs for the performance of any planned inspections or
unplanned capital maintenance are recorded in the statements of cash flows as
investing activities. Receipts of major parts into materials and supplies
inventory prior to planned inspections are treated as noncash transactions in
the statements of cash flows. Any payments made prior to the work being
performed are recorded as prepayments in other current assets and noncurrent
assets on the balance sheets. At the time work is performed, an appropriate
amount is accrued for future payments or transferred from the prepayment and
recorded as property, plant, and equipment or expensed.
Transmission Receivables/Prepayments
As a result of Southern Power's acquisition and construction of generating
facilities, Southern Power has transmission receivables and/or prepayments
representing the portion of interconnection network and transmission upgrades
that will be reimbursed to Southern Power. Upon completion of the related
project, transmission costs are generally reimbursed by the interconnection
provider within a five-year period and the receivable/prepayments are reduced as
payments or services are received.
Cash and Cash Equivalents
For purposes of the financial statements, temporary cash investments are
considered cash equivalents. Temporary cash investments are securities with
original maturities of 90 days or less.
Restricted Cash
At December 31, 2020 and 2019, Southern Company Gas had $2 million and $3
million, respectively, of restricted cash held as collateral for workers'
compensation, life insurance, and long-term disability insurance, which is
included in cash, cash equivalents, and restricted cash on the statements of
cash flows.
Storm Damage Reserves
Each traditional electric operating company maintains a reserve to cover or is
allowed to defer and recover the cost of damages from major storms to its
transmission and distribution lines and, for Mississippi Power, the cost of
uninsured damages to its generation facilities and other property. Alabama Power
also has authority from the Alabama PSC to accrue certain additional amounts as
circumstances warrant. Alabama Power recorded additional accruals of $100
million and $84 million in 2020 and 2019, respectively. In accordance with their
respective state PSC orders, the traditional electric operating companies
accrued the following amounts related to storm damage recovery in 2020, 2019,
and 2018:
Southern Alabama Georgia Mississippi
Company(a)(b) Power(b) Power Power
(in millions)
2020 $ 326 $ 112 $ 213 $ 1
2019 170 139 30 1
2018 74 16 30 1
(a)Includes accruals at Gulf Power of $26.9 million in 2018. See Note 15 under
"Southern Company" for information regarding the sale of Gulf Power.
(b)Includes $39 million applied in 2019 to Alabama Power's NDR from its
remaining excess deferred income tax regulatory liability balance in accordance
with an Alabama PSC order.
See Note 2 under "Alabama Power - Rate NDR," "Georgia Power - Storm Damage
Recovery," and "Mississippi Power - System Restoration Rider" for additional
information regarding each company's storm damage reserve.
Leveraged Leases
At December 31, 2020 and 2019, a subsidiary of Southern Holdings had four
leveraged lease agreements, with original terms ranging up to 45 years, which
relate to energy generation, distribution, and transportation assets, including
two international projects. Southern Company receives federal income tax
deductions for depreciation and amortization, as well as interest on long-term
debt related to these investments. Southern Company reviews all important lease
assumptions at least annually, or more frequently if events or changes in
circumstances indicate that a change in assumptions has occurred or may occur.
These assumptions include the effective tax rate, the residual value, the credit
quality of the lessees, and the timing of expected tax cash flows. See Notes 3
and 15 under "Other Matters - Southern Company" and "Southern Company,"
respectively, for additional information on the leveraged lease investments,
including impairment charges and completed and planned sales.
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Southern Company and Subsidiary Companies 2020 Annual Report
Southern Company's net investment in leveraged leases consists of the following
at December 31:
2020(*) 2019
(in millions)
Net rentals receivable $ 734 $ 1,410
Unearned income (178) (622)
Investment in leveraged leases 556 788
Deferred taxes from leveraged leases (7) (238) Net investment in leveraged leases $ 549 $ 550
(*)Excludes the investment classified as held for sale at December 31, 2020. See
Note 15 under "Assets Held for Sale" for additional information.
The following table provides a summary of the components of income related to
leveraged lease investments. Income was impacted in 2020 and 2019 by the
impairment charges discussed in Note 3 under "Other Matters - Southern Company."
2020 2019 2018
(in millions)
Pretax leveraged lease income (loss) $ (180) $ 11 $ 25 Income tax benefit (expense)
98 - (6)
Net leveraged lease income (loss) $ (82) $ 11 $ 19
Materials and Supplies
Materials and supplies for the traditional electric operating companies
generally includes the average cost of transmission, distribution, and
generating plant materials. Materials and supplies for Southern Company Gas
generally includes propane gas inventory, fleet fuel, and other materials and
supplies. Materials and supplies for Southern Power generally includes the
average cost of generating plant materials.
Materials are recorded to inventory when purchased and then expensed or
capitalized to property, plant, and equipment, as appropriate, at weighted
average cost when installed. In addition, certain major parts are recorded as
inventory when acquired and then capitalized at cost when installed to property,
plant, and equipment.
Fuel Inventory
Fuel inventory for the traditional electric operating companies includes the
average cost of coal, natural gas, oil, transportation, and emissions
allowances. Fuel inventory for Southern Power, which is included in other
current assets, includes the average cost of oil, natural gas, and emissions
allowances. Fuel is recorded to inventory when purchased and then expensed, at
weighted average cost, as used. Emissions allowances granted by the EPA are
included in inventory at zero cost. The traditional electric operating companies
recover fuel expense through fuel cost recovery rates approved by each state PSC
or, for wholesale rates, the FERC.
Natural Gas for Sale
With the exception of Nicor Gas, the natural gas distribution utilities record
natural gas inventories on a WACOG basis. In Georgia's deregulated, competitive
environment, Marketers sell natural gas to firm end-use customers at
market-based prices. On a monthly basis, Atlanta Gas Light assigns to Marketers
the majority of the pipeline storage services that it has under contract, along
with a corresponding amount of inventory. Atlanta Gas Light retains and manages
a portion of its pipeline storage assets and related natural gas inventories for
system balancing and to serve system demand.
Nicor Gas' natural gas inventory is carried at cost on a LIFO basis. Inventory
decrements occurring during the year that are restored prior to year end are
charged to cost of natural gas at the estimated annual replacement cost.
Inventory decrements that are not restored prior to year end are charged to cost
of natural gas at the actual LIFO cost of the inventory layers liquidated. The
cost of natural gas, including inventory costs, is recovered from customers
under a purchased gas recovery mechanism adjusted for differences between actual
costs and amounts billed; therefore, LIFO liquidations have no impact on
Southern Company's or Southern Company Gas' net income. At December 31, 2020,
the Nicor Gas LIFO inventory balance was $178 million. Based on the average cost
of gas purchased in December 2020, the estimated replacement cost of Nicor Gas'
inventory at December 31, 2020 was $259 million.
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Southern Company and Subsidiary Companies 2020 Annual Report
Southern Company Gas' gas marketing services, wholesale gas services, and all
other segments record inventory at LOCOM, with cost determined on a WACOG basis.
For these segments, Southern Company Gas evaluates the weighted average cost of
its natural gas inventories against market prices to determine whether any
declines in market prices below the WACOG are other than temporary. For any
declines considered to be other than temporary, Southern Company Gas records
LOCOM adjustments to cost of natural gas to reduce the value of its natural gas
inventories to market value. LOCOM adjustments for wholesale gas services were
$1 million, $21 million, and $10 million during 2020, 2019, and 2018,
respectively.
Energy Marketing Receivables and Payables
Southern Company Gas' wholesale gas services provides services to retail gas
marketers, wholesale gas marketers, utility companies, and industrial customers.
These counterparties utilize netting agreements that enable wholesale gas
services to net receivables and payables by counterparty upon settlement.
Southern Company Gas' wholesale gas services also nets across product lines and
against cash collateral, provided the netting and cash collateral agreements
include such provisions. While the amounts due from, or owed to, wholesale gas
services' counterparties are settled net, they are recorded on a gross basis in
the balance sheets as energy marketing receivables and energy marketing
payables.
Southern Company Gas' wholesale gas services has trade and credit contracts that
contain minimum credit rating requirements. These credit rating requirements
typically give counterparties the right to suspend or terminate credit if
Southern Company Gas' credit ratings are downgraded to non-investment grade
status. Under such circumstances, Southern Company Gas' wholesale gas services
would need to post collateral to continue transacting business with some of its
counterparties. As of December 31, 2020 and 2019, the required collateral in the
event of a credit rating downgrade was $5 million and $11 million, respectively.
Southern Company Gas' wholesale gas services uses established credit policies to
determine and monitor the creditworthiness of counterparties, including
requirements to post collateral or other credit security, as well as the quality
of pledged collateral. Collateral or credit security is most often in the form
of cash or letters of credit from an investment-grade financial institution, but
may also include cash or U.S. government securities held by a trustee. When more
than one derivative transaction with the same counterparty is outstanding and a
legally enforceable netting agreement exists with that counterparty, the "net"
mark-to-market exposure represents a reasonable measure of Southern Company Gas'
credit risk with that counterparty. Southern Company Gas' wholesale gas services
also uses other netting agreements with certain counterparties with whom it
conducts significant transactions.
See "Concentration of Credit Risk" herein for additional information.
Provision for Uncollectible Accounts
The customers of the traditional electric operating companies and the natural
gas distribution utilities are billed monthly. For the majority of receivables,
a provision for uncollectible accounts is established based on historical
collection experience and other factors. For the remaining receivables, if the
company is aware of a specific customer's inability to pay, a provision for
uncollectible accounts is recorded to reduce the receivable balance to the
amount reasonably expected to be collected. If circumstances change, the
estimate of the recoverability of accounts receivable could change as well.
Circumstances that could affect this estimate include, but are not limited to,
customer credit issues, customer deposits, and general economic conditions.
Customers' accounts are written off once they are deemed to be uncollectible.
For all periods presented, uncollectible accounts averaged less than 1% of
revenues for each Registrant.
Credit risk exposure at Nicor Gas is mitigated by a bad debt rider approved by
the Illinois Commission. The bad debt rider provides for the recovery from (or
refund to) customers of the difference between Nicor Gas' actual bad debt
experience on an annual basis and the benchmark bad debt expense used to
establish its base rates for the respective year.
See Note 2 for information regarding recovery of incremental bad debt expense
related to the COVID-19 pandemic at certain of the traditional electric
operating companies and the natural gas distribution utilities.
Financial Instruments
The traditional electric operating companies and Southern Power use derivative
financial instruments to limit exposure to fluctuations in interest rates, the
prices of certain fuel purchases, electricity purchases and sales, and
occasionally foreign currency exchange rates. Southern Company Gas uses
derivative financial instruments to limit exposure to fluctuations in natural
gas prices, weather, interest rates, and commodity prices. All derivative
financial instruments are recognized as either assets or liabilities on the
balance sheets (included in "Other" or shown separately as "Risk Management
Activities") and are measured at fair value. See Note 13 for additional
information regarding fair value. Substantially all of the traditional electric
operating companies' and Southern Power's bulk energy purchases and sales
contracts that meet the definition of a derivative are excluded from fair value
accounting requirements because they qualify for the "normal" scope exception,
and are accounted for under the
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Southern Company and Subsidiary Companies 2020 Annual Report
accrual method. Derivative contracts that qualify as cash flow hedges of
anticipated transactions or are recoverable through the traditional electric
operating companies' and the natural gas distribution utilities' fuel-hedging
programs result in the deferral of related gains and losses in AOCI or
regulatory assets and liabilities, respectively, until the hedged transactions
occur. Other derivative contracts that qualify as fair value hedges are marked
to market through current period income and are recorded on a net basis in the
statements of income. Cash flows from derivatives are classified on the
statements of cash flows in the same category as the hedged item. See Note 14
for additional information regarding derivatives.
The Registrants offset fair value amounts recognized for multiple derivative
instruments executed with the same counterparty under netting arrangements. The
Registrants had no outstanding collateral repayment obligations or rights to
reclaim collateral arising from derivative instruments recognized at
December 31, 2020.
The Registrants are exposed to potential losses related to financial instruments
in the event of counterparties' nonperformance. The Registrants have established
risk management policies and controls to determine and monitor the
creditworthiness of counterparties in order to mitigate their exposure to
counterparty credit risk.
Southern Company Gas
Southern Company Gas enters into weather derivative contracts as economic hedges
of natural gas revenues in the event of warmer-than-normal weather in the
Heating Season. Exchange-traded options are carried at fair value, with changes
reflected in natural gas revenues. Non-exchange-traded options are accounted for
using the intrinsic value method. Changes in the intrinsic value for
non-exchange-traded contracts are also reflected in natural gas revenues in the
statements of income.
Wholesale gas services purchases natural gas for storage when the current market
price paid to buy and transport natural gas plus the cost to store and finance
the natural gas is less than the market price that can be received in the
future, resulting in positive net natural gas revenues. NYMEX futures and OTC
contracts are used to sell natural gas at that future price to substantially
protect the natural gas revenues that will ultimately be realized when the
stored natural gas is sold. Southern Company Gas enters into transactions to
secure transportation capacity between delivery points in order to serve its
customers and various markets. NYMEX futures and OTC contracts are used to
capture the price differential or spread between the locations served by the
capacity in order to substantially protect the natural gas revenues that will
ultimately be realized when the physical flow of natural gas between delivery
points occurs. These contracts generally meet the definition of derivatives and
are carried at fair value on the balance sheets, with changes in fair value
recorded in natural gas revenues on the statements of income in the period of
change. These contracts are not designated as hedges for accounting purposes.
The purchase, transportation, storage, and sale of natural gas are accounted for
on a weighted average cost or accrual basis, as appropriate, rather than on the
fair value basis utilized for the derivatives used to mitigate the natural gas
price risk associated with the storage and transportation portfolio. Monthly
demand charges are incurred for the contracted storage and transportation
capacity and payments associated with asset management agreements, and these
demand charges and payments are recognized on the statements of income in the
period they are incurred. This difference in accounting methods can result in
volatility in reported earnings, even though the economic margin is
substantially unchanged from the dates the transactions were consummated.
Comprehensive Income
The objective of comprehensive income is to report a measure of all changes in
common stock equity of an enterprise that result from transactions and other
economic events of the period other than transactions with owners. Comprehensive
income consists of net income attributable to the Registrant, changes in the
fair value of qualifying cash flow hedges, and reclassifications for amounts
included in net income. Comprehensive income also consists of certain changes in
pension and other postretirement benefit plans for Southern Company, Southern
Power, and Southern Company Gas.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report AOCI (loss) balances, net of tax effects, for Southern Company, Southern Power, and Southern Company Gas were as follows:
Pension and Other Accumulated Other
Qualifying Postretirement Comprehensive
Hedges Benefit Plans Income (Loss)
(in millions)
Southern Company
Balance at December 31, 2019 $ (179) $ (142) $ (321)
Current period change (30) (45) (75)
Balance at December 31, 2020(*) $ (209) $ (187) $ (395)
Southern Power
Balance at December 31, 2019 $ 11 $ (37) $ (26)
Current period change (32) (10) (42)
Balance at December 31, 2020(*) $ (21) $ (47) $ (67)
Southern Company Gas
Balance at December 31, 2019 $ (6) $ 13 $ 7
Current period change (14) (15) (29)
Balance at December 31, 2020 $ (20) $ (2) $ (22)
(*)May not add due to rounding.
Variable Interest Entities
The Registrants may hold ownership interests in a number of business ventures
with varying ownership structures. Partnership interests and other variable
interests are evaluated to determine if each entity is a VIE. The primary
beneficiary of a VIE is required to consolidate the VIE when it has both the
power to direct the activities of the VIE that most significantly impact the
VIE's economic performance and the obligation to absorb losses or the right to
receive benefits from the VIE that could potentially be significant to the VIE.
See Note 7 for additional information regarding VIEs.
Alabama Power has established a wholly-owned trust to issue preferred
securities. See Note 8 under "Long-term Debt" for additional information.
However, Alabama Power is not considered the primary beneficiary of the trust.
Therefore, the investment in the trust is reflected as other investments, and
the related loan from the trust is reflected as long-term debt in Alabama
Power's balance sheets.
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Southern Company and Subsidiary Companies 2020 Annual Report
2. REGULATORY MATTERS
Regulatory Assets and Liabilities
Details of regulatory assets and (liabilities) reflected in the balance sheets
at December 31, 2020 and 2019 are provided in the following tables:
Southern Southern
Company Alabama Power Georgia Power Mississippi Power Company Gas
(in millions)
At December 31, 2020
AROs(a)(s) $ 5,147 $ 1,470 $ 3,457 $ 212 $ -
Retiree benefit plans(b)(s) 4,958 1,265 1,647 238 187
Remaining net book value of retired assets(c) 1,183 632 527 24 -
Deferred income tax charges(d) 801 235 531 32 -
Environmental remediation(e)(s) 310 - 41 - 269
Loss on reacquired debt(f) 304 47 248 6 3
Storm damage(g) 262 - 262 - -
Vacation pay(h)(s) 207 80 104 10 13
Under recovered regulatory clause revenues(i) 185 58 - 52 75
Regulatory clauses(j) 142 142 - - -
Nuclear outage(k) 101 61 40 - -
Long-term debt fair value adjustment(l) 92 - - - 92
Kemper County energy facility assets, net(m) 50 - - 50 -
Plant Daniel Units 3 and 4(n) 32 - - 32 -
Other regulatory assets(o) 205 52 68 4 81
Deferred income tax credits(d) (6,016) (2,016) (2,805) (320) (847)
Other cost of removal obligations(a) (1,999) (335) 212 (194) (1,649)
Over recovered regulatory clause revenues(i) (185) (46) (44) - (95)
Storm/property damage reserves(p) (81) (77) - (4) -
Customer refunds(q) (56) (50) (6) - -
Other regulatory liabilities(r) (149) (37) (30) (6) (54)
Total regulatory assets (liabilities), net $ 5,493 $ 1,481 $ 4,252 $
136 $ (1,925)
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Southern Southern
Company Alabama Power Georgia Power Mississippi Power Company Gas
(in millions)
At December 31, 2019
Retiree benefit plans(b)(s) $ 4,423 $ 1,131 $ 1,516 $ 213 $ 167
AROs(a)(s) 4,381 1,043 3,119 210 -
Remaining net book value of retired assets(c) 1,275 649 596 30 -
Deferred income tax charges(d) 803 245 523 33 -
Storm damage(g) 410 - 410 - -
Environmental remediation(e)(s) 349 - 52 - 296
Loss on reacquired debt(f) 323 52 262 6 4
Vacation pay(h)(s) 186 72 93 9 11
Under recovered regulatory clause revenues(i) 159 40 - 47 72
Regulatory clauses(j) 142 142 - - -
Long-term debt fair value adjustment(l) 107 - - - 107
Nuclear outage(k) 105 78 27 - -
Fuel-hedging (realized and unrealized)
losses(t) 102 22 53 27 -
Kemper County energy facility assets, net(m) 61 - - 61 -
Plant Daniel Units 3 and 4(n) 34 - - 34 -
Other regulatory assets(o) 127 45 23 6 53
Deferred income tax credits(d) (6,301) (1,960) (3,078) (358) (874)
Other cost of removal obligations(a) (2,084) (412) 156 (189) (1,606)
Customer refunds(q) (285) (56) (229) - -
Over recovered regulatory clause revenues(i) (205) (112) (10) - (82)
Storm/property damage reserves(p) (204) (150) - (55) -
Other regulatory liabilities(r) (70) (19) (6) (10) (22)
Total regulatory assets (liabilities), net $ 3,838 $ 810 $ 3,507 $
64 $ (1,874)
Unless otherwise noted, the following recovery and amortization periods for
these regulatory assets and (liabilities) have been approved by the respective
state PSC or regulatory agency:
(a)AROs and other cost of removal obligations generally are recorded over the
related property lives, which may range up to 53 years for Alabama Power, 60
years for Georgia Power, 55 years for Mississippi Power, and 80 years for
Southern Company Gas. AROs and cost of removal obligations will be settled and
trued up following completion of the related activities. Effective January 1,
2020, Georgia Power is recovering CCR AROs, including past under recovered costs
and estimated annual compliance costs, over three-year periods ending December
31, 2022, 2023, and 2024 through its Environmental Compliance Cost Recovery
(ECCR) tariff, as discussed further under "Georgia Power - Rate Plans" herein.
See Note 6 for additional information on AROs.
(b)Recovered and amortized over the average remaining service period, which may
range up to 13 years for Alabama Power, 13 years for Georgia Power, 14 years for
Mississippi Power, and 13 years for Southern Company Gas. Southern Company's
balances also include amounts at SCS and Southern Nuclear that are allocated to
the applicable regulated utilities. See Note 11 for additional information.
(c)Alabama Power: Primarily represents the net book value of Plant Gorgas Units
8, 9, and 10 ($585 million at December 31, 2020). Being amortized over remaining
periods not exceeding 17 years (through 2037).
Georgia Power: Net book values of Plant Hammond Units 1 through 4 and Plant
Branch Units 2 through 4 (totaling $503 million at December 31, 2020) are being
amortized over remaining periods of between two and 15 years (between 2022 and
2035) and the net book values of Plant McIntosh Unit 1 and Plant Mitchell Unit 3
(totaling $24 million at December 31, 2020) are being amortized through 2022.
Mississippi Power: Represents net book value associated with Plant Watson and
Plant Greene County. The retail and wholesale portions totaling approximately
$11 million and $13 million at December 31, 2020, respectively, are being
amortized over a four-year period through 2024 and a 10-year period through
2030, respectively. See "Mississippi Power - Environmental Compliance Overview
Plan" herein for additional information.
(d)Deferred income tax charges are recovered and deferred income tax credits are
amortized over the related property lives, which may range up to 53 years for
Alabama Power, 60 years for Georgia Power, 55 years for Mississippi Power, and
80 years for Southern Company Gas. See Note 10 for additional information.
Included in the deferred income tax charges are amounts ($8 million, $9 million,
and $1 million for Alabama Power, Georgia Power, and Mississippi Power,
respectively, at December 31, 2020) for the retiree Medicare drug subsidy, which
are being recovered and amortized through 2027, 2022, and 2024 for Alabama
Power, Georgia Power, and Mississippi Power, respectively. As a result of the
Tax Reform Legislation, these accounts include certain deferred income tax
assets and liabilities not subject to normalization, as described further below:
Alabama Power: Related amounts are being recovered and amortized ratably over
the related property lives.
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Southern Company and Subsidiary Companies 2020 Annual Report
Georgia Power: Related amounts at December 31, 2020 include $145 million of
deferred income tax assets related to CWIP for Plant Vogtle Units 3 and 4 and
approximately $440 million of deferred income tax liabilities. The recovery of
deferred income tax assets related to CWIP for Plant Vogtle Units 3 and 4 is
expected to be determined in a future regulatory proceeding. Effective January
1, 2020, the deferred income tax liabilities are being amortized through 2022.
Mississippi Power: Related amounts at December 31, 2020 include $74 million of
deferred income tax liabilities, consisting of the retail portion of $66 million
being amortized over three years (through 2023) and the wholesale portion of $9
million being amortized over two years (through 2021). See "Mississippi Power -
2019 Base Rate Case" and " - Municipal and Rural Associations Tariff" herein for
additional information.
Southern Company Gas: Related amounts at December 31, 2020 include $8 million of
deferred income tax liabilities, which are being amortized through 2024. See
"Southern Company Gas - Rate Proceedings" herein for additional information.
(e)Georgia Power is recovering $12 million annually for environmental
remediation. Southern Company Gas' costs are recovered through environmental
cost recovery mechanisms when the remediation work is performed. See Note 3
under "Environmental Remediation" for additional information.
(f)Recovered over either the remaining life of the original issue or, if
refinanced, over the remaining life of the new issue. At December 31, 2020, the
remaining amortization periods do not exceed 28 years for Alabama Power, 32
years for Georgia Power, eight years for Mississippi Power, and seven years for
Southern Company Gas.
(g)Georgia Power is recovering approximately $213 million annually for storm
damage. See "Georgia Power - Storm Damage Recovery" herein and Note 1 under
"Storm Damage Reserves" for additional information.
(h)Recorded as earned by employees and recovered as paid, generally within one
year. Includes both vacation and banked holiday pay, if applicable.
(i)Alabama Power: Balances are recorded monthly and expected to be recovered or
returned within nine years. Recovery periods could change based on several
factors including changes in cost estimates, load forecasts, and timing of rate
adjustments. See "Alabama Power - Rate CNP PPA," " - Rate CNP Compliance," and "
- Rate ECR" herein for additional information.
Georgia Power: Balances are recorded monthly and expected to be recovered or
returned within two years. See "Georgia Power - Rate Plans" herein for
additional information.
Mississippi Power: At December 31, 2020, $37 million is being amortized over a
four-year period through March 2024 and the remaining $15 million is expected to
be recovered through various rate recovery mechanisms over a period to be
determined in future rate filings. See "Mississippi Power - Ad Valorem Tax
Adjustment" herein for additional information.
Southern Company Gas: Balances are recorded and recovered or amortized over
periods generally not exceeding five years. In addition to natural gas cost
recovery mechanisms, the natural gas distribution utilities have various other
cost recovery mechanisms for the recovery of costs, including those related to
infrastructure replacement programs.
(j)Will be amortized concurrently with the effective date of Alabama Power's
next depreciation study, which is expected to occur no later than 2023.
(k)Nuclear outage costs are deferred to a regulatory asset when incurred and
amortized over a subsequent period of 18 months for Alabama Power and up to 24
months for Georgia Power. See Note 5 for additional information.
(l)Recovered over the remaining lives of the original debt issuances at
acquisition, which range up to 18 years at December 31, 2020.
(m)Includes $62 million of regulatory assets and $12 million of regulatory
liabilities at December 31, 2020. The retail portion includes $50 million of
regulatory assets and $12 million of regulatory liabilities that are expected to
be fully amortized by 2024 and 2023, respectively. The wholesale portion
includes $12 million of regulatory assets that are expected to be fully
amortized by 2029. See Note 3 under "Mississippi Power - Other Matters - Kemper
County Energy Facility" for additional information.
(n)Represents the difference between Mississippi Power's revenue requirement for
Plant Daniel Units 3 and 4 under purchase accounting and operating lease
accounting, which is expected to be amortized over a period to be determined in
future retail and wholesale rate filings.
(o)Except as otherwise noted, comprised of numerous immaterial components with
remaining amortization periods generally not exceeding 23 years for Alabama
Power, three years for Georgia Power, four years for Mississippi Power, and 20
years for Southern Company Gas at December 31, 2020. Balances at December 31,
2020 include deferred COVID-19 costs (except for Alabama Power), as discussed
further under "Deferral of Incremental COVID-19 Costs" for each applicable
Registrant herein. Balances for Georgia Power also include certain operations
and maintenance costs associated with software and cloud computing projects for
which the recovery period will be determined in its next base rate case.
(p)Amortized as related expenses are incurred. See "Alabama Power - Rate NDR"
and "Mississippi Power - System Restoration Rider" herein for additional
information.
(q)Primarily includes approximately $50 million and $53 million at December 31,
2020 and 2019, respectively, for Alabama Power and $110 million at December 31,
2019 for Georgia Power as a result of each company exceeding its allowed retail
return range. Georgia Power's December 31, 2019 balance also includes
approximately $105 million pursuant to the Georgia Power Tax Reform Settlement
Agreement. Georgia Power's balances also include immaterial amounts related to
refunds for transmission service customers. See "Alabama Power" and "Georgia
Power - Rate Plans" herein for additional information.
(r)Comprised of numerous immaterial components with remaining amortization
periods generally not exceeding 17 years for Alabama Power, 12 years for Georgia
Power, three years for Mississippi Power, and 20 years for Southern Company Gas
at December 31, 2020.
(s)Generally not earning a return as they are excluded from rate base or are
offset in rate base by a corresponding asset or liability.
(t)Fuel-hedging assets and liabilities are recorded over the life of the
underlying hedged purchase contracts. Upon final settlement, actual costs
incurred are recovered through the applicable traditional electric operating
company's fuel cost recovery mechanism. Purchase contracts generally do not
exceed three and a half years for Alabama Power, three years for Georgia Power,
and five years for Mississippi Power. Immaterial amounts at December 31, 2020
are included in other regulatory assets and liabilities.
Alabama Power
Alabama Power's revenues from regulated retail operations are collected through
various rate mechanisms subject to the oversight of the Alabama PSC. Alabama
Power currently recovers its costs from the regulated retail business primarily
through Rate RSE, Rate CNP, Rate ECR, and Rate NDR. In addition, the Alabama PSC
issues accounting orders to address current events impacting Alabama Power.
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Petition for Certificate of Convenience and Necessity
On August 14, 2020, the Alabama PSC issued its order regarding Alabama Power's
September 2019 petition for a CCN, which authorized Alabama Power to (i)
construct an approximately 720-MW combined cycle facility at Alabama Power's
Plant Barry (Plant Barry Unit 8) that is expected to be placed in service by the
end of 2023, (ii) complete the acquisition of the Central Alabama Generating
Station, which occurred on August 31, 2020, (iii) purchase approximately 240 MWs
of combined cycle generation under a long-term PPA, which began on September 1,
2020, and (iv) pursue up to approximately 200 MWs of cost-effective demand-side
management and distributed energy resource programs. Alabama Power's petition
for a CCN was predicated on the results of Alabama Power's 2019 IRP provided to
the Alabama PSC, which identified an approximately 2,400-MW resource need for
Alabama Power, driven by the need for additional winter reserve capacity. See
Note 15 under "Alabama Power" for additional information on the acquisition of
the Central Alabama Generating Station.
The Alabama PSC authorized the recovery of actual costs for the construction of
Plant Barry Unit 8 up to 5% above the estimated in-service cost of $652 million.
In so doing, it recognized the potential for developments that could cause the
project costs to exceed the capped amount, in which case Alabama Power would
provide documentation to the Alabama PSC to explain and justify potential
recovery of the additional costs. At December 31, 2020, project expenditures
associated with Plant Barry Unit 8 included in CWIP totaled approximately
$66 million.
The Alabama PSC further directed that the proposed solar generation of
approximately 400 MWs, coupled with battery energy storage systems
(solar/battery systems), be evaluated under an existing Renewable Generation
Certificate (RGC) issued by the Alabama PSC in September 2015. The contracts
proposed in the CCN petition expired on July 31, 2020. Any future requests for
solar/battery systems will be evaluated under the RGC process.
Energy Alabama, Gasp, Inc., and the Sierra Club filed requests for
reconsideration and rehearing with the Alabama PSC, and, on December 10, 2020,
the Alabama PSC issued an order denying the requests. On January 7, 2021, Energy
Alabama and Gasp, Inc. filed judicial appeals regarding both the Alabama PSC's
August 14, 2020 CCN order and the December 10, 2020 order denying
reconsideration and rehearing.
Alabama Power expects to recover costs associated with Plant Barry Unit 8
pursuant to its Rate CNP New Plant. Alabama Power is recovering all costs
associated with the Central Alabama Generating Station through the inclusion in
Rate RSE of revenues from the existing power sales agreement and, on expiration
of that agreement, expects to recover costs pursuant to Rate CNP New Plant. The
recovery of costs associated with laws, regulations, and other such mandates
directed at the utility industry are expected to be recovered through Rate CNP
Compliance. Alabama Power expects to recover the capacity-related costs
associated with the PPAs through its Rate CNP PPA. In addition, fuel and
energy-related costs are expected to be recovered through Rate ECR. Any
remaining costs associated with Plant Barry Unit 8 and the acquisition of the
Central Alabama Generating Station are expected to be recovered through Rate
RSE.
The ultimate outcome of these matters cannot be determined at this time.
Rate RSE
The Alabama PSC has adopted Rate RSE that provides for periodic annual
adjustments based upon Alabama Power's projected weighted common equity return
(WCER) compared to an allowable range. Rate RSE adjustments are based on
forward-looking information for the applicable upcoming calendar year. Rate RSE
adjustments for any two-year period, when averaged together, cannot exceed 4.0%
and any annual adjustment is limited to 5.0%. When the projected WCER is under
the allowed range, there is an adjusting point of 5.98% and eligibility for a
performance-based adder of seven basis points, or 0.07%, to the WCER adjusting
point if Alabama Power (i) has an "A" credit rating equivalent with at least one
of the recognized rating agencies or (ii) is in the top one-third of a
designated customer value benchmark survey. As initially designed, if Alabama
Power's actual retail return was above the allowed WCER range, the excess would
be refunded to customers unless otherwise directed by the Alabama PSC; however,
there was no provision for additional customer billings should the actual retail
return fall below the WCER range.
In 2018, the Alabama PSC approved modifications to Rate RSE and other
commitments designed to position Alabama Power to address the growing pressure
on its credit quality resulting from the Tax Reform Legislation, without
increasing retail rates under Rate RSE in the near term. Alabama Power continues
to reduce growth in total debt by increasing equity, with corresponding
reductions in debt issuances, thereby de-leveraging its capital structure.
Alabama Power's goal is to achieve an equity ratio of approximately 55% by the
end of 2025. At December 31, 2020 and 2019, Alabama Power's equity ratio was
approximately 51.6% and 50.3%, respectively.
The approved modifications to Rate RSE began for billings in January 2019. The
modifications include reducing the top of the allowed WCER range from 6.21% to
6.15% and modifications to the refund mechanism applicable to prior year actual
results that
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allow Alabama Power to retain a portion of the revenue that causes the actual
WCER for a given year to exceed the allowed range.
Generally, during a year without a Rate RSE upward adjustment, if Alabama
Power's actual WCER is between 6.15% and 7.65%, customers will receive 25% of
the amount between 6.15% and 6.65%, 40% of the amount between 6.65% and 7.15%,
and 75% of the amount between 7.15% and 7.65%. Customers will receive all
amounts in excess of an actual WCER of 7.65%. During a year with a Rate RSE
upward adjustment, if Alabama Power's actual WCER exceeds 6.15%, customers
receive 50% of the amount between 6.15% and 6.90% and all amounts in excess of
an actual WCER of 6.90%. There is no provision for additional customer billings
should the actual retail return fall below the WCER range.
In conjunction with these modifications to Rate RSE, in 2018, Alabama Power
consented to a moratorium on any upward adjustments under Rate RSE for 2019 and
2020 and to return $50 million to customers through bill credits in 2019. Retail
rates under Rate RSE remained unchanged for 2019 and 2020.
Together with Rate RSE, Alabama Power has an established retail tariff that
provides for an adjustment to customer billings to recognize the impact of a
change in the statutory income tax rate. In accordance with this tariff, Alabama
Power returned $267 million to retail customers through bill credits during 2018
as a result of the change in the federal income tax rate under the Tax Reform
Legislation.
At December 31, 2018, Alabama Power's retail return exceeded the allowed WCER
range, which resulted in Alabama Power establishing a regulatory liability of
$109 million for Rate RSE refunds. In accordance with an Alabama PSC order
issued in February 2019, Alabama Power applied $78 million to reduce the Rate
ECR under recovered balance and the remaining $31 million was refunded to
customers through bill credits starting in July 2019. At December 31, 2019 and
2020, Alabama Power's WCER exceeded 6.15%, resulting in Alabama Power
establishing a current regulatory liability of $53 million and $50 million,
respectively, for Rate RSE refunds. In April 2020, the regulatory liability at
December 31, 2019 was refunded to customers through bill credits. The
$50 million regulatory liability at December 31, 2020 will be refunded to
customers through bill credits in April 2021.
During 2019, Alabama Power provided to the Alabama PSC and the Alabama Office of
the Attorney General information related to the operation and utilization of
Rate RSE, in accordance with the rules governing the operation of Rate RSE.
During 2020, the Alabama PSC concluded that Rate RSE continues to fulfill its
intended purposes and that no significant revisions are needed or warranted.
On December 1, 2020, Alabama Power made its required annual Rate RSE submission
to the Alabama PSC of projected data for calendar year 2021, resulting in an
increase of 4.09%, or approximately $228 million annually, that became effective
for the billing month of January 2021.
Rate CNP New Plant
Rate CNP New Plant allows for recovery of Alabama Power's retail costs
associated with newly developed or acquired certificated generating facilities
placed into retail service. No adjustments to Rate CNP New Plant occurred during
the period 2018 through 2020. See "Petition for Certificate of Convenience and
Necessity" herein for additional information.
Rate CNP PPA
Rate CNP PPA allows for the recovery of Alabama Power's retail costs associated
with certificated PPAs. Revenues for Rate CNP PPA, as recorded on the financial
statements, are adjusted for differences in actual recoverable costs and amounts
billed in current regulated rates. Accordingly, changes in the billing factor
will have no significant effect on Southern Company's or Alabama Power's
revenues or net income but will affect annual cash flow. No adjustments to Rate
CNP PPA occurred during the period 2018 through 2020 and no adjustment is
expected for 2021. At December 31, 2020 and 2019, Alabama Power had an under
recovered Rate CNP PPA balance of $58 million and $40 million, respectively,
which is included in other regulatory assets, deferred on the balance sheet.
Rate CNP Compliance
Rate CNP Compliance allows for the recovery of Alabama Power's retail costs
associated with laws, regulations, and other such mandates directed at the
utility industry involving the environment, security, reliability, safety,
sustainability, or similar considerations impacting Alabama Power's facilities
or operations. Rate CNP Compliance is based on forward-looking information and
provides for the recovery of these costs pursuant to factors that are calculated
and submitted to the Alabama PSC by December 1 with rates effective for the
following calendar year. Compliance costs to be recovered include operations and
maintenance expenses, depreciation, and a return on certain invested capital.
Revenues for Rate CNP Compliance, as recorded on the financial statements, are
adjusted for differences in actual recoverable costs and amounts billed in
current regulated rates.
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Accordingly, changes in the billing factor will have no significant effect on
Southern Company's or Alabama Power's revenues or net income, but will affect
annual cash flow. Changes in Rate CNP Compliance-related operations and
maintenance expenses and depreciation generally will have no effect on net
income.
In November 2018, 2019, and 2020, Alabama Power submitted calculations
associated with its cost of complying with governmental mandates for the
following calendar year, as provided under Rate CNP Compliance. The 2018 filing
reflected a projected under recovered retail revenue requirement of
approximately $205 million, which was recovered in the billing months of January
2019 through December 2019. The 2019 filing reflected a projected over recovered
retail revenue requirement, which resulted in a rate decrease of approximately
$68 million that became effective for the billing month of January 2020. The
2020 filing reflected a projected under recovered retail revenue requirement of
approximately $59 million.
On December 1, 2020, the Alabama PSC issued a consent order that Alabama Power
leave the 2020 Rate CNP Compliance factor in effect for 2021, with any prior
year under collected amount deemed recovered before any current year amounts are
recovered. Any remaining under recovered amount will be reflected in the 2021
filing.
At December 31, 2020, Alabama Power had an over recovered Rate CNP Compliance
balance of $28 million included in other regulatory liabilities, current on the
balance sheet. At December 31, 2019, Alabama Power had an over recovered Rate
CNP Compliance balance of $62 million, of which $55 million is included in other
regulatory liabilities, current and $7 million is included in other regulatory
liabilities, deferred on the balance sheet.
Rate ECR
Rate ECR recovers Alabama Power's retail energy costs based on an estimate of
future energy costs and the current over or under recovered balance. Revenues
recognized under Rate ECR and recorded on the financial statements are adjusted
for the difference in actual recoverable fuel costs and amounts billed in
current regulated rates. The difference in the recoverable fuel costs and
amounts billed gives rise to the over or under recovered amounts recorded as
regulatory assets or liabilities. Alabama Power, along with the Alabama PSC,
continually monitors the over or under recovered cost balance to determine
whether an adjustment to billing rates is required. Changes in the Rate ECR
factor have no significant effect on Southern Company's or Alabama Power's net
income but will impact operating cash flows. The Alabama PSC may approve billing
rates under Rate ECR of up to 5.910 cents per KWH.
In May 2018, the Alabama PSC approved an increase to Rate ECR from 2.015 cents
per KWH to 2.353 cents per KWH effective July 2018 through December 2018. In
December 2018, the Alabama PSC issued a consent order to leave this rate in
effect through December 31, 2019.
As discussed herein under "Rate RSE," in accordance with an Alabama PSC order
issued in February 2019, Alabama Power utilized $78 million of the 2018 Rate RSE
refund liability to reduce the Rate ECR under recovered balance.
In December 2019, the Alabama PSC approved a decrease to Rate ECR from 2.353
cents per KWH to 2.160 cents per KWH, equal to 1.82%, or approximately $102
million annually, that became effective for the billing month of January 2020.
In October 2020, Alabama Power reduced its over-collected fuel balance by
$94.3 million in accordance with an August 7, 2020 Alabama PSC order authorizing
Alabama Power to reduce its over-collected fuel balance by $100 million and
return that amount to customers in the form of bill credits, with any
undistributed amount remaining in the regulatory liability for the benefit of
customers.
On December 1, 2020, the Alabama PSC approved a decrease to Rate ECR from 2.160
cents per KWH to 1.960 cents per KWH, equal to 1.84%, or approximately $103
million annually, that became effective for the billing month of January 2021.
The rate will adjust to 5.910 cents per KWH in January 2022 absent a further
order from the Alabama PSC.
At December 31, 2020, Alabama Power's over recovered fuel costs totaled $18
million and is included in other regulatory liabilities, current on the balance
sheet. At December 31, 2019, Alabama Power's over recovered fuel costs totaled
$49 million, of which $32 million is included in other regulatory liabilities,
current and $17 million is included in other regulatory liabilities, deferred on
the balance sheet. These classifications are based on estimates, which include
such factors as weather, generation availability, energy demand, and the price
of energy. A change in any of these factors could have a significant impact on
the timing of any recovery or return of fuel costs.
Tax Reform Accounting Order
In 2018, the Alabama PSC approved an accounting order that authorized Alabama
Power to defer the benefits of federal excess deferred income taxes associated
with the Tax Reform Legislation for the year ended December 31, 2018 as a
regulatory liability and to use up to $30 million of such deferrals to offset
under recovered amounts under Rate ECR. The final excess deferred tax liability
for the year ended December 31, 2018 totaled approximately $69 million, of which
$30 million was used to offset the
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Rate ECR under recovered balance. In December 2019, the Alabama PSC issued an
order authorizing Alabama Power to apply the remaining deferred balance of
approximately $39 million to increase the balance in the NDR. See "Rate NDR"
herein and Note 10 under "Current and Deferred Income Taxes" for additional
information.
Software Accounting Order
In February 2019, the Alabama PSC approved an accounting order that authorizes
Alabama Power to establish a regulatory asset for operations and maintenance
costs associated with software implementation projects. The regulatory asset
will be amortized ratably over the life of the related software. At December 31,
2020 and 2019, the regulatory asset balance totaled $17 million and $6 million,
respectively, and is included in other deferred charges and assets on the
balance sheet.
Plant Greene County
Alabama Power jointly owns Plant Greene County with an affiliate, Mississippi
Power. See Note 5 under "Joint Ownership Agreements" for additional information.
In December 2019, Mississippi Power updated its proposed RMP, originally filed
in 2018 with the Mississippi PSC. The RMP proposed a four-year acceleration of
the retirement of Plant Greene County Units 1 and 2 to the third quarter 2021
and the third quarter 2022, respectively. On December 17, 2020, the Mississippi
PSC issued an order concluding the RMP docket and requiring Mississippi Power to
incorporate into its 2021 IRP a schedule of early or anticipated retirement of
950 MWs of fossil-steam generation, which could include Plant Greene County, by
year-end 2027 to reduce Mississippi Power's excess reserve margin. Mississippi
Power's IRP is scheduled to be filed in April 2021.
Any proposed Plant Greene County unit retirements by Mississippi Power would
require the completion of transmission and system reliability improvements, as
well as agreement by Alabama Power. Alabama Power will continue to monitor the
status of Mississippi Power's IRP and associated regulatory processes, as well
as the transmission and system reliability improvements. Alabama Power will
review all the facts and circumstances and will evaluate all of its alternatives
prior to reaching a final determination on the ongoing operations of Plant
Greene County. The ultimate outcome of this matter cannot be determined at this
time.
Rate NDR
Based on an order from the Alabama PSC, Alabama Power maintains a reserve for
operations and maintenance expenses to cover the cost of damages from major
storms to its transmission and distribution facilities. The order approves a
separate monthly Rate NDR charge to customers consisting of two components. The
first component is intended to establish and maintain a reserve balance for
future storms and is an on-going part of customer billing. When the reserve
balance falls below $50 million, a reserve establishment charge will be
activated (and the on-going reserve maintenance charge concurrently suspended)
until the reserve balance reaches $75 million.
The second component of the Rate NDR charge is intended to allow recovery of any
existing deferred storm-related operations and maintenance costs and any future
reserve deficits over a 24-month period. The Alabama PSC order gives Alabama
Power authority to record a deficit balance in the NDR when costs of storm
damage exceed any established reserve balance. Absent further Alabama PSC
approval, the maximum total Rate NDR charge consisting of both components is $10
per month per non-residential customer account and $5 per month per residential
customer account. Alabama Power has the authority, based on an order from the
Alabama PSC, to accrue certain additional amounts as circumstances warrant. The
order allows for reliability-related expenditures to be charged against the
additional accruals when the NDR balance exceeds $75 million. Alabama Power may
designate a portion of the NDR to reliability-related expenditures as a part of
an annual budget process for the following year or during the current year for
identified unbudgeted reliability-related expenditures that are incurred.
Accruals that have not been designated can be used to offset storm charges.
Additional accruals to the NDR enhance Alabama Power's ability to mitigate the
financial effects of future natural disasters, promote system reliability, and
offset costs retail customers would otherwise bear. Alabama Power made
additional accruals of $100 million and $84 million in 2020 and 2019,
respectively. There were no such accruals in 2018.
As discussed herein under "Tax Reform Accounting Order," in accordance with an
Alabama PSC order issued in December 2019, Alabama Power also applied the
remaining excess deferred income tax regulatory liability balance of
approximately $39 million to increase the balance in the NDR, resulting in an
accumulated balance of $150 million at December 31, 2019. Of this amount,
Alabama Power designated $37 million to be applied to budgeted
reliability-related expenditures for 2020, which was included in other
regulatory liabilities, current and was utilized in 2020. The remaining NDR
balance of $113 million was included in other regulatory liabilities, deferred
on the balance sheet.
Alabama Power collected approximately $16 million annually in 2018 and 2019
through the reserve establishment charge. Effective with March 2020 billings,
the reserve establishment charge was suspended and the reserve maintenance
charge was
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activated as a result of the NDR balance exceeding $75 million. Alabama Power
collected approximately $5 million in 2020 and expects to collect $3 million
annually beginning in 2021 unless the NDR balance falls below $50 million.
During 2020, Alabama Power recorded $51 million and $67 million against the NDR
for damages incurred to its transmission and distribution facilities from
Hurricane Sally and Hurricane Zeta, respectively. The remaining balance of $77
million is included in other regulatory liabilities, deferred on the balance
sheet.
As revenue from the Rate NDR charge is recognized, an equal amount of operations
and maintenance expenses related to the NDR will also be recognized. As a
result, the Rate NDR charge will not have an effect on net income but will
impact operating cash flows.
Environmental Accounting Order
Based on an order from the Alabama PSC (Environmental Accounting Order), Alabama
Power is authorized to establish a regulatory asset to record the unrecovered
investment costs, including the unrecovered plant asset balance and the
unrecovered costs associated with site removal and closure associated with
future unit retirements caused by environmental regulations. The regulatory
asset is amortized and recovered over the affected unit's remaining useful life,
as established prior to the decision regarding early retirement, through Rate
CNP Compliance.
Georgia Power
Georgia Power's revenues from regulated retail operations are collected through
various rate mechanisms subject to the oversight of the Georgia PSC. Georgia
Power currently recovers its costs from the regulated retail business through
the 2019 ARP, which includes traditional base tariffs, Demand-Side Management
(DSM) tariffs, the Environmental Compliance Cost Recovery (ECCR) tariff, and
Municipal Franchise Fee (MFF) tariffs. In addition, financing costs on certified
construction costs of Plant Vogtle Units 3 and 4 are being collected through the
NCCR tariff and fuel costs are collected through a fuel cost recovery tariff,
both under separate regulatory proceedings.
As approved by the Georgia PSC in the seventeenth VCM proceeding, prior to the
expected in-service date of Plant Vogtle Unit 3, Georgia Power expects to file a
request to adjust retail base rates to include the portion of costs related to
Plant Vogtle Unit 3 and common facilities that were deemed prudent in a previous
stipulated agreement. As costs are included in retail base rates, the related
financing costs will no longer be recovered through the NCCR tariff. See
"Nuclear Construction" herein for additional information on Plant Vogtle Units 3
and 4.
Rate Plans
2019 ARP
In December 2019, the Georgia PSC voted to approve the 2019 ARP, under which
Georgia Power increased its rates on January 1, 2020. On December 15, 2020, the
Georgia PSC approved tariff adjustments effective January 1, 2021. Details of
tariff adjustments are provided in the table below:
Tariff 2020 2021
(in millions)
Traditional base $ - $ 120
ECCR(*) 318 2
DSM 12 (15)
MFF 12 4
Total $ 342 $ 111
(*) Effective January 1, 2020, CCR AROs are being recovered through the ECCR
tariff.
In July 2019, the Georgia PSC voted to approve Georgia Power's modified
triennial IRP (Georgia Power 2019 IRP), including Georgia Power's proposed
environmental compliance strategy associated with ash pond and certain landfill
closures and post-closure care in compliance with the CCR Rule and the related
state rule. In the 2019 ARP, the Georgia PSC approved recovery of the estimated
under recovered balance of these compliance costs at December 31, 2019 over a
three-year period ending December 31, 2022 and recovery of estimated compliance
costs for 2020, 2021, and 2022 over three-year periods ending December 31, 2022,
2023, and 2024, respectively, with recovery of construction contingency
beginning in the year following actual expenditure. The ECCR tariff is expected
to be revised for actual expenditures and updated estimates through future
annual compliance filings. On February 4, 2020, the Georgia PSC denied a motion
for reconsideration filed by the Sierra Club regarding the Georgia PSC's
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decision in the 2019 ARP allowing Georgia Power to recover compliance costs for
CCR AROs, and, on December 7, 2020, the Superior Court of Fulton County affirmed
the decision of the Georgia PSC. On January 5, 2021, the Sierra Club filed a
notice of appeal with the Georgia Court of Appeals. The ultimate outcome of this
matter cannot be determined at this time. See Note 6 for additional information
regarding Georgia Power's AROs.
Under the 2019 ARP, Georgia Power's retail ROE is set at 10.50%, and earnings
will be evaluated against a retail ROE range of 9.50% to 12.00%. Any retail
earnings above 12.00% will be shared, with 40% being applied to reduce
regulatory assets, 40% directly refunded to customers, and the remaining 20%
retained by Georgia Power. There will be no recovery of any earnings shortfall
below 9.50% on an actual basis. However, if at any time during the term of the
2019 ARP, Georgia Power projects that its retail earnings will be below 9.50%
for any calendar year, it could petition the Georgia PSC for implementation of
the Interim Cost Recovery (ICR) tariff to adjust Georgia Power's retail rates to
achieve a 9.50% ROE. The Georgia PSC would have 90 days to rule on Georgia
Power's request. The ICR tariff would expire at the earlier of January 1, 2023
or the end of the calendar year in which the ICR tariff becomes effective. In
lieu of requesting implementation of an ICR tariff, or if the Georgia PSC
chooses not to implement the ICR tariff, Georgia Power may file a full rate
case. In 2020, Georgia Power's retail ROE was within the allowed retail ROE
range.
Additionally, under the 2019 ARP and pursuant to the sharing mechanism approved
in the 2013 ARP whereby two-thirds of any earnings above the top of the allowed
ROE range are shared with Georgia Power's customers, (i) Georgia Power used 50%
(approximately $50 million) of the customer share of earnings above the band in
2018 to reduce regulatory assets and refunded 50% (approximately $50 million) to
customers in 2020 and (ii) Georgia Power agreed to forego its share of 2019
earnings in excess of the earnings band so 50% (approximately $60 million) of
all earnings over the 2019 band were refunded to customers in 2020 and 50%
(approximately $60 million) were used to reduce regulatory assets.
Except as provided above, Georgia Power will not file for a general base rate
increase while the 2019 ARP is in effect. Georgia Power is required to file a
general base rate case by July 1, 2022, in response to which the Georgia PSC
would be expected to determine whether the 2019 ARP should be continued,
modified, or discontinued.
2013 ARP
Under the 2013 ARP, there were no changes to Georgia Power's traditional base
tariffs, ECCR tariff, DSM tariffs, or MFF tariffs in 2019. Georgia Power's
retail ROE under the 2013 ARP was set at 10.95% and earnings were evaluated
against a retail ROE range of 10.00% to 12.00%. Two-thirds of any earnings above
12.00% were to be directly refunded to customers, with the remaining one-third
retained by Georgia Power. In 2019 and 2018, Georgia Power's retail ROE exceeded
12.00% and, under the modified sharing mechanism pursuant to the 2019 ARP,
Georgia Power reduced regulatory assets by a total of approximately $110 million
and accrued refunds for retail customers of a total of approximately $110
million. In June 2020 and October 2020, Georgia Power issued bill credits to
retail customers of approximately $50 million and $60 million, respectively,
related to the excess retail earnings in 2018 and 2019, respectively. See "2019
ARP" herein for additional information.
Deferral of Incremental COVID-19 Costs
On April 7, 2020 and June 2, 2020, in response to the COVID-19 pandemic, the
Georgia PSC approved orders directing Georgia Power to continue its previous,
voluntary suspension of customer disconnections through July 14, 2020 and to
defer the resulting incremental bad debt as a regulatory asset. On June 16, 2020
and July 7, 2020, the Georgia PSC approved orders establishing a methodology for
identifying incremental bad debt and allowing the deferral of other incremental
costs associated with the COVID-19 pandemic. The period over which such costs
will be recovered is expected to be determined in Georgia Power's next base rate
case. At December 31, 2020, the incremental costs deferred totaled approximately
$38 million. The ultimate outcome of this matter cannot be determined at this
time.
Fuel Cost Recovery
Georgia Power has established fuel cost recovery rates approved by the Georgia
PSC. On May 28, 2020, the Georgia PSC approved a stipulation agreement among
Georgia Power, the staff of the Georgia PSC, and certain intervenors to lower
total fuel billings by approximately $740 million over a two-year period
effective June 1, 2020. In addition, Georgia Power further lowered fuel billings
by approximately $44 million under an interim fuel rider effective June 1, 2020
through September 30, 2020. Georgia Power continues to be allowed to adjust its
fuel cost recovery rates under an interim fuel rider prior to the next fuel case
if the under or over recovered fuel balance exceeds $200 million. Georgia Power
is scheduled to file its next fuel case no later than February 28, 2023.
Georgia Power's over recovered fuel balance totaled $113 million at December 31,
2020 and is included in other current liabilities on Southern Company's balance
sheets and over recovered fuel clause revenues on Georgia Power's balance
sheets. At
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December 31, 2019, Georgia Power's over recovered fuel balance totaled $73
million and is included in other deferred credits and liabilities on Southern
Company's and Georgia Power's balance sheets.
Georgia Power's fuel cost recovery mechanism includes costs associated with a
natural gas hedging program, as revised and approved by the Georgia PSC,
allowing the use of an array of derivative instruments within a 36-month time
horizon.
Fuel cost recovery revenues as recorded on the financial statements are adjusted
for differences in actual recoverable fuel costs and amounts billed in current
regulated rates. Accordingly, changes in the billing factor will not have a
significant effect on Southern Company's or Georgia Power's revenues or net
income but will affect operating cash flows.
Storm Damage Recovery
Georgia Power defers and recovers certain costs related to damages from major
storms as mandated by the Georgia PSC. Beginning January 1, 2020, Georgia Power
is recovering $213 million annually under the 2019 ARP. At December 31, 2020 and
2019, the balance in the regulatory asset related to storm damage was $262
million and $410 million, respectively, with $213 million for each year included
in other regulatory assets, current on Southern Company's balance sheets and
regulatory assets - storm damage on Georgia Power's balance sheets and $49
million and $197 million, respectively, included in other regulatory assets,
deferred on Southern Company's and Georgia Power's balance sheets. During
October 2020, Tropical Storm Zeta caused significant damage to Georgia Power's
transmission and distribution facilities. The incremental restoration costs
related to this tropical storm deferred in the regulatory asset for storm damage
totaled approximately $50 million. The rate of storm damage cost recovery is
expected to be adjusted in future regulatory proceedings as necessary. As a
result of this regulatory treatment, costs related to storms are not expected to
have a material impact on Southern Company's or Georgia Power's financial
statements.
Nuclear Construction
In 2009, the Georgia PSC certified construction of Plant Vogtle Units 3 and 4,
in which Georgia Power holds a 45.7% ownership interest. In 2012, the NRC issued
the related combined construction and operating licenses, which allowed full
construction of the two AP1000 nuclear units (with electric generating capacity
of approximately 1,100 MWs each) and related facilities to begin. Until March
2017, construction on Plant Vogtle Units 3 and 4 continued under the Vogtle 3
and 4 Agreement, which was a substantially fixed price agreement.
In connection with the EPC Contractor's bankruptcy filing in March 2017, Georgia
Power, acting for itself and as agent for the other Vogtle Owners, entered into
several transitional arrangements to allow construction to continue. In July
2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners,
entered into the Vogtle Services Agreement, whereby Westinghouse provides
facility design and engineering services, procurement and technical support, and
staff augmentation on a time and materials cost basis. The Vogtle Services
Agreement provides that it will continue until the start-up and testing of Plant
Vogtle Units 3 and 4 are complete and electricity is generated and sold from
both units. The Vogtle Services Agreement is terminable by the Vogtle Owners
upon 30 days' written notice.
In October 2017, Georgia Power, acting for itself and as agent for the other
Vogtle Owners, executed the Bechtel Agreement, a cost reimbursable plus fee
arrangement, whereby Bechtel is reimbursed for actual costs plus a base fee and
an at-risk fee, which is subject to adjustment based on Bechtel's performance
against cost and schedule targets. Each Vogtle Owner is severally (not jointly)
liable for its proportionate share, based on its ownership interest, of all
amounts owed to Bechtel under the Bechtel Agreement. The Vogtle Owners may
terminate the Bechtel Agreement at any time for their convenience, provided that
the Vogtle Owners will be required to pay amounts related to work performed
prior to the termination (including the applicable portion of the base fee),
certain termination-related costs, and, at certain stages of the work, the
applicable portion of the at-risk fee. Bechtel may terminate the Bechtel
Agreement under certain circumstances, including certain Vogtle Owner
suspensions of work, certain breaches of the Bechtel Agreement by the Vogtle
Owners, Vogtle Owner insolvency, and certain other events.
See Note 8 under "Long-term Debt - DOE Loan Guarantee Borrowings" for
information on the Amended and Restated Loan Guarantee Agreement, including
applicable covenants, events of default, mandatory prepayment events, and
conditions to borrowing.
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Cost and Schedule
Georgia Power's approximate proportionate share of the remaining estimated
capital cost to complete Plant Vogtle Units 3 and 4 by the expected in-service
dates of November 2021 and November 2022, respectively, is as follows:
(in billions)
Base project capital cost forecast(a)(b) $ 8.5
Construction contingency estimate 0.2
Total project capital cost forecast(a)(b) 8.7
Net investment as of December 31, 2020(b) (7.2)
Remaining estimate to complete(a) $ 1.5
(a)Excludes financing costs expected to be capitalized through AFUDC of
approximately $246 million, of which $93 million had been accrued through
December 31, 2020.
(b)Net of $1.7 billion received from Toshiba under the Guarantee Settlement
Agreement and approximately $188 million in related customer refunds.
Georgia Power estimates that its financing costs for construction of Plant
Vogtle Units 3 and 4 will total approximately $3.0 billion, of which $2.6
billion had been incurred through December 31, 2020.
As part of its ongoing processes, Southern Nuclear continues to evaluate cost
and schedule forecasts on a regular basis to incorporate current information
available, particularly in the areas of engineering support, commodity
installation, system turnovers and related test results, and workforce
statistics. Southern Nuclear has established aggressive target values for
monthly construction production and system turnover activities as part of a
strategy that was designed to maintain margin to the regulatory-approved
in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4.
As of June 30, 2020, assignments of contingency exceeded the remaining balance
of the $366 million construction contingency originally established in the
second quarter 2018 by approximately $34 million and Georgia Power established
$115 million of additional construction contingency. During the third and fourth
quarters 2020, this construction contingency, plus an additional $5 million, was
fully assigned to the base capital cost forecast. Assignment of contingency
during 2020 addressed cost risks related to construction productivity, including
the April 2020 reduction in workforce designed to mitigate impacts of the
COVID-19 pandemic described below; other COVID-19 impacts; craft labor
incentives; additional resources for supervision, field support, project
management, initial test program, start-up, engineering support, and operations
and maintenance support; subcontracts; and procurement, among other factors.
These factors continue to represent further potential cost risk to the project;
therefore, Georgia Power established $171 million of additional construction
contingency as of December 31, 2020.
After considering the significant level of uncertainty that exists regarding the
future recoverability of these costs since the ultimate outcome of these matters
is subject to the outcome of future assessments by management, as well as
Georgia PSC decisions in future regulatory proceedings, Georgia Power recorded
total pre-tax charges to income of $149 million ($111 million after tax) and
$176 million ($131 million after tax) for the increases in the total project
capital cost forecast as of June 30, 2020 and December 31, 2020, respectively.
As and when these amounts are spent, Georgia Power may request the Georgia PSC
to evaluate those expenditures for rate recovery.
In mid-March 2020, Southern Nuclear began implementing policies and procedures
designed to mitigate the risk of transmission of COVID-19 at the construction
site, including worker distancing measures, isolating individuals who have
tested positive for COVID-19, are showing symptoms consistent with COVID-19, are
being tested for COVID-19, or have been in close contact with such persons,
requiring self-quarantine, and adopting additional precautionary measures. In
April 2020, Georgia Power, acting for itself and as agent for the other Vogtle
Owners, announced a reduction in workforce at Plant Vogtle Units 3 and 4 and
began reducing the then-existing site workforce by approximately 20%. This
reduction in workforce was a mitigation action intended to address the impact of
the COVID-19 pandemic on the Plant Vogtle Units 3 and 4 workforce and
construction site, including challenges with labor productivity that were
exacerbated by the impact of the COVID-19 pandemic, by increasing productivity
of the remaining workforce and reducing workforce fatigue and absenteeism.
Further, it was also intended to allow for increased social distancing by the
workforce and facilitate compliance with the recommendations from the Centers
for Disease Control and Prevention. The April 2020 workforce reduction did
reduce absenteeism, providing an improvement in operational efficiency and
allowing for increased social distancing. Since April 2020, the number of active
cases at the site has fluctuated and has continued to impact productivity levels
and pace of activity completion.
The lower productivity levels and slower pace of activity completion contributed
to a backlog to the aggressive site work plan established at the beginning of
2020. To address these issues, in July 2020, Southern Nuclear updated its
aggressive site work plan for both Unit 3 and Unit 4; however, through October
2020, the project continued to face challenges in meeting the updated
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aggressive site work plan targets including, but not limited to, overall
construction and subcontractor labor productivity, resulting in further
extension of certain milestone dates in the aggressive site work plan. From
November 2020 through January 2021, the number of active COVID-19 cases at the
site increased significantly, consistent with a national rise in cases, which
further impacted productivity and the pace of activity completion. In addition,
and exacerbated by this rise in COVID-19 cases, the project continues to face
challenges including, but not limited to, higher than expected absenteeism;
overall construction and subcontractor labor productivity; system turnover and
testing activities; and electrical equipment and commodity installation.
As a result of these factors, overall production levels were not achieved at the
levels anticipated, contributing to the December 31, 2020 allocation of
construction contingency and increase in total project capital cost forecast
described previously. Georgia Power estimates the productivity impacts of the
COVID-19 pandemic have consumed approximately three to four months of schedule
margin previously embedded in the site work plan for Unit 3 and Unit 4. Also,
after considering these factors, Southern Nuclear has further extended certain
milestone dates, including the start of hot functional testing and fuel load for
Unit 3, from those established in October 2020. These updated milestone dates
are expected to support the regulatory-approved in-service dates of November
2021 and November 2022 for Units 3 and 4, respectively. With minimal schedule
margin remaining, the Unit 3 schedule is challenged, and any further extension
of the hot functional testing or fuel load milestones, or other delays from the
challenges described below, could impact the ability to achieve the November
2021 in-service date. As Unit 3 approaches hot functional testing, achievement
of the extended milestone dates for Unit 3 primarily depends on improvements in
the pace of work package completion and system turnovers, as well as the level
of any required construction remediation work. Achievement of the extended
milestone dates for Unit 4 primarily depends on overall construction
productivity and production levels significantly improving as well as
appropriate levels of craft laborers, particularly electrical and pipefitter
craft labor, being added and maintained.
In addition, the continuing effects of the COVID-19 pandemic could further
disrupt or delay construction and testing activities at Plant Vogtle Units 3 and
4. Georgia Power's proportionate share of the estimated incremental cost
associated with COVID-19 mitigation actions and impacts on construction
productivity is currently estimated to be between $150 million and $190 million
and is included in the total project capital cost. As described previously,
estimated costs associated with near-term COVID-19 mitigation actions and
related impacts on construction productivity were included in the additional
contingency established as of December 31, 2020.
As construction, including subcontract work, continues and testing and system
turnover activities increase, challenges with management of contractors and
vendors; subcontractor performance; supervision of craft labor and related
productivity, particularly in the installation of electrical, mechanical, and
instrumentation and controls commodities, ability to attract and retain craft
labor, and/or related cost escalation; procurement, fabrication, delivery,
assembly, installation, system turnover, and the initial testing and start-up,
including any required engineering changes or any remediation related thereto,
of plant systems, structures, or components (some of which are based on new
technology that only within the last few years began initial operation in the
global nuclear industry at this scale), any of which may require additional
labor and/or materials; or other issues could arise and change the projected
schedule and estimated cost.
There have been technical and procedural challenges to the construction and
licensing of Plant Vogtle Units 3 and 4 at the federal and state level and
additional challenges may arise. Processes are in place that are designed to
assure compliance with the requirements specified in the Westinghouse Design
Control Document and the combined construction and operating licenses, including
inspections by Southern Nuclear and the NRC that occur throughout construction.
Findings resulting from such inspections could require additional remediation
and/or further NRC oversight. In addition, certain license amendment requests
have been filed and approved or are pending before the NRC. On August 10, 2020,
the Atomic Safety and Licensing Board rejected the Blue Ridge Environmental
Defense League's (BREDL) May 11, 2020 petition challenging a license amendment
request. The staff of the NRC has issued the requested amendment to the combined
construction and operating license for Plant Vogtle Unit 3. BREDL appealed the
Atomic Safety and Licensing Board decision to the NRC, which the NRC denied on
December 22, 2020. BREDL also filed a motion to reopen the proceeding and
submitted an amended contention on December 7, 2020, which is pending before the
NRC.
In September 2020, Southern Nuclear notified the NRC of its intent to load fuel
for Unit 3 in 2021. Various design and other licensing-based compliance matters,
including the timely submittal by Southern Nuclear of the ITAAC documentation
for each unit and the related reviews and approvals by the NRC necessary to
support NRC authorization to load fuel, may arise, which may result in
additional license amendments or require other resolution. If any license
amendment requests or other licensing-based compliance issues, including
inspections and ITAACs, are not resolved in a timely manner, there may be delays
in the project schedule that could result in increased costs.
The ultimate outcome of these matters cannot be determined at this time.
However, any schedule extension beyond the regulatory-approved in-service dates
is currently estimated to result in additional base capital costs for Georgia
Power of approximately $25
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million per month for Unit 3 and approximately $15 million per month for Unit 4,
as well as the related AFUDC. While Georgia Power is not precluded from seeking
recovery of any future capital cost forecast increase, management will
ultimately determine whether or not to seek recovery. Any further changes to the
capital cost forecast that are not expected to be recoverable through regulated
rates will be required to be charged to income and such charges could be
material.
Joint Owner Contracts
In November 2017, the Vogtle Owners entered into an amendment to their joint
ownership agreements for Plant Vogtle Units 3 and 4 to provide for, among other
conditions, additional Vogtle Owner approval requirements. Effective in August
2018, the Vogtle Owners further amended the joint ownership agreements to
clarify and provide procedures for certain provisions of the joint ownership
agreements related to adverse events that require the vote of the holders of at
least 90% of the ownership interests in Plant Vogtle Units 3 and 4 to continue
construction (as amended, and together with the November 2017 amendment, the
Vogtle Joint Ownership Agreements). The Vogtle Joint Ownership Agreements also
confirm that the Vogtle Owners' sole recourse against Georgia Power or Southern
Nuclear for any action or inaction in connection with their performance as agent
for the Vogtle Owners is limited to removal of Georgia Power and/or Southern
Nuclear as agent, except in cases of willful misconduct.
As a result of an increase in the total project capital cost forecast and
Georgia Power's decision not to seek rate recovery of the increase in the base
capital costs in conjunction with the nineteenth VCM report in 2018, the holders
of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 were
required to vote to continue construction. In September 2018, the Vogtle Owners
unanimously voted to continue construction of Plant Vogtle Units 3 and 4.
Amendments to the Vogtle Joint Ownership Agreements
In connection with the vote to continue construction, Georgia Power entered into
(i) a binding term sheet (Vogtle Owner Term Sheet) with the other Vogtle Owners
and MEAG Power's wholly-owned subsidiaries MEAG Power SPVJ, LLC (MEAG SPVJ),
MEAG Power SPVM, LLC (MEAG SPVM), and MEAG Power SPVP, LLC (MEAG SPVP) to take
certain actions which partially mitigate potential financial exposure for the
other Vogtle Owners, including additional amendments to the Vogtle Joint
Ownership Agreements and the purchase of PTCs from the other Vogtle Owners at
pre-established prices, and (ii) a term sheet (MEAG Term Sheet) with MEAG Power
and MEAG SPVJ to provide up to $300 million of funding with respect to MEAG
SPVJ's ownership interest in Plant Vogtle Units 3 and 4 under certain
circumstances. In January 2019, Georgia Power, MEAG Power, and MEAG SPVJ entered
into an agreement to implement the provisions of the MEAG Term Sheet. In
February 2019, Georgia Power, the other Vogtle Owners, and MEAG Power's
wholly-owned subsidiaries MEAG SPVJ, MEAG SPVM, and MEAG SPVP entered into
certain amendments to the Vogtle Joint Ownership Agreements to implement the
provisions of the Vogtle Owner Term Sheet (Global Amendments).
As previously disclosed, pursuant to the Global Amendments: (i) each Vogtle
Owner must pay its proportionate share of qualifying construction costs for
Plant Vogtle Units 3 and 4 based on its ownership percentage up to the estimated
cost at completion (EAC) for Plant Vogtle Units 3 and 4 which formed the basis
of Georgia Power's forecast of $8.4 billion in the nineteenth VCM plus $800
million; (ii) Georgia Power will be responsible for 55.7% of actual qualifying
construction costs between $800 million and $1.6 billion over the EAC in the
nineteenth VCM (resulting in $80 million of potential additional costs to
Georgia Power), with the remaining Vogtle Owners responsible for 44.3% of such
costs pro rata in accordance with their respective ownership interests; and
(iii) Georgia Power will be responsible for 65.7% of qualifying construction
costs between $1.6 billion and $2.1 billion over the EAC in the nineteenth VCM
(resulting in a further $100 million of potential additional costs to Georgia
Power), with the remaining Vogtle Owners responsible for 34.3% of such costs pro
rata in accordance with their respective ownership interests. If the EAC is
revised and exceeds the EAC in the nineteenth VCM by more than $2.1 billion,
each of the other Vogtle Owners will have a one-time option at the time the
project budget forecast is so revised to tender a portion of its ownership
interest to Georgia Power in exchange for Georgia Power's agreement to pay 100%
of such Vogtle Owner's remaining share of total construction costs in excess of
the EAC in the nineteenth VCM plus $2.1 billion.
In addition, pursuant to the Global Amendments, the holders of at least 90% of
the ownership interests in Plant Vogtle Units 3 and 4 must vote to continue
construction if certain adverse events occur, including, among other events: (i)
the bankruptcy of Toshiba; (ii) the termination or rejection in bankruptcy of
certain agreements, including the Vogtle Services Agreement, the Bechtel
Agreement, or the agency agreement with Southern Nuclear; (iii) Georgia Power's
public announcement of its intention not to submit for rate recovery any portion
of its investment in Plant Vogtle Units 3 and 4 or the Georgia PSC determines
that any of Georgia Power's costs relating to the construction of Plant Vogtle
Units 3 and 4 will not be recovered in retail rates, excluding any additional
amounts paid by Georgia Power on behalf of the other Vogtle Owners pursuant to
the Global Amendments described above and the first 6% of costs during any
six-month VCM reporting period that are disallowed by the Georgia PSC for
recovery, or for which Georgia Power elects not to seek cost recovery, through
retail rates; and (iv) an incremental extension of one year or more over the
most recently approved schedule.
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The ultimate outcome of these matters cannot be determined at this time.
Regulatory Matters
In 2009, the Georgia PSC voted to certify construction of Plant Vogtle Units 3
and 4 with a certified capital cost of $4.418 billion. In addition, in 2009 the
Georgia PSC approved inclusion of the Plant Vogtle Units 3 and 4 related CWIP
accounts in rate base, and the State of Georgia enacted the Georgia Nuclear
Energy Financing Act, which allows Georgia Power to recover financing costs for
Plant Vogtle Units 3 and 4. Financing costs are recovered on all applicable
certified costs through annual adjustments to the NCCR tariff up to the
certified capital cost of $4.418 billion. At December 31, 2020, Georgia Power
had recovered approximately $2.5 billion of financing costs. Financing costs
related to capital costs above $4.418 billion are being recognized through AFUDC
and are expected to be recovered through retail rates over the life of Plant
Vogtle Units 3 and 4; however, Georgia Power will not record AFUDC related to
any capital costs in excess of the total deemed reasonable by the Georgia PSC
(currently $7.3 billion) and not requested for rate recovery. On November 3,
2020, the Georgia PSC approved Georgia Power's request to decrease the NCCR
tariff by $142 million annually, effective January 1, 2021.
Georgia Power is required to file semi-annual VCM reports with the Georgia PSC
by February 28 and August 31 of each year. In 2013, in connection with the
eighth VCM report, the Georgia PSC approved a stipulation between Georgia Power
and the staff of the Georgia PSC to waive the requirement to amend the Plant
Vogtle Units 3 and 4 certificate in accordance with the 2009 certification order
until the completion of Plant Vogtle Unit 3, or earlier if deemed appropriate by
the Georgia PSC and Georgia Power.
In 2016, the Georgia PSC voted to approve a settlement agreement (Vogtle Cost
Settlement Agreement) resolving certain prudency matters in connection with the
fifteenth VCM report. In December 2017, the Georgia PSC voted to approve (and
issued its related order on January 11, 2018) Georgia Power's seventeenth VCM
report and modified the Vogtle Cost Settlement Agreement. The Vogtle Cost
Settlement Agreement, as modified by the January 11, 2018 order, resolved the
following regulatory matters related to Plant Vogtle Units 3 and 4: (i) none of
the $3.3 billion of costs incurred through December 31, 2015 and reflected in
the fourteenth VCM report should be disallowed from rate base on the basis of
imprudence; (ii) the Contractor Settlement Agreement was reasonable and prudent
and none of the $0.3 billion paid pursuant to the Contractor Settlement
Agreement should be disallowed from rate base on the basis of imprudence; (iii)
(a) capital costs incurred up to $5.68 billion would be presumed to be
reasonable and prudent with the burden of proof on any party challenging such
costs, (b) Georgia Power would have the burden to show that any capital costs
above $5.68 billion were prudent, and (c) a revised capital cost forecast of
$7.3 billion (after reflecting the impact of payments received under the
Guarantee Settlement Agreement and related customer refunds) was found
reasonable; (iv) construction of Plant Vogtle Units 3 and 4 should be completed,
with Southern Nuclear serving as project manager and Bechtel as primary
contractor; (v) approved and deemed reasonable Georgia Power's revised schedule
placing Plant Vogtle Units 3 and 4 in service in November 2021 and November
2022, respectively; (vi) confirmed that the revised cost forecast does not
represent a cost cap and that prudence decisions on cost recovery will be made
at a later date, consistent with applicable Georgia law; (vii) reduced the ROE
used to calculate the NCCR tariff (a) from 10.95% (the ROE rate setting point
authorized by the Georgia PSC in the 2013 ARP) to 10.00% effective January 1,
2016, (b) from 10.00% to 8.30%, effective January 1, 2020, and (c) from 8.30% to
5.30%, effective January 1, 2021 (provided that the ROE in no case will be less
than Georgia Power's average cost of long-term debt); (viii) reduced the ROE
used for AFUDC equity for Plant Vogtle Units 3 and 4 from 10.00% to Georgia
Power's average cost of long-term debt, effective January 1, 2018; and (ix)
agreed that upon Unit 3 reaching commercial operation, retail base rates would
be adjusted to include the costs related to Unit 3 and common facilities deemed
prudent in the Vogtle Cost Settlement Agreement. The January 11, 2018 order also
stated that if Plant Vogtle Units 3 and 4 are not commercially operational by
June 1, 2021 and June 1, 2022, respectively, the ROE used to calculate the NCCR
tariff will be further reduced by 10 basis points each month (but not lower than
Georgia Power's average cost of long-term debt) until the respective Unit is
commercially operational. The ROE reductions negatively impacted earnings by
approximately $150 million, $75 million, and $100 million in 2020, 2019, and
2018, respectively, and are estimated to have negative earnings impacts of
approximately $260 million and $200 million in 2021 and 2022, respectively. In
its January 11, 2018 order, the Georgia PSC also stated if other conditions
change and assumptions upon which Georgia Power's seventeenth VCM report are
based do not materialize, the Georgia PSC reserved the right to reconsider the
decision to continue construction.
In 2018, Georgia Interfaith Power & Light, Inc., Partnership for Southern
Equity, Inc., and Georgia Watch filed petitions in Fulton County Superior Court
seeking judicial review of the Georgia PSC's January 11, 2018 order. The
petitions were dismissed by the Fulton County Superior Court and later remanded
by the Georgia Court of Appeals. The Fulton County Superior Court issued another
order dismissing the petitions and, in August 2020, the petitioners withdrew
their notice of appeal. This matter is now concluded.
The Georgia PSC has approved 23 VCM reports covering periods through June 30,
2020, including total construction capital costs incurred through that date of
$8.1 billion (before $1.7 billion of payments received under the Guarantee
Settlement Agreement
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and approximately $188 million in related customer refunds). The Georgia PSC's
order approving the twenty-third VCM report also instructed Georgia Power and
the staff of the Georgia PSC to develop a mutually-agreeable recommendation to
the Georgia PSC by the end of March 2021 regarding the procedure for and the
timing, form, and substance of the rate adjustment filing related to the Unit 3
and common facility costs. Georgia Power expects to file its twenty-fourth VCM
report with the Georgia PSC on February 18, 2021, covering the period from July
1, 2020 through December 31, 2020, requesting approval of $670 million of
construction capital costs incurred during that period.
The ultimate outcome of these matters cannot be determined at this time.
Mississippi Power
Mississippi Power's rates and charges for service to retail customers are
subject to the regulatory oversight of the Mississippi PSC. Mississippi Power's
rates are a combination of base rates and several separate cost recovery clauses
for specific categories of costs. These separate cost recovery clauses address
such items as fuel and purchased power, ad valorem taxes, property damage, and
the costs of compliance with environmental laws and regulations. Costs not
addressed through one of the specific cost recovery clauses are expected to be
recovered through Mississippi Power's base rates.
2019 Base Rate Case
On March 17, 2020, the Mississippi PSC approved a settlement agreement between
Mississippi Power and the Mississippi Public Utilities Staff related to
Mississippi Power's base rate case filed in November 2019 (Mississippi Power
Rate Case Settlement Agreement).
Under the terms of the Mississippi Power Rate Case Settlement Agreement, annual
retail rates decreased approximately $16.7 million, or 1.85%, effective for the
first billing cycle of April 2020, based on a test year period of January 1,
2020 through December 31, 2020, a 53% average equity ratio, an allowed maximum
actual equity ratio of 55% by the end of 2020, and a 7.57% return on investment.
Additionally, the Mississippi Power Rate Case Settlement Agreement: (i)
established common amortization periods of four years for regulatory assets and
three years for regulatory liabilities included in the approved revenue
requirement, including those related to unprotected deferred income taxes; (ii)
established new depreciation rates reflecting an annual increase in depreciation
of approximately $10 million; and (iii) excluded certain compensation costs
totaling approximately $3.9 million. It also eliminated separate rates for costs
associated with Plant Ratcliffe and energy efficiency initiatives and includes
such costs in the PEP, ECO Plan, and ad valorem tax adjustment factor, as
applicable. In accordance with the previous order of the Mississippi PSC
suspending the operation of PEP and the ECO Plan for 2018 through 2020,
Mississippi Power submitted its 2021 ECO Plan filing on February 12, 2021 and
plans to submit its 2021 PEP filing in March 2021.
Performance Evaluation Plan
Mississippi Power's retail base rates generally are set under the PEP, a rate
plan approved by the Mississippi PSC. In recognition that Mississippi Power's
long-term financial success is dependent upon how well it satisfies its
customers' needs, PEP includes performance indicators that directly tie customer
service indicators to Mississippi Power's allowed ROE. PEP measures Mississippi
Power's performance on a 10-point scale as a weighted average of results in
three areas: average customer price, as compared to prices of other regional
utilities (weighted at 40%); service reliability, measured in percentage of time
customers had electric service (40%); and customer satisfaction, measured in a
survey of residential customers (20%). Typically, two PEP filings are made for
each calendar year: the PEP projected filing and the PEP lookback filing. On
July 24, 2020, the Mississippi PSC approved Mississippi Power's revisions to the
PEP compliance rate clause as agreed to in the Mississippi Power Rate Case
Settlement Agreement. These revisions include, among other things, changing the
filing date for the annual PEP rate projected filing from November of the
immediately preceding year to March of the current year, utilizing a historic
test year adjusted for "known and measurable" changes, using discounted cash
flow and regression formulas to determine base ROE, and moving all embedded ad
valorem property taxes currently collected in PEP to the ad valorem tax
adjustment clause. The PEP lookback filing will continue to be filed after the
end of the year and allows for review of the actual revenue requirement.
In 2018, Mississippi Power revised its annual projected PEP filing for 2018 to
reflect the impacts of the Tax Reform Legislation. The revised filing requested
an increase of $26 million in annual revenues, based on a performance adjusted
ROE of 9.33% and an increased equity ratio of 50%. Mississippi Power and the
MPUS entered into a settlement agreement, which was approved by the Mississippi
PSC, with respect to the 2018 PEP filing and all unresolved PEP filings for
prior years (2018 PEP Settlement Agreement). Rates under the 2018 PEP Settlement
Agreement became effective with the first billing cycle of September 2018. The
2018 PEP Settlement Agreement provided for an increase of approximately $21.6
million in annual base retail revenues, which excluded certain compensation
costs contested by the MPUS, as well as approximately $2 million subsequently
approved
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for recovery through the 2018 Energy Efficiency Cost Rider. Under the 2018 PEP
Settlement Agreement, Mississippi Power deferred a portion of the contested
compensation costs for 2018 and 2019 as a regulatory asset totaling $4 million,
which was included in other regulatory assets, deferred on the balance sheet at
December 31, 2019. These costs are being recovered over a four-year period
through March 2024 as approved in the Mississippi Power Rate Case Settlement
Agreement.
Pursuant to the 2018 PEP Settlement Agreement, Mississippi Power's
performance-adjusted allowed ROE was 9.31% and its allowed equity ratio was
capped at 51%, pending further review by the Mississippi PSC. In lieu of the
requested equity ratio increase, Mississippi Power retained $44 million of
excess accumulated deferred income taxes resulting from the Tax Reform
Legislation. The Mississippi Power Rate Case Settlement Agreement set
amortization periods for the excess accumulated deferred income taxes, as
discussed under "2019 Base Rate Case" herein.
Pursuant to the 2018 PEP Settlement Agreement, Mississippi Power was not
required to make any PEP filings for regulatory years 2018, 2019, and 2020.
Mississippi Power plans to submit its 2021 PEP filing in March 2021. The
ultimate outcome of this matter cannot be determined at this time.
Operations Review
In 2018, the Mississippi PSC began an operations review of Mississippi Power.
The review includes, but is not limited to, a comparative analysis of its costs,
its cost recovery framework, and ways in which it may streamline management
operations for the reasonable benefit of ratepayers. The ultimate outcome of
this matter cannot be determined at this time.
Reserve Margin Plan
In December 2019, Mississippi Power updated its proposed RMP, originally filed
in 2018, as required by the Mississippi PSC. In 2018, Mississippi Power had
proposed alternatives to reduce its reserve margin and lower or avoid operating
costs, with the most economic alternatives being the two-year and seven-year
acceleration of the retirement of Plant Watson Units 4 and 5, respectively, to
the first quarter 2022 and the four-year acceleration of the retirement of Plant
Greene County Units 1 and 2 to the third quarter 2021 and the third quarter
2022, respectively. The December 2019 update noted that Plant Daniel Units 1 and
2 currently have long-term economics similar to Plant Watson Unit 5. The Plant
Greene County unit retirements would require the completion by Alabama Power of
transmission and system reliability improvements, as well as agreement by
Alabama Power.
On December 17, 2020, the Mississippi PSC issued an order concluding the RMP
docket and requiring Mississippi Power to incorporate into its 2021 IRP a
schedule of early or anticipated retirement of 950 MWs of fossil-steam
generation by year-end 2027 to reduce Mississippi Power's excess reserve margin.
The order stated that Mississippi Power will be allowed to defer any
retirement-related costs as regulatory assets for future recovery. Mississippi
Power's IRP is scheduled to be filed in April 2021.
The ultimate outcome of these matters cannot be determined at this time. See
Note 3 under "Other Matters - Mississippi Power" for additional information on
Plant Daniel Units 1 and 2.
Environmental Compliance Overview Plan
In accordance with a 2011 accounting order from the Mississippi PSC, Mississippi
Power has the authority to defer in a regulatory asset for future recovery all
plant retirement- or partial retirement-related costs resulting from
environmental regulations.
In 2018, the Mississippi PSC approved an annual increase in revenues related to
the ECO Plan of approximately $17 million, effective with the first billing
cycle for September 2018. This increase represented the maximum 2% annual
increase in revenues and primarily related to the carryforward from the prior
year. The increase was the result of Mississippi PSC approval of an agreement
between Mississippi Power and the MPUS to settle the 2018 ECO Plan filing (ECO
Settlement Agreement) and was sufficient to recover costs through 2019,
including remaining amounts deferred from prior years along with the related
carrying costs. In accordance with the ECO Settlement Agreement, Mississippi
Power was not required to make any ECO Plan filings for 2018, 2019, and 2020,
and any necessary adjustments were reflected in Mississippi Power's 2019 base
rate case. The ECO Settlement Agreement contains the same terms as the 2018 PEP
Settlement Agreement described herein with respect to allowed ROE and equity
ratio.
In October 2019, the Mississippi PSC approved Mississippi Power's July 2019
request for a CPCN to complete certain environmental compliance projects,
primarily associated with the Plant Daniel coal units co-owned 50% with Gulf
Power. The total estimated cost is approximately $125 million, with Mississippi
Power's share of approximately $66 million being proposed for recovery through
its ECO Plan. Approximately $17 million of Mississippi Power's share is
associated with ash pond closure and is reflected in Mississippi Power's ARO
liabilities. See Note 6 for additional information on AROs and Note 3 under
"Other Matters - Mississippi Power" for additional information on Gulf Power's
ownership in Plant Daniel.
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On February 12, 2021, Mississippi Power submitted its ECO Plan filing for 2021,
which requested an annual decrease in revenues of approximately $9 million
primarily due to a change in the amortization periods of certain regulatory
assets and liabilities. The ultimate outcome of this matter cannot be determined
at this time.
Fuel Cost Recovery
Mississippi Power annually establishes and is required to file for an adjustment
to the retail fuel cost recovery factor that is approved by the Mississippi PSC.
The Mississippi PSC approved an increase of $39 million effective February 2018,
decreases of $35 million and $24 million effective in February 2019 and 2020,
respectively, and an increase of $2 million effective in February 2021. At
December 31, 2020 and 2019, over recovered retail fuel costs totaled
approximately $24 million and $23 million, respectively, and were included in
other current liabilities on Southern Company's balance sheets and over
recovered regulatory clause liabilities on Mississippi Power's balance sheets.
Mississippi Power has wholesale MRA and Market Based (MB) fuel cost recovery
factors. Effective with the first billing cycles for January 2019, 2020, and
2021, annual revenues under the wholesale MRA fuel rate increased $16 million,
increased $1 million, and decreased $5 million, respectively. The wholesale MB
fuel rate did not change materially in any period presented. At December 31,
2020 and 2019, over recovered wholesale fuel costs totaled approximately $10
million and $6 million, respectively, and were included in other current
liabilities on Southern Company's balance sheets and over recovered regulatory
clause liabilities on Mississippi Power's balance sheets.
Mississippi Power's operating revenues are adjusted for differences in actual
recoverable fuel cost and amounts billed in accordance with the currently
approved cost recovery rate. Accordingly, changes in the billing factor should
have no significant effect on Mississippi Power's revenues or net income but
will affect operating cash flows.
Ad Valorem Tax Adjustment
Mississippi Power establishes annually an ad valorem tax adjustment factor that
is approved by the Mississippi PSC to collect the ad valorem taxes paid by
Mississippi Power. In 2020, 2019, and 2018, the annual revenues collected
through the ad valorem tax adjustment factor increased by $10 million, decreased
by $2 million, and increased by $7 million, respectively. On February 12, 2021,
Mississippi Power submitted its ad valorem tax adjustment factor filing for
2021, which requested an annual increase in revenues of approximately
$28 million, primarily due to higher ad valorem taxes and inclusion of the ad
valorem taxes previously recovered in PEP in accordance with the Mississippi
Power Rate Case Settlement Agreement. The ultimate outcome of this matter cannot
be determined at this time.
System Restoration Rider
Mississippi Power carries insurance for the cost of certain types of damage to
generation plants and general property. However, Mississippi Power is
self-insured for the cost of storm, fire, and other uninsured casualty damage to
its property, including transmission and distribution facilities. As permitted
by the Mississippi PSC and the FERC, Mississippi Power accrues for the cost of
such damage through an annual expense accrual which is credited to regulatory
liability accounts for the retail and wholesale jurisdictions. The cost of
repairing actual damage resulting from such events that individually exceed
$50,000 is charged to the reserve. Every three years the Mississippi PSC, the
MPUS, and Mississippi Power agree on SRR revenue level(s) for the ensuing
period, based on historical data, expected exposure, type and amount of
insurance coverage, excluding insurance cost, and any other relevant
information. The accrual amount and the reserve balance are determined based on
the SRR revenue level(s). If a significant change in circumstances occurs, then
the SRR revenue level can be adjusted more frequently if Mississippi Power, the
MPUS, and the Mississippi PSC deem the change appropriate. The property damage
reserve accrual will be the difference between the approved SRR revenues and the
SRR revenue requirement. In addition, SRR allows Mississippi Power to set up a
regulatory asset, pending review, if the allowable actual retail property damage
costs exceed the amount in the retail property damage reserve. The SRR rate was
zero for all years presented.
On October 28, 2020, Hurricane Zeta hit the Gulf Coast of Mississippi causing
major damage to Mississippi Power's transmission and distribution infrastructure
and, as a result, approximately $43 million was charged to the retail property
damage reserve. These costs are expected to be addressed in a subsequent SRR
rate filing. The ultimate outcome of this matter cannot be determined at this
time.
Mississippi Power made retail SRR annual expense accruals of $1 million in 2020,
2019, and 2018. As of December 31, 2020, the retail property damage reserve
balance was $4 million.
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Deferral of Incremental COVID-19 Costs
On April 14, 2020 and May 12, 2020, in order to mitigate the economic impact of
the COVID-19 pandemic on customers, the Mississippi PSC approved orders
directing Mississippi Power to continue its previous, voluntary suspension of
customer disconnections through May 26, 2020 and to defer as a regulatory asset
all necessary and reasonable incremental costs or expenses to plan, prepare,
stage, or react to protect and keep safe its employees and customers, and to
reliably operate its utility system during the COVID-19 pandemic. The period
over which such costs will be recovered is expected to be determined in a future
PEP filing. At December 31, 2020, the incremental costs deferred totaled
approximately $1 million. The ultimate outcome of this matter cannot be
determined at this time.
Municipal and Rural Associations Tariff
Mississippi Power provides wholesale electric service to Cooperative Energy,
East Mississippi Electric Power Association, and the City of Collins, all
located in southeastern Mississippi, under a long-term, cost-based,
FERC-regulated MRA tariff.
In 2017, Mississippi Power and Cooperative Energy executed, and the FERC
accepted, a Shared Service Agreement (SSA), as part of the MRA tariff, under
which Mississippi Power and Cooperative Energy will share in providing
electricity to the Cooperative Energy delivery points under the tariff,
effective January 1, 2018. The SSA may be cancelled by Cooperative Energy with
10 years notice. As of December 31, 2020, Cooperative Energy has the option to
decrease its use of Mississippi Power's generation services under the MRA tariff
up to 2.5% annually, with required notice, up to a maximum total reduction of
11%, or approximately $9 million in cumulative annual base revenues.
In May 2019, the FERC accepted Mississippi Power's requested $3.7 million annual
decrease in MRA base rates effective January 1, 2019, as agreed upon in a
settlement agreement reached with its wholesale customers resolving all matters
related to the Kemper County energy facility, similar to the 2018 PEP Settlement
Agreement, and reflecting the impacts of the Tax Reform Legislation.
On June 25, 2020, the FERC accepted Mississippi Power's requested $2 million
annual increase in MRA base rates effective June 1, 2020, as agreed upon in a
settlement agreement reached with its wholesale customers.
Cooperative Energy Power Supply Agreement
Effective April 1, 2018, Mississippi Power and Cooperative Energy amended and
extended a previous power supply agreement (PSA) through March 31, 2021, which
was subsequently extended through May 31, 2021. The amendment increased the
total capacity from 86 MWs to 286 MWs. The parties are currently negotiating a
further extension of the agreement. The ultimate outcome of this matter cannot
be determined at this time.
Cooperative Energy also has a 10-year network integration transmission service
agreement (NITSA) with SCS for transmission service to certain delivery points
on Mississippi Power's transmission system through March 31, 2021. As a result
of the PSA amendment, Cooperative Energy and SCS also amended the terms of the
NITSA, which the FERC approved, to provide for the purchase of incremental
transmission capacity from April 1, 2018 through March 31, 2021. On February 7,
2021, the NITSA was renewed for a 10-year term beginning April 1, 2021.
Southern Company Gas
Utility Regulation and Rate Design
The natural gas distribution utilities are subject to regulation and oversight
by their respective state regulatory agencies. Rates charged to customers vary
according to customer class (residential, commercial, or industrial) and rate
jurisdiction. These agencies approve rates designed to provide the opportunity
to generate revenues to recover all prudently-incurred costs, including a return
on rate base sufficient to pay interest on debt and provide a reasonable ROE.
As a result of operating in a deregulated environment, Atlanta Gas Light earns
revenue by charging rates to its customers based primarily on monthly fixed
charges that are set by the Georgia PSC and adjusted periodically. The Marketers
add these fixed charges when billing customers. This mechanism, called a
straight-fixed-variable rate design, minimizes the seasonality of Atlanta Gas
Light's revenues since the monthly fixed charge is not volumetric or directly
weather dependent.
With the exception of Atlanta Gas Light, the earnings of the natural gas
distribution utilities can be affected by customer consumption patterns that are
largely a function of weather conditions and price levels for natural gas.
Specifically, customer demand substantially increases during the Heating Season
when natural gas is used for heating purposes. Southern Company Gas has various
mechanisms, such as weather and revenue normalization mechanisms and weather
derivative instruments, that limit exposure to weather changes within typical
ranges in these utilities' respective service territories.
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In addition to natural gas cost recovery mechanisms, other cost recovery
mechanisms and regulatory riders, which vary by utility, allow recovery of
certain costs, such as those related to infrastructure replacement programs as
well as environmental remediation, energy efficiency plans, and bad debts. In
traditional rate designs, utilities recover a significant portion of the fixed
customer service and pipeline infrastructure costs based on assumed natural gas
volumes used by customers. The utilities, including Nicor Gas beginning in
November 2019, have decoupled regulatory mechanisms that Southern Company Gas
believes encourage conservation by separating the recoverable amount of these
fixed costs from the amounts of natural gas used by customers. See "Rate
Proceedings" for additional information. Also see "Infrastructure Replacement
Programs and Capital Projects" for additional information regarding
infrastructure replacement programs at certain of the natural gas distribution
utilities.
The following table provides regulatory information for Southern Company Gas'
natural gas distribution utilities:
Nicor Gas Atlanta Gas Light Virginia Natural Gas Chattanooga Gas
Authorized ROE(a) 9.73% 10.25% 9.50% 9.80%
Weather normalization mechanisms(b) ü ü
Decoupled, including straight-fixed-variable
rates(c) ü ü ü
Regulatory infrastructure program rates(d) ü ü
Bad debt rider(e) ü ü ü
Energy efficiency plan(f) ü ü
Annual base rate adjustment mechanism(g) ü ü
Year of last base rate case decision 2019 2019 2017 2018
(a)Represents the authorized ROE, or the mid-point of the authorized ROE range,
at December 31, 2020.
(b)Designed to help stabilize operating results by allowing recovery of costs in
the event of unseasonal weather, but are not direct offsets to the potential
impacts on earnings of weather and customer consumption.
(c)Allows for recovery of fixed customer service costs separately from assumed
natural gas volumes used by customers and provides a benchmark level of revenue
for recovery.
(d)Programs that update or expand distribution systems and LNG facilities.
(e)The recovery (refund) of bad debt expense over (under) an established
benchmark expense. The gas portion of bad debt expense is recovered through
purchased gas adjustment mechanisms. Nicor Gas also has a rider to recover the
non-gas portion of bad debt expense.
(f)Recovery of costs associated with plans to achieve specified energy savings
goals.
(g)Regulatory mechanism allowing annual adjustments to base rates up or down
based on authorized ROE and/or ROE range.
Infrastructure Replacement Programs and Capital Projects
In addition to capital expenditures recovered through base rates by each of the
natural gas distribution utilities, Nicor Gas and Virginia Natural Gas have
separate rate riders that provide timely recovery of capital expenditures for
specific infrastructure replacement programs. Total capital expenditures
incurred during 2020 for gas distribution operations were $1.5 billion.
The following table and discussions provide updates on the infrastructure
replacement programs and capital projects at the natural gas distribution
utilities at December 31, 2020. These programs are risk-based and designed to
update and replace cast iron, bare steel, and mid-vintage plastic materials or
expand Southern Company Gas' distribution systems to improve reliability and
meet operational flexibility and growth.
Pipe
Expenditures in Expenditures Since Installed Since Scope of Last
Utility Program Recovery 2020 Project Inception Project Inception Program Program Duration Year of Program
(in millions) (miles) (miles) (years)
Nicor Gas Investing in
Illinois(*) Rider $ 389 $ 2,101 996 1,450 9 2023
Steps to Advance
Virginia Natural Gas Virginia's Energy
(SAVE) Rider 49 293 413 770 13 2024
Total $ 438 $ 2,394 1,409 2,220
(*)Includes replacement of pipes, compressors, and transmission mains along with
other improvements such as new meters. Scope of program miles is an estimate and
subject to change.
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Nicor Gas
Illinois legislation allows Nicor Gas to provide more widespread safety and
reliability enhancements to its distribution system and stipulates that rate
increases to customers as a result of any infrastructure investments shall not
exceed a cumulative annual average of 4.0% or, in any given year, 5.5% of base
rate revenues. In 2014, the Illinois Commission approved the nine-year
regulatory infrastructure program, Investing in Illinois, subject to annual
review. In conjunction with the base rate case order issued by the Illinois
Commission in 2018, Nicor Gas is recovering program costs incurred prior to
December 31, 2017 through base rates. Additionally, the Illinois Commission's
approval of Nicor Gas' rate case in October 2019 included $65 million in annual
revenues related to the recovery of program costs from January 1, 2018 through
September 30, 2019 under the Investing in Illinois program. See "Rate
Proceedings" herein for additional information, including additional amounts
requested for recovery in the base rate case filed in January 2021. Nicor Gas'
capital expenditures related to qualifying projects under the Investing in
Illinois program totaled $396 million and $409 million in 2019 and 2018,
respectively.
Virginia Natural Gas
In September 2019, the Virginia Commission approved amendments to and extension
of the Steps to Advance Virginia's Energy (SAVE) program, an accelerated
infrastructure replacement program. The extension allows Virginia Natural Gas to
continue replacing aging pipeline infrastructure through 2024 and increases its
authorized investment under the previously-approved plan from $35 million to $40
million in 2019 with additional annual investments of $50 million in 2020, $60
million in 2021, $70 million in each year from 2022 through 2024, and a total
potential variance of up to $5 million allowed for the program, for a maximum
total investment over the six-year term (2019 through 2024) of $365 million.
The SAVE program is subject to annual review by the Virginia Commission. In
accordance with the base rate case filed with the Virginia Commission in 2020,
Virginia Natural Gas is recovering program costs incurred prior to November 1,
2020 through base rates. Program costs incurred subsequent to November 1, 2020
are currently being recovered through a separate rider and are subject to future
base rate case proceedings.
In December 2019, Virginia Natural Gas filed an application with the Virginia
Commission for a 24.1-mile header improvement project to improve resiliency and
increase the supply of natural gas delivered to energy suppliers, including
Virginia Natural Gas. Following Virginia Natural Gas' notification on November
13, 2020 that it had terminated its agreements with the project's primary
customer, the Virginia Commission issued an order on December 1, 2020 dismissing
Virginia Natural Gas' application for the project. On December 15, 2020,
Virginia Natural Gas filed a new application with the Virginia Commission for a
9.5-mile interconnect project to serve its existing transportation customers.
The ultimate outcome of this matter cannot be determined at this time.
Atlanta Gas Light
GRAM
In December 2019, the Georgia PSC approved the continuation of GRAM as part of
Atlanta Gas Light's 2019 rate case order. Various infrastructure programs
previously authorized by the Georgia PSC, including the Integrated Vintage
Plastic Replacement Program to replace aging plastic pipe and the Integrated
System Reinforcement Program to upgrade Atlanta Gas Light's distribution system
and LNG facilities in Georgia, continue under GRAM and the recovery of and
return on the infrastructure program investments are included in annual base
rate adjustments. The amounts to be recovered through rates related to allowed,
but not incurred, costs have been recognized in an unrecognized ratemaking
amount that is not reflected on the balance sheets. This allowed cost is
primarily the equity return on the capital investment under the infrastructure
programs in place prior to GRAM. These PRP costs are being recovered through
GRAM and base rates until the earlier of the full recovery of the related under
recovered amount or December 31, 2025. The under recovered balance at December
31, 2020 was $113 million, including $59 million of unrecognized equity return.
The Georgia PSC reviews Atlanta Gas Light's performance annually under GRAM. See
"Rate Proceedings" and "Unrecognized Ratemaking Amounts" herein for additional
information.
Atlanta Gas Light and the staff of the Georgia PSC previously agreed to a
variation of the Integrated Customer Growth Program to extend pipeline
facilities to serve customers in areas without pipeline access and create new
economic development opportunities in Georgia. A separate tariff provides
recovery of up to $15 million annually for strategic economic development
projects approved by the Georgia PSC.
Natural Gas Cost Recovery
With the exception of Atlanta Gas Light, the natural gas distribution utilities
are authorized by the relevant regulatory agencies in the states in which they
serve to use natural gas cost recovery mechanisms that adjust rates to reflect
changes in the wholesale cost of natural gas and ensure recovery of all costs
prudently incurred in purchasing natural gas for customers. The natural gas
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distribution utilities defer or accrue the difference between the actual cost of
natural gas and the amount of commodity revenue earned in a given period. The
deferred or accrued amount is either billed or refunded to customers
prospectively through adjustments to the commodity rate. Deferred natural gas
costs are reflected as regulatory assets and accrued natural gas costs are
reflected as regulatory liabilities. Changes in the billing factor will not have
a significant effect on Southern Company's or Southern Company Gas' revenues or
net income, but will affect cash flows. Since Atlanta Gas Light does not sell
natural gas directly to its end-use customers, it does not utilize a traditional
natural gas cost recovery mechanism. However, Atlanta Gas Light does maintain
natural gas inventory for the Marketers in Georgia and recovers the cost through
recovery mechanisms approved by the Georgia PSC. At December 31, 2020 and 2019,
the over recovered balances were $88 million and $74 million, respectively,
which were included in other regulatory liabilities on Southern Company's and
Southern Company Gas' balance sheets.
Rate Proceedings
Nicor Gas
In January 2018, the Illinois Commission approved a $137 million increase in
annual base rate revenues, including $93 million related to the recovery of
investments under the Investing in Illinois program, effective in February 2018,
based on a ROE of 9.8%. In May 2018, the Illinois Commission approved Nicor Gas'
rehearing request for revised base rates to incorporate the reduction in the
federal income tax rate as a result of the Tax Reform Legislation. The resulting
decrease of approximately $44 million in annual base rate revenues became
effective May 5, 2018. The benefits of the Tax Reform Legislation from January
25, 2018 through May 4, 2018 were refunded to customers via bill credits and
concluded in the second quarter 2019.
In October 2019, the Illinois Commission approved a $168 million annual base
rate increase effective October 8, 2019. The base rate increase included $65
million related to the recovery of program costs under the Investing in Illinois
program and was based on a ROE of 9.73% and an equity ratio of 54.2%.
Additionally, the Illinois Commission approved a volume balancing adjustment, a
revenue decoupling mechanism for residential customers that provides a benchmark
level of revenue per rate class for recovery.
On January 14, 2021, Nicor Gas filed a general base rate case with the Illinois
Commission, requesting a $293 million increase in annual base rate revenues,
including $94 million related to the recovery of investments under the Investing
in Illinois program. The requested increase is based on a projected test year
ending December 31, 2022, a ROE of 10.35%, and an equity ratio of 54.5%. The
Illinois Commission has an 11-month statutory time limit to rule on the
requested increase, after which rate adjustments will be effective. The ultimate
outcome of this matter cannot be determined at this time.
Atlanta Gas Light
In 2018, Atlanta Gas Light revised its annual GRAM filing to reflect the impacts
of the Tax Reform Legislation and requested a $16 million rate reduction. In May
2018, the Georgia PSC approved a stipulation for Atlanta Gas Light's annual base
rates to remain at the 2017 level for 2018 and 2019, with customer credits of $8
million in each of July 2018 and October 2018 to reflect the impacts of the Tax
Reform Legislation. The Georgia PSC maintained Atlanta Gas Light's previously
authorized earnings band based on a ROE between 10.55% and 10.95% and increased
the allowed equity ratio by 4% to an equity ratio of 55% to address the negative
cash flow and credit metric impacts of the Tax Reform Legislation.
In December 2019, the Georgia PSC approved a $65 million annual base rate
increase, effective January 1, 2020, based on a ROE of 10.25% and an equity
ratio of 56%. Earnings will be evaluated against a ROE range of 10.05% to
10.45%, with disposition of any earnings above 10.45% to be determined by the
Georgia PSC. Additionally, the Georgia PSC approved continuation of the
previously authorized inclusion in base rates of the recovery of and return on
the infrastructure program investments, including, but not limited to, GRAM
adjustments, and a reauthorization and continuation of GRAM until terminated by
the Georgia PSC. GRAM filing rate adjustments will be based on the authorized
ROE of 10.25%. GRAM adjustments for 2021 may not exceed 5% of 2020 base rates.
The 5% limitation does not set a precedent in any future rate proceedings by
Atlanta Gas Light.
On July 1, 2020, Atlanta Gas Light filed its 2020 GRAM filing with the Georgia
PSC requesting an annual base rate increase of $37.6 million based on the
projected 12-month period beginning January 1, 2021, which did not exceed the 5%
limitation established by the Georgia PSC. Rates went into effect on January 1,
2021 in accordance with Atlanta Gas Light's 2019 rate case order.
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On February 16, 2021, the Georgia PSC approved a stipulation between Atlanta Gas
Light and the Georgia PSC staff establishing a long-range comprehensive planning
process. Under the terms of the stipulation, Atlanta Gas Light will develop and
file at least triennially an Integrated Capacity and Delivery Plan (i-CDP). Each
i-CDP will include a 10-year forecast of interstate and intrastate capacity
asset requirements, including a detailed plan for the first three years
consistent with Atlanta Gas Light's current capacity supply plan, and a 10-year
projection of capital budgets and related operations and maintenance spending.
Recovery of the related revenue requirements will be included in either
subsequent annual GRAM filings or a new System Reinforcement Rider for
authorized large pressure improvement and system reliability projects. Atlanta
Gas Light will file its first i-CDP later in 2021. The ultimate outcome of this
matter cannot be determined at this time.
Virginia Natural Gas
In 2018, the Virginia Commission approved Virginia Natural Gas' annual
information form filing, which was based on the previously authorized ROE range
of 9.0% to 10.0%, with a midpoint of 9.5%, and reduced annual base rates by $14
million effective January 1, 2019 due to lower tax expense as a result of the
Tax Reform Legislation, along with customer refunds, via bill credits, for $14
million related to 2018 tax benefits deferred as a regulatory liability at
December 31, 2018. These customer refunds were completed in the first quarter
2019.
On June 1, 2020, Virginia Natural Gas filed a general rate case with the
Virginia Commission seeking an increase in annual base revenues of $49.6 million
primarily to recover investments and increased costs associated with
infrastructure, technology, and workforce development. The requested increase is
based on a projected 12-month test year beginning November 1, 2020, a ROE of
10.35%, and an equity ratio of 54%. Interim rate adjustments became effective
November 1, 2020, subject to refund. The ultimate outcome of this matter cannot
be determined at this time.
Deferral of Incremental COVID-19 Costs
As discussed under "Utility Regulation and Rate Design," the natural gas
distribution utilities have various regulatory mechanisms to recover bad debt
expense, which will mitigate potential increases in bad debt expense as a result
of the COVID-19 pandemic.
Atlanta Gas Light
On April 30, 2020, in response to the COVID-19 pandemic, the Georgia PSC
approved orders directing Atlanta Gas Light to continue its previous, voluntary
suspension of customer disconnections. On June 22, 2020, the Georgia PSC ordered
Atlanta Gas Light to resume customer disconnections beginning July 1, 2020, with
exceptions for customers still covered by a shelter-in-place order. All
suspensions for customer disconnections were lifted in October 2020. The orders
provide the Marketers, including SouthStar, with a mechanism to receive credits
from Atlanta Gas Light for the base rates it charged to the Marketers of
non-paying customers during the suspension. Atlanta Gas Light expects to recover
these credits through the annual GRAM revenue true-up process, which would
impact rates starting on January 1, 2022. The ultimate outcome of this matter
cannot be determined at this time.
Nicor Gas
On March 18, 2020, in response to the COVID-19 pandemic, the Illinois Commission
issued an order directing utilities to cease disconnections for non-payment and
to suspend the imposition of late payment fees or penalties. On June 18, 2020,
the Illinois Commission approved a stipulation pursuant to which Nicor Gas and
other utilities in Illinois will provide more flexible credit and collection
procedures to assist customers with financial hardship and which authorizes a
special purpose rider for recovery of the following COVID-19 pandemic-related
impacts: incremental costs directly associated with the COVID-19 pandemic, net
of the offset for COVID-19 pandemic-related credits received, foregone late
fees, foregone reconnection charges, and the costs associated with a bill
payment assistance program. Nicor Gas resumed late payment fees on July 27, 2020
and, on October 1, 2020, began recovery of the COVID-19 pandemic-related impacts
through the special purpose rider, which will continue over a 24-month period.
In response to an Illinois Commission request, Nicor Gas will continue to
voluntarily suspend residential customer disconnections for non-payment through
March 31, 2021. At December 31, 2020, Nicor Gas' related regulatory asset was $9
million.
Virginia Natural Gas
In response to the COVID-19 pandemic, the Virginia Commission issued orders
requiring Virginia Natural Gas to suspend disconnections beginning on March 16,
2020 and also to suspend late payment and reconnection fees beginning on April
9, 2020; these orders expired on October 5, 2020. On November 18, 2020, the
Virginia legislature approved the continuation of these orders until the
declared state of emergency in Virginia ends. On April 29, 2020, the Virginia
Commission authorized Virginia Natural Gas to defer the following COVID-19
pandemic-related costs as a regulatory asset: incremental uncollectible expense
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incurred, suspended late fees, suspended reconnection charges, carrying costs,
and other incremental prudently incurred costs associated with the COVID-19
pandemic. Specific recovery of the amounts deferred in a regulatory asset will
be addressed in a future rate proceeding. At December 31, 2020, Virginia Natural
Gas' related regulatory asset was immaterial. The ultimate outcome of this
matter cannot be determined at this time.
Unrecognized Ratemaking Amounts
The following table illustrates Southern Company Gas' authorized ratemaking
amounts that are not recognized on its balance sheets. These amounts are
primarily composed of an allowed equity rate of return on assets associated with
certain regulatory infrastructure programs. These amounts will be recognized as
revenues in Southern Company Gas' financial statements in the periods they are
billable to customers, the majority of which will be recovered by 2025.
December 31, 2020 December 31, 2019
(in millions)
Atlanta Gas Light $ 59 $ 70
Virginia Natural Gas 10 10
Nicor Gas 3 2
Total $ 72 $ 82
3. CONTINGENCIES, COMMITMENTS, AND GUARANTEES
General Litigation Matters
The Registrants are involved in various matters being litigated and regulatory
matters. The ultimate outcome of such pending or potential litigation or
regulatory matters against each Registrant and any subsidiaries cannot be
determined at this time; however, for current proceedings not specifically
reported herein, management does not anticipate that the ultimate liabilities,
if any, arising from such current proceedings would have a material effect on
such Registrant's financial statements.
The Registrants believe the pending legal challenges discussed below have no
merit; however, the ultimate outcome of these matters cannot be determined at
this time.
Southern Company
In January 2017, a securities class action complaint was filed in the U.S.
District Court for the Northern District of Georgia by Monroe County Employees'
Retirement System on behalf of all persons who purchased shares of Southern
Company's common stock between April 25, 2012 and October 30, 2013, as
subsequently amended. The amended complaint named as defendants Southern
Company, certain of its current and former officers, and certain former
Mississippi Power officers and alleged that the defendants made materially false
and misleading statements regarding the Kemper County energy facility in
violation of certain provisions under the Securities Exchange Act of 1934, as
amended. The complaint sought, among other things, compensatory damages and
litigation costs and attorneys' fees. In 2018, the court issued an order
dismissing certain claims against certain officers of Southern Company and
Mississippi Power and dismissing the allegations related to a number of the
statements that plaintiffs challenged as being false or misleading. In 2018, the
court denied the defendants' motion for reconsideration and also denied a motion
to certify the issue for interlocutory appeal. In 2019, the court certified the
plaintiffs' proposed class and entered an order staying all deadlines in the
case pending mediation. In the third quarter 2020, the parties reached a
settlement and the plaintiffs filed a stipulation of settlement and motion for
preliminary approval to resolve the case on a class-wide basis, which the court
granted on October 1, 2020. On January 14, 2021, the court granted final
approval of the settlement. The settlement amount was paid entirely through
existing insurance policies and did not have a material impact on Southern
Company's financial statements. This matter is now concluded.
In February 2017, Jean Vineyard and Judy Mesirov each filed a shareholder
derivative lawsuit in the U.S. District Court for the Northern District of
Georgia. Each of these lawsuits names as defendants Southern Company, certain of
its directors, certain of its current and former officers, and certain former
Mississippi Power officers. In 2017, these two shareholder derivative lawsuits
were consolidated in the U.S. District Court for the Northern District of
Georgia. The complaints allege that the defendants caused Southern Company to
make false or misleading statements regarding the Kemper County energy facility
cost and schedule. Further, the complaints allege that the defendants were
unjustly enriched and caused the waste of corporate assets and also allege that
the individual defendants violated their fiduciary duties.
In May 2017, Helen E. Piper Survivor's Trust filed a shareholder derivative
lawsuit in the Superior Court of Gwinnett County, Georgia that names as
defendants Southern Company, certain of its directors, certain of its current
and former officers, and certain
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former Mississippi Power officers. The complaint alleges that the individual
defendants, among other things, breached their fiduciary duties in connection
with schedule delays and cost overruns associated with the construction of the
Kemper County energy facility. The complaint further alleges that the individual
defendants authorized or failed to correct false and misleading statements
regarding the Kemper County energy facility schedule and cost and failed to
implement necessary internal controls to prevent harm to Southern Company. In
August 2019, the court granted a motion filed by the plaintiff in July 2019 to
substitute a new named plaintiff, Martin J. Kobuck, in place of Helen E. Piper
Survivor's Trust.
The plaintiffs in each of these cases seek to recover, on behalf of Southern
Company, unspecified actual damages and, on each plaintiff's own behalf,
attorneys' fees and costs in bringing the lawsuit, as well as certain changes to
Southern Company's corporate governance and internal processes. In 2018, the
court in each case entered an order staying each lawsuit until 30 days after the
resolution of any dispositive motions or any settlement, whichever is earlier,
in the securities class action. In September 2020, the plaintiffs in each case
filed a status report noting the settlement of the securities class action and
informing the court that the parties had scheduled mediation, which occurred on
November 12, 2020. The parties in each case did not reach settlement but
continue to explore possible resolution. Each case is stayed while the parties
discuss potential resolution.
Georgia Power
In 2011, plaintiffs filed a putative class action against Georgia Power in the
Superior Court of Fulton County, Georgia alleging that Georgia Power's
collection in rates of amounts for municipal franchise fees (which fees are paid
to municipalities) exceeded the amounts allowed in orders of the Georgia PSC and
alleging certain state law claims. This case has been ruled upon and appealed
numerous times over the last several years. In one recent appeal, the Georgia
Supreme Court remanded the case and noted that the trial court could refer the
matter to the Georgia PSC to interpret its tariffs. Following a motion by
Georgia Power, in February 2019, the Superior Court of Fulton County ordered the
parties to submit petitions to the Georgia PSC for a declaratory ruling and also
conditionally certified the proposed class. In March 2019, Georgia Power and the
plaintiffs filed petitions with the Georgia PSC seeking confirmation of the
proper application of the municipal franchise fee schedule pursuant to the
Georgia PSC's orders. Also in March 2019, Georgia Power appealed the class
certification decision to the Georgia Court of Appeals. In October 2019, the
Georgia PSC issued an order that found Georgia Power has appropriately
implemented the municipal franchise fee schedule. On March 11, 2020, the Georgia
Court of Appeals vacated the Superior Court of Fulton County's February 2019
order granting conditional class certification and remanded the case to the
Superior Court of Fulton County for further proceedings. In September 2020, the
plaintiffs and Georgia Power each filed motions for summary judgment and the
plaintiffs renewed their motion for class certification. The amount of any
possible losses cannot be estimated at this time because, among other factors,
it is unknown whether a class will be certified, the ultimate composition of any
class, and whether any losses would be subject to recovery from any
municipalities.
On July 29, 2020, a group of individual plaintiffs filed a complaint in the
Superior Court of Fulton County, Georgia against Georgia Power alleging that
releases from Plant Scherer have impacted groundwater, surface water, and air,
resulting in alleged personal injuries and property damage. The plaintiffs seek
an unspecified amount of monetary damages including punitive damages, a medical
monitoring fund, and injunctive relief. In September 2020, Georgia Power filed a
motion to dismiss. The amount of any possible losses cannot be estimated at this
time.
Mississippi Power
In 2018, Ray C. Turnage and 10 other individual plaintiffs filed a putative
class action complaint against Mississippi Power and the three then-serving
members of the Mississippi PSC in the U.S. District Court for the Southern
District of Mississippi. Mississippi Power received Mississippi PSC approval in
2013 to charge a mirror CWIP rate premised upon including in its rate base
pre-construction and construction costs for the Kemper IGCC prior to placing the
Kemper IGCC into service. The Mississippi Supreme Court reversed that approval
and ordered Mississippi Power to refund the amounts paid by customers under the
previously-approved mirror CWIP rate. The plaintiffs allege that the initial
approval process, and the amount approved, were improper. They also allege that
Mississippi Power underpaid customers by up to $23.5 million in the refund
process by applying an incorrect interest rate. The plaintiffs seek to recover,
on behalf of themselves and their putative class, actual damages, punitive
damages, pre-judgment interest, post-judgment interest, attorney's fees, and
costs. In response to Mississippi Power and the Mississippi PSC each filing a
motion to dismiss, the plaintiffs filed an amended complaint in March 2019. The
amended complaint included four additional plaintiffs and additional claims for
gross negligence, reckless conduct, and intentional wrongdoing. Mississippi
Power and the Mississippi PSC each filed a motion to dismiss the amended
complaint, which occurred on May 26, 2020 and March 27, 2020, respectively. Also
on March 27, 2020, the plaintiffs filed a motion seeking to name the new members
of the Mississippi PSC, the Mississippi Development Authority, and Southern
Company as additional defendants and add a cause of action against all
defendants based on a dormant commerce clause theory under the U.S.
Constitution. On July 28, 2020, the plaintiffs filed a motion for leave to file
a third amended complaint, which included the same federal claims as the
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proposed second amended complaint, as well as several additional state law
claims based on the allegation that Mississippi Power failed to disclose the
annual percentage rate of interest applicable to refunds. On November 10, 2020,
the court denied each of the plaintiffs' pending motions and entered final
judgment in favor of Mississippi Power. On January 22, 2021, the court denied
further motions by the plaintiffs to vacate the judgment and to file a revised
second amended complaint. An adverse outcome in this proceeding could have a
material impact on Mississippi Power's financial statements.
See "Other Matters - Mississippi Power - Kemper County Energy Facility" herein
for additional information.
Environmental Remediation
The Southern Company system must comply with environmental laws and regulations
governing the handling and disposal of waste and releases of hazardous
substances. Under these various laws and regulations, the Southern Company
system could incur substantial costs to clean up affected sites. The traditional
electric operating companies and the natural gas distribution utilities conduct
studies to determine the extent of any required cleanup and have recognized the
estimated costs to clean up known impacted sites in the financial statements. A
liability for environmental remediation costs is recognized only when a loss is
determined to be probable and reasonably estimable and is reduced as
expenditures are incurred. The traditional electric operating companies and the
natural gas distribution utilities in Illinois and Georgia have each received
authority from their respective state PSCs or other applicable state regulatory
agencies to recover approved environmental remediation costs through regulatory
mechanisms. Any difference between the liabilities accrued and costs recovered
through rates is deferred as a regulatory asset or liability. These regulatory
mechanisms are adjusted annually or as necessary within limits approved by the
state PSCs or other applicable state regulatory agencies. At December 31, 2020
and 2019, Alabama Power did not have environmental remediation liabilities and
Mississippi Power's balance was immaterial.
Georgia Power has been designated or identified as a potentially responsible
party at sites governed by the Georgia Hazardous Site Response Act and/or by the
federal Comprehensive Environmental Response, Compensation, and Liability Act,
and assessment and potential cleanup of such sites is expected. For 2020, 2019,
and 2018, Georgia Power recovered approximately $12 million, $2 million, and $2
million, respectively, through the ECCR tariff for environmental remediation.
In December 2019, Mississippi Power entered into an agreement with the
Mississippi Commission on Environmental Quality related to groundwater
conditions arising from the closed ash pond at Plant Watson. Mississippi Power
will complete an assessment and remediation consistent with the requirements of
the agreement and the CCR Rule. It is anticipated that corrective action will be
needed; however, an estimate of remedial costs will not be available until
further site assessment is completed. Mississippi Power expects to recover the
retail portion of remedial costs through the ECO Plan and the wholesale portion
through MRA rates.
Southern Company Gas is subject to environmental remediation liabilities
associated with 40 former MGP sites in four different states. Southern Company
Gas' accrued environmental remediation liability at December 31, 2020 and 2019
was based on the estimated cost of environmental investigation and remediation
associated with these sites.
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At December 31, 2020 and 2019, the environmental remediation liability and the
balance of under recovered environmental remediation costs were reflected in the
balance sheets as follows:
Georgia Southern Company
Southern Company Power Gas
(in millions)
December 31, 2020:
Environmental remediation liability:
Other current liabilities $ 44 $ 15 $ 29
Accrued environmental remediation 216 - 216
Under recovered environmental remediation costs:
Other regulatory assets, current $ 46 $ 12 $ 34
Other regulatory assets, deferred 265 29 236
December 31, 2019:
Environmental remediation liability:
Other current liabilities $ 51 $ 15 $ 36
Accrued environmental remediation 234 - 233
Under recovered environmental remediation costs:
Other regulatory assets, current $ 49 $ 12 $ 37
Other regulatory assets, deferred 300 40 260
The ultimate outcome of these matters cannot be determined at this time;
however, as a result of the regulatory treatment for environmental remediation
expenses described above, the final disposition of these matters is not expected
to have a material impact on the financial statements of the applicable
Registrants.
Nuclear Fuel Disposal Costs
Acting through the DOE and pursuant to the Nuclear Waste Policy Act of 1982, the
U.S. government entered into contracts with Alabama Power and Georgia Power that
required the DOE to dispose of spent nuclear fuel generated at Plants Farley,
Hatch, and Vogtle Units 1 and 2 beginning no later than January 31, 1998. The
DOE has yet to commence the performance of its contractual and statutory
obligation to dispose of spent nuclear fuel. Consequently, Alabama Power and
Georgia Power pursued and continue to pursue legal remedies against the U.S.
government for its partial breach of contract.
In 2014, Alabama Power and Georgia Power filed lawsuits against the U.S.
government for the costs of continuing to store spent nuclear fuel at Plants
Farley, Hatch, and Vogtle Units 1 and 2 for the period from January 1, 2011
through December 31, 2013. The damage period was subsequently extended to
December 31, 2014. On June 12, 2019, the Court of Federal Claims granted Alabama
Power's and Georgia Power's motion for summary judgment on damages not disputed
by the U.S. government, awarding those undisputed damages to Alabama Power and
Georgia Power. However, those undisputed damages are not collectible and no
amounts will be recognized in the financial statements until the court enters
final judgment on the remaining damages.
In 2017, Alabama Power and Georgia Power filed additional lawsuits against the
U.S. government in the Court of Federal Claims for the costs of continuing to
store spent nuclear fuel at Plants Farley, Hatch, and Vogtle Units 1 and 2 for
the period from January 1, 2015 through December 31, 2017. On August 13, 2020,
Alabama Power and Georgia Power filed amended complaints in each of the lawsuits
adding damages from January 1, 2018 to December 31, 2019 to the claim period.
The outstanding claims for the period January 1, 2011 through December 31, 2019
total $110 million and $132 million for Alabama Power and Georgia Power (based
on its ownership interests), respectively. Damages will continue to accumulate
until the issue is resolved, the U.S. government disposes of Alabama Power's and
Georgia Power's spent nuclear fuel pursuant to its contractual obligations, or
alternative storage is otherwise provided. No amounts have been recognized in
the financial statements as of December 31, 2020 for any potential recoveries
from the pending lawsuits.
The final outcome of these matters cannot be determined at this time. However,
Alabama Power and Georgia Power expect to credit any recoveries for the benefit
of customers in accordance with direction from their respective PSC; therefore,
no material impact on Southern Company's, Alabama Power's, or Georgia Power's
net income is expected.
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On-site dry spent fuel storage facilities are operational at all three plants
and can be expanded to accommodate spent fuel through the expected life of each
plant.
Nuclear Insurance
Under the Price-Anderson Amendments Act (Act), Alabama Power and Georgia Power
maintain agreements of indemnity with the NRC that, together with private
insurance, cover third-party liability arising from any nuclear incident
occurring at the companies' nuclear power plants. The Act provides funds up to
$13.8 billion for public liability claims that could arise from a single nuclear
incident. Each nuclear plant is insured against this liability to a maximum of
$450 million by American Nuclear Insurers (ANI), with the remaining coverage
provided by a mandatory program of deferred premiums that could be assessed,
after a nuclear incident, against all owners of commercial nuclear reactors. A
company could be assessed up to $138 million per incident for each licensed
reactor it operates but not more than an aggregate of $20 million per incident
to be paid in a calendar year for each reactor. Such maximum assessment,
excluding any applicable state premium taxes, for Alabama Power and Georgia
Power, based on its ownership and buyback interests in all licensed reactors, is
$275 million and $267 million, respectively, per incident, but not more than an
aggregate of $41 million and $40 million, respectively, to be paid for each
incident in any one year. Both the maximum assessment per reactor and the
maximum yearly assessment are adjusted for inflation at least every five years.
The next scheduled adjustment is due no later than November 1, 2023. See Note 5
under "Joint Ownership Agreements" for additional information on joint ownership
agreements.
Alabama Power and Georgia Power are members of Nuclear Electric Insurance
Limited (NEIL), a mutual insurer established to provide property damage
insurance in an amount up to $1.5 billion for members' operating nuclear
generating facilities. Additionally, both companies have NEIL policies that
currently provide decontamination, excess property insurance, and premature
decommissioning coverage up to $1.25 billion for nuclear losses and policies
providing coverage up to $750 million for non-nuclear losses in excess of the
$1.5 billion primary coverage.
NEIL also covers the additional costs that would be incurred in obtaining
replacement power during a prolonged accidental outage at a member's nuclear
plant. Members can purchase this coverage, subject to a deductible waiting
period of up to 26 weeks, with a maximum per occurrence per unit limit of $490
million. After the deductible period, weekly indemnity payments would be
received until either the unit is operational or until the limit is exhausted.
Alabama Power and Georgia Power each purchase limits based on the projected full
cost of replacement power, subject to ownership limitations, and have each
elected a 12-week deductible waiting period for each nuclear plant.
A builders' risk property insurance policy has been purchased from NEIL for the
construction of Plant Vogtle Units 3 and 4. This policy provides the Vogtle
Owners up to $2.75 billion for accidental property damage occurring during
construction.
Under each of the NEIL policies, members are subject to assessments each year if
losses exceed the accumulated funds available to the insurer. The maximum annual
assessments for Alabama Power and Georgia Power as of December 31, 2020 under
the NEIL policies would be $56 million and $84 million, respectively.
Claims resulting from terrorist acts and cyber events are covered under both the
ANI and NEIL policies (subject to normal policy limits). The maximum aggregate
that NEIL will pay for all claims resulting from terrorist acts and cyber events
in any 12-month period is $3.2 billion each, plus such additional amounts NEIL
can recover through reinsurance, indemnity, or other sources.
For all on-site property damage insurance policies for commercial nuclear power
plants, the NRC requires that the proceeds of such policies shall be dedicated
first for the sole purpose of placing the reactor in a safe and stable condition
after an accident. Any remaining proceeds are to be applied next toward the
costs of decontamination and debris removal operations ordered by the NRC, and
any further remaining proceeds are to be paid either to the applicable company
or to its debt trustees as may be appropriate under the policies and applicable
trust indentures. In the event of a loss, the amount of insurance available
might not be adequate to cover property damage and other expenses incurred.
Uninsured losses and other expenses, to the extent not recovered from customers,
would be borne by Alabama Power or Georgia Power, as applicable, and could have
a material effect on Southern Company's, Alabama Power's, and Georgia Power's
financial condition and results of operations.
All retrospective assessments, whether generated for liability, property, or
replacement power, may be subject to applicable state premium taxes.
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Other Matters
Southern Company
As discussed in Note 1 under "Leveraged Leases," a subsidiary of Southern
Holdings has four leveraged lease agreements, two domestic and two
international. The ability of the lessees to make required payments to the
Southern Holdings subsidiary is dependent on the operational performance of the
assets.
Since 2017, the financial and operational performance of one of the domestic
lessees and the associated generation assets raised significant concerns about
the short-term ability of the generation assets to produce cash flows sufficient
to support ongoing operations and the lessee's contractual obligations and its
ability to make the remaining semi-annual lease payments through the end of the
lease term in 2047. In addition, following the expiration of the existing power
offtake agreement in 2032, the lessee also is exposed to remarketing risk, which
encompasses the price and availability of alternative sources of generation.
In connection with the 2019 annual impairment analysis, Southern Company revised
the estimated cash flows to be received under the leveraged lease, which
resulted in an impairment charge of $17 million ($13 million after tax) recorded
in the fourth quarter 2019. During the second quarter 2020, Southern Company
received the latest annual forecasts of natural gas prices and considered the
significant decline in forecasted prices to be an indicator of potential
impairment that required an interim impairment assessment. Accordingly,
consistent with prior impairment analyses, Southern Company evaluated the
recoverability of the lease receivable and the expected residual value of the
generation assets under various natural gas price scenarios to estimate the cash
flows expected to be received from remarketing the generation assets following
the expiration of the existing PPA and the residual value of the generation
assets at the end of the lease. Based on the current forecasts of energy prices
in the years following the expiration of the existing PPA, Southern Company
concluded that it is no longer probable that any of the associated rental
payments will be received, because it is no longer probable the generation
assets will be successfully remarketed and continue to operate after that date.
During the second quarter 2020, Southern Company revised the estimated cash
flows to be received under the leveraged lease to reflect this conclusion, which
resulted in a full impairment of the lease investment and a pre-tax charge to
earnings of $154 million ($74 million after tax).
All required lease payments through December 31, 2020 have been paid in full. If
any future lease payments due prior to the expiration of the associated PPA are
not paid in full, the Southern Holdings subsidiary may be unable to make its
corresponding payment to the holders of the underlying non-recourse debt related
to the generation assets. Failure to make the required payment to the
debtholders could represent an event of default that would give the debtholders
the right to foreclose on, and take ownership of, the generation assets, in
effect terminating the lease. As the remaining amount of the lease investment
was charged against earnings in the second quarter 2020, termination would not
be expected to result in additional charges. Southern Company will continue to
monitor the operational performance of the underlying assets and evaluate the
ability of the lessee to continue to make the required lease payments and meet
its obligations associated with a future closure or retirement of the generation
assets and associated properties, including the dry ash landfill.
During the fourth quarter 2020, Southern Company management initiated steps to
sell the investment in its other domestic leveraged lease and reclassified the
investment as held for sale. In connection with the annual impairment analysis
of this investment, Southern Company management concluded that the estimated
residual value of the generation assets should be reduced due to significant
uncertainty as to whether the related natural gas generation assets will
continue to operate at the end of the lease term in 2040 and recorded the
resulting impairment charge. An additional charge was recorded to further reduce
the related investment in the leveraged lease to its estimated fair value, less
costs to sell. The pre-tax charges to earnings in the fourth quarter 2020
totaled $52 million ($31 million after tax). See Note 15 under "Assets Held for
Sale" for additional information.
The leveraged lease agreements for the two international projects include lessee
purchase options related to the leased assets, which consist of nine gas
distribution networks and two district heating systems in the Netherlands. The
lessee has communicated its intent to exercise the first purchase option in
2022. The purchase options for the remaining ten assets are exercisable on
various dates through 2028 with at least one year's notice. The exercise of
these purchase options is not expected to result in any gain or loss.
Mississippi Power
Kemper County Energy Facility
The Kemper County energy facility was designed to utilize IGCC technology with
an expected output capacity of 582 MWs and to be fueled by locally mined lignite
from a mine owned by Mississippi Power and situated adjacent to the Kemper
County energy facility. In 2012, the Mississippi PSC issued an order confirming
the CPCN originally approved by the Mississippi PSC in 2010 authorizing the
acquisition, construction, and operation of the Kemper County energy facility.
Mississippi Power placed the
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combined cycle and the associated common facilities portion of the Kemper County
energy facility in service in 2014 and dedicated them as Plant Ratcliffe in
2018.
In 2017, the Mississippi PSC issued an order directing Mississippi Power to
pursue a settlement under which the Kemper County energy facility would be
operated as a natural gas plant, rather than an IGCC plant, and address all
issues associated with the Kemper County energy facility. Following this order,
cost recovery of the gasifier portions was no longer probable and Mississippi
Power recorded significant charges to income in 2017.
In 2018, the Mississippi PSC approved a settlement agreement for the Kemper
County energy facility, which resolved all cost recovery issues, modified the
CPCN to limit the Kemper County energy facility to natural gas combined cycle
operation, and reduced retail customer rates by approximately $26.8 million
annually based on a revenue requirement that included no recovery for costs
associated with the gasifier portion of the Kemper County energy facility.
In 2018, 2019, and 2020, Mississippi Power recorded charges to income associated
with abandonment and related closure costs and ongoing period costs, net of
salvage proceeds, for the mine and gasifier-related assets at the Kemper County
energy facility. These charges, including related tax impacts, totaled
$37 million pre-tax ($68 million benefit after tax) in 2018, $24 million pre-tax
and after tax in 2019, and $4 million pre-tax ($3 million after tax) in 2020.
The pre-tax charges are included in other operations and maintenance expenses on
the statements of income.
Dismantlement of the abandoned gasifier-related assets and site restoration
activities are expected to be completed by 2026. Additional pre-tax period costs
associated with dismantlement and site restoration activities, including related
costs for compliance and safety, ARO accretion, and property taxes, net of
salvage, are estimated to total $10 million to $20 million annually through
2025.
The Mississippi Power Rate Case Settlement Agreement eliminated separate rates
associated with the Kemper County energy facility and included these costs in
rates for PEP, ECO Plan, and ad valorem taxes, as applicable, effective with the
revised rates in 2020. See Note 2 under "Mississippi Power - 2019 Base Rate
Case" for additional information.
Lignite Mine and CO2 Pipeline Facilities
Mississippi Power owns the lignite mine and equipment and mineral reserves
located around the Kemper County energy facility site. The mine started
commercial operation in 2013. In connection with the Kemper County energy
facility construction, Mississippi Power also constructed a pipeline for the
transport of captured CO2.
In 2010, Mississippi Power executed a management fee contract with Liberty Fuels
Company, LLC (Liberty Fuels), a wholly-owned subsidiary of The North American
Coal Corporation, which developed, constructed, and is responsible for the
mining operations through the end of the mine reclamation. As the mining permit
holder, Liberty Fuels has a legal obligation to perform mine reclamation and
Mississippi Power has a contractual obligation to fund all reclamation
activities. As a result of the abandonment of the Kemper IGCC, final mine
reclamation began in 2018 and was substantially completed in 2020, with
monitoring expected to continue through 2027. See Note 6 for additional
information.
In December 2019, Mississippi Power transferred ownership of the CO2 pipeline to
an unrelated gas pipeline company, with no resulting impact on income. In
conjunction with the transfer of the CO2 pipeline, the parties agreed to enter
into a 15-year firm transportation agreement, which became effective in December
2020, upon the conversion by the pipeline company of the CO2 pipeline to a
natural gas pipeline to be used for the delivery of natural gas to Plant
Ratcliffe. The agreement is treated as a finance lease for accounting purposes.
See Note 9 for additional information.
Government Grants
In 2010, the DOE, through a cooperative agreement with SCS, agreed to fund $270
million of the Kemper County energy facility through the grants awarded to the
project by the DOE under the Clean Coal Power Initiative Round 2. In 2016,
additional DOE grants in the amount of $137 million were awarded to the Kemper
County energy facility. In 2018, Mississippi Power filed with the DOE its
request for property closeout certification under the contract related to the
$387 million of total grants received. On September 3, 2020, Mississippi Power
and Southern Company executed an agreement with the DOE completing Mississippi
Power's request, which enabled Mississippi Power to proceed with full
dismantlement of the abandoned gasifier-related assets and site restoration
activities. The expected impact of the closeout agreement was accrued in 2019.
In connection with the DOE closeout discussions, in April 2019, the Civil
Division of the Department of Justice informed Southern Company and Mississippi
Power of an investigation related to the grants received. The ultimate outcome
of this matter cannot be determined at this time; however, it could have a
material impact on Southern Company's and Mississippi Power's financial
statements.
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Plant Daniel
In conjunction with Southern Company's sale of Gulf Power, NextEra Energy held
back $75 million of the purchase price pending Mississippi Power and Gulf Power
negotiating a mutually acceptable revised operating agreement for Plant Daniel.
In addition, Mississippi Power and Gulf Power agreed to seek a restructuring of
their 50% undivided ownership interests in Plant Daniel such that each of them
would, after the restructuring, own 100% of a generating unit. In January 2019,
Gulf Power provided notice to Mississippi Power that Gulf Power will retire its
share of the generating capacity of Plant Daniel on January 15, 2024.
Mississippi Power has the option to purchase Gulf Power's ownership interest for
$1 on January 15, 2024, provided that Mississippi Power exercises the option no
later than 120 days prior to that date. Mississippi Power is assessing the
potential operational and economic effects of Gulf Power's notice. On April 24,
2020, Mississippi Power and Gulf Power amended the terms of their agreement to
extend the deadline from May 1, 2020 to August 1, 2020 for Mississippi Power to
notify Gulf Power of which generating unit it has selected for 100% ownership.
The parties agreed not to select a specific unit by August 1, 2020 and are
continuing negotiations on a mutually acceptable revised operating agreement.
The impacts of operating the units on an individual basis continue to be
evaluated by Mississippi Power and any transfer of ownership would be subject to
approval by the FERC and the Mississippi PSC. The ultimate outcome of this
matter cannot be determined at this time. See Note 15 under "Southern Company"
for information regarding the sale of Gulf Power.
Southern Company Gas
PennEast Pipeline Project
In 2014, Southern Company Gas entered into a partnership in which it holds a 20%
ownership interest in the PennEast Pipeline, an interstate pipeline company
formed to develop and operate an approximate 118-mile natural gas pipeline
between New Jersey and Pennsylvania. The expected initial transportation
capacity of 1.0 Bcf per day is under long-term contracts, mainly with public
utilities and other market-serving entities, such as electric generation
companies, in New Jersey, Pennsylvania, and New York.
Expected project costs related to the PennEast Pipeline for Southern Company Gas
total approximately $300 million, excluding financing costs. In 2018, the
PennEast Pipeline received initial FERC approval. Work continues with state and
federal agencies to obtain the required permits to begin construction. On
February 20, 2020, the FERC approved a two-year extension for PennEast Pipeline
to complete the project by January 19, 2022.
On January 30, 2020, PennEast Pipeline filed an amendment with the FERC to
construct the pipeline project in two phases. The first phase would consist of
68 miles of pipe, constructed entirely within Pennsylvania, which is expected to
be completed in late 2022. The second phase would include the remaining route in
Pennsylvania and New Jersey and is targeted for completion in 2024. FERC
approval of the amended plan is required prior to beginning the first phase.
In September 2019, an appellate court ruled that the PennEast Pipeline does not
have federal eminent domain authority over lands in which a state has property
rights interests. On February 18, 2020, PennEast Pipeline filed a petition for a
writ of certiorari to seek U.S. Supreme Court review of the appellate court
decision, which the U.S. Supreme Court granted on February 3, 2021.
The ultimate outcome of these matters cannot be determined at this time;
however, any work delays, whether caused by judicial or regulatory action,
abnormal weather, or other conditions, may result in additional cost or schedule
modifications or, ultimately, in project cancellation, any of which could result
in impairment of Southern Company Gas' PennEast Pipeline investment and could
have a significant impact on Southern Company's financial statements and a
material impact on Southern Company Gas' financial statements. Southern Company
Gas evaluated its $91 million investment and determined there was no impairment
as of December 31, 2020.
See Note 7 under "Southern Company Gas" for additional information.
Natural Gas Storage Facility
In 2019, Southern Company Gas recorded a pre-tax impairment charge of $91
million ($69 million after-tax) related to Jefferson Island. On December 1,
2020, Southern Company Gas completed the sale of this facility. See Note 15
under "Southern Company Gas - Sale of Natural Gas Storage Facility" for
additional information.
Commitments
To supply a portion of the fuel requirements of the Southern Company system's
electric generating plants, the Southern Company system has entered into various
long-term commitments not recognized on the balance sheets for the procurement
and delivery of fossil fuel and, for Alabama Power and Georgia Power, nuclear
fuel. The majority of the Registrants' fuel expense for the periods presented
was purchased under long-term commitments. Each Registrant expects that a
substantial amount of its future fuel needs will continue to be purchased under
long-term commitments.
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Southern Company and Subsidiary Companies 2020 Annual Report
Georgia Power has commitments, in the form of capacity purchases, regarding a
portion of a 5% interest in the original cost of Plant Vogtle Units 1 and 2
owned by MEAG Power that are in effect until the later of the retirement of the
plant or the latest stated maturity date of MEAG Power's bonds issued to finance
such ownership interest. The payments for capacity are required whether or not
any capacity is available. Portions of the capacity payments made to MEAG Power
for its Plant Vogtle Units 1 and 2 investment relate to costs in excess of
Georgia Power's allowed investment for ratemaking purposes. The present value of
these portions at the time of the disallowance was written off. Generally, the
cost of such capacity is included in purchased power in Southern Company's
statements of income and in purchased power, non-affiliates in Georgia Power's
statements of income. Georgia Power's capacity payments related to this
commitment totaled $5 million, $6 million, and $8 million in 2020, 2019, and
2018, respectively. At December 31, 2020, Georgia Power's estimated long-term
obligations related to this commitment totaled $49 million, consisting of $5
million for 2021, $4 million for 2022, $3 million annually for 2023 through
2025, and $31 million thereafter.
See Note 9 for information regarding PPAs accounted for as leases.
Southern Company Gas has commitments for pipeline charges, storage capacity, and
gas supply, including charges recoverable through natural gas cost recovery
mechanisms or, alternatively, billed to marketers selling retail natural gas, as
well as demand charges associated with Southern Company Gas' wholesale gas
services. Gas supply commitments include amounts for gas commodity purchases
associated with Southern Company Gas' gas marketing services of 31 million mmBtu
at floating gas prices calculated using forward natural gas prices at
December 31, 2020 and valued at $72 million. Southern Company Gas provides
guarantees to certain gas suppliers for certain of its subsidiaries in support
of payment obligations. Southern Company Gas' expected future contractual
obligations for pipeline charges, storage capacity, and gas supply that are not
recognized on the balance sheets at December 31, 2020 were as follows:
Pipeline Charges, Storage Capacity, and Gas Supply
(in millions)
2021 $ 719
2022 529
2023 441
2024 311
2025 285
Thereafter 1,035
Total $ 3,320
As a 50% equity investor in SNG, Southern Company Gas is required to make
additional capital contributions as necessary pursuant to the terms of its
operating agreement with SNG. SNG has $300 million of debt maturing in June 2021
that it anticipates refinancing. If SNG is unable to refinance or otherwise
satisfy this debt obligation, Southern Company Gas has committed to fund up to
$150 million as a contingent capital contribution. See Note 7 under "Southern
Company Gas" for additional information.
Guarantees
SCS may enter into various types of wholesale energy and natural gas contracts
acting as an agent for the traditional electric operating companies and Southern
Power. Under these agreements, each of the traditional electric operating
companies and Southern Power may be jointly and severally liable. Accordingly,
Southern Company has entered into keep-well agreements with each of the
traditional electric operating companies to ensure they will not subsidize or be
responsible for any costs, losses, liabilities, or damages resulting from the
inclusion of Southern Power as a contracting party under these agreements.
Alabama Power has guaranteed a $100 million principal amount long-term bank loan
entered into by SEGCO in 2018. Georgia Power has agreed to reimburse Alabama
Power for the portion of such obligation corresponding to Georgia Power's
proportionate ownership of SEGCO's stock if Alabama Power is called upon to make
such payment under its guarantee. At December 31, 2020, the capitalization of
SEGCO consisted of $85 million of equity and $100 million of long-term debt that
matures in November 2021, on which the annual interest requirement is derived
from a variable rate index. In addition, SEGCO had short-term debt outstanding
of $25 million. See Note 7 under "SEGCO" for additional information.
As discussed in Note 9, Alabama Power and Georgia Power have entered into
certain residual value guarantees related to railcar leases.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
4. REVENUE FROM CONTRACTS WITH CUSTOMERS
The Registrants generate revenues from a variety of sources, some of which are
not accounted for as revenue from contracts with customers, such as leases,
derivatives, and certain cost recovery mechanisms. See Note 1 under "Revenues"
for additional information on the revenue policies of the Registrants. See Notes
9 and 14 for additional information on revenue accounted for under lease and
derivative accounting guidance, respectively.
The following table disaggregates revenue from contracts with customers for the
periods presented:
Southern Southern
Company Alabama Power Georgia Power Mississippi Power Southern Power Company Gas
(in millions)
2020
Operating revenues
Retail electric revenues
Residential $ 6,113 $ 2,377 $ 3,476 $ 260 $ - $ -
Commercial 4,699 1,512 2,933 254 - -
Industrial 2,775 1,293 1,197 285 - -
Other 90 21 60 9 - -
Total retail electric revenues 13,677 5,203 7,666 808 - -
Natural gas distribution revenues
Residential 1,338 - - - - 1,338
Commercial 340 - - - - 340
Transportation 971 - - - - 971
Industrial 30 - - - - 30
Other 209 - - - - 209
Total natural gas distribution revenues 2,888 - - - - 2,888
Wholesale electric revenues
PPA energy revenues 735 133 42 9 570 -
PPA capacity revenues 454 108 50 3 296 -
Non-PPA revenues 210 43 10 311 239 -
Total wholesale electric revenues 1,399 284 102 323 1,105 -
Other natural gas revenues
Wholesale gas services 1,727 - - - - 1,727
Gas marketing services 391 - - - - 391
Other natural gas revenues 33 - - - - 33
Total natural gas revenues 2,151 - - - - 2,151
Other revenues 982 159 447 26 14 -
Total revenue from contracts with
customers 21,097 5,646 8,215 1,157 1,119 5,039
Other revenue sources(a) 3,764 184 94 15 614 2,881
Other adjustments(b) (4,486) - - - - (4,486)
Total operating revenues $ 20,375 $ 5,830 $ 8,309 $ 1,172 $ 1,733 $ 3,434
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report
Southern Southern
Company Alabama Power Georgia Power Mississippi Power Southern Power Company Gas
(in millions)
2019
Operating revenues
Retail electric revenues
Residential $ 6,164 $ 2,509 $ 3,377 $ 278 $ - $ -
Commercial 5,065 1,677 3,097 291 - -
Industrial 3,126 1,460 1,360 306 - -
Other 90 25 54 11 - -
Total retail electric revenues 14,445 5,671 7,888 886 - -
Natural gas distribution revenues
Residential 1,413 - - - - 1,413
Commercial 389 - - - - 389
Transportation 907 - - - - 907
Industrial 35 - - - - 35
Other 245 - - - - 245
Total natural gas distribution revenues 2,989 - - - - 2,989
Wholesale electric revenues
PPA energy revenues 833 145 60 11 648 -
PPA capacity revenues 453 102 54 3 322 -
Non-PPA revenues 232 81 9 352 238 -
Total wholesale electric revenues 1,518 328 123 366 1,208 -
Other natural gas revenues
Gas pipeline investments 32 - - - - 32
Wholesale gas services 2,095 - - - - 2,095
Gas marketing services 440 - - - - 440
Other natural gas revenues 42 - - - - 42
Total other natural gas revenues 2,609 - - - - 2,609
Other revenues 1,035 153 407 19 12 -
Total revenue from contracts with
customers 22,596 6,152 8,418 1,271 1,220 5,598
Other revenue sources(a) 4,266 (27) (10) (7) 718 3,637
Other adjustments(b) (5,443) - - - - (5,443)
Total operating revenues $ 21,419 $ 6,125 $ 8,408 $ 1,264 $ 1,938 $ 3,792
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report
Southern Southern
Company Alabama Power Georgia Power Mississippi Power Southern Power Company Gas
(in millions)
2018
Operating revenues
Retail electric revenues
Residential $ 6,586 $ 2,285 $ 3,295 $ 277 $ - $ -
Commercial 5,255 1,541 3,025 290 - -
Industrial 3,152 1,364 1,321 326 - -
Other 94 25 56 9 - -
Total retail electric revenues 15,087 5,215 7,697 902 - -
Natural gas distribution revenues
Residential 1,525 - - - - 1,525
Commercial 436 - - - - 436
Transportation 944 - - - - 944
Industrial 40 - - - - 40
Other 230 - - - - 230
Total natural gas distribution revenues 3,175 - - - - 3,175
Wholesale electric revenues
PPA energy revenues 950 158 81 15 727 -
PPA capacity revenues 498 101 53 6 394 -
Non-PPA revenues 263 119 24 329 230 -
Total wholesale electric revenues 1,711 378 158 350 1,351 -
Other natural gas revenues
Gas pipeline investments 32 - - - - 32
Wholesale gas services 3,083 - - - - 3,083
Gas marketing services 571 - - - - 571
Other natural gas revenues 53 - - - - 53
Total other natural gas revenues 3,739 - - - - 3,739
Other revenues 1,529 210 236 22 13 -
Total revenue from contracts with
customers 25,241 5,803 8,091 1,274 1,364 6,914
Other revenue sources(a) 5,108 229 329 (9) 841 3,849
Other adjustments(b) (6,854) - - - - (6,854)
Total operating revenues $ 23,495 $ 6,032 $ 8,420 $ 1,265 $ 2,205 $ 3,909
(a)Other revenue sources relate to revenues from customers accounted for as
derivatives and leases, alternative revenue programs at Southern Company Gas,
and cost recovery mechanisms and revenues that meet other scope exceptions for
revenues from contracts with customers at the traditional electric operating
companies.
(b)Other adjustments relate to the cost of Southern Company Gas' energy and risk
management activities. Wholesale gas services revenues are presented net of the
related costs of those activities on the statement of income. See Note 16 under
"Southern Company Gas" for additional information on the components of wholesale
gas services' operating revenues.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report Contract Balances The following table reflects the closing balances of receivables, contract assets, and contract liabilities related to revenues from contracts with customers at December 31, 2020 and 2019:
Southern Southern
Company Alabama Power Georgia Power Mississippi Power Southern Power Company Gas
(in millions)
Accounts Receivables
As of December 31, 2020 $ 2,614 $ 632 $ 806 $ 77 $ 112 $ 788
As of December 31, 2019 2,413 586 688 79 97 749
Contract Assets
As of December 31, 2020 $ 158 $ 2 $ 71 $ - $ - $ -
As of December 31, 2019 117 - 69 - - -
Contract Liabilities
As of December 31, 2020 $ 61 $ 6 $ 27 $ 1 $ 1 $ 1
As of December 31, 2019 52 10 13 - 1 1
As of December 31, 2020 and 2019, Georgia Power had contract assets primarily
related to unregulated service agreements, where payment is contingent on
project completion, and fixed retail customer bill programs, where the payment
is contingent upon Georgia Power's continued performance and the customer's
continued participation in the program over a one-year contract term. Contract
liabilities for Georgia Power relate to cash collections recognized in advance
of revenue for certain unregulated service agreements. Alabama Power had
contract liabilities for outstanding performance obligations primarily related
to pole attachment and extended service agreements. Southern Company's
unregulated distributed generation business had contract assets of $81 million
and $40 million at December 31, 2020 and 2019, respectively, and contract
liabilities of $27 million and $28 million at December 31, 2020 and 2019,
respectively, for outstanding performance obligations.
The following table reflects revenue from contracts with customers recognized in
2020 and 2019 included in the contract liability at December 31, 2019 and
December 31, 2018, respectively, for the applicable Registrants:
Southern Company
Southern Company Alabama Power Georgia Power Southern Power Gas
(in millions)
Revenue Recognized
2020 $ 33 $ 10 $ 8 $ 1 $ 1
2019 30 11 6 11 2
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Southern Company and Subsidiary Companies 2020 Annual Report
Remaining Performance Obligations
The traditional electric operating companies and Southern Power have long-term
contracts with customers in which revenues are recognized as performance
obligations are satisfied over the contract term. These contracts primarily
relate to PPAs whereby the traditional electric operating companies and Southern
Power provide electricity and generation capacity to a customer. The revenue
recognized for the delivery of electricity is variable; however, certain PPAs
include a fixed payment for fixed generation capacity over the term of the
contract. Southern Company's unregulated distributed generation business also
has partially satisfied performance obligations related to certain fixed price
contracts. Revenues from contracts with customers related to these performance
obligations remaining at December 31, 2020 are expected to be recognized as
follows:
2021 2022 2023 2024 2025 Thereafter
(in millions)
Southern Company $ 547 $ 395 $ 338 $ 326 $ 306 $ 2,634
Alabama Power 33 31 24 7 5 -
Georgia Power 75 46 35 24 21 42
Southern Power 285 287 280 296 280 2,610
Revenue expected to be recognized for performance obligations remaining at
December 31, 2020 was immaterial for Mississippi Power.
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is stated at original cost or fair value at
acquisition, as appropriate, less any regulatory disallowances and impairments.
Original cost may include: materials; labor; minor items of property;
appropriate administrative and general costs; payroll-related costs such as
taxes, pensions, and other benefits; and the interest capitalized and/or cost of
equity funds used during construction.
The Registrants' property, plant, and equipment in service consisted of the
following at December 31, 2020 and 2019:
Southern Southern Southern
At December 31, 2020: Company Alabama Power Georgia Power Mississippi Power Power Company Gas
(in millions)
Electric utilities:
Generation $ 52,179 $ 16,201 $ 18,675 $ 2,819 $ 13,872 $ -
Transmission 12,879 5,033 6,951 856 - -
Distribution 20,958 8,248 11,622 1,088 - -
General/other 5,072 2,334 2,434 248 32 -
Electric utilities' plant in service 91,088 31,816 39,682 5,011 13,904 -
Southern Company Gas:
Natural gas distribution utilities
transportation and distribution 14,610 - - - - 14,610
Storage facilities 1,752 - - - - 1,752
Other 1,249 - - - - 1,249
Southern Company Gas plant in service 17,611 - - - - 17,611
Other plant in service 1,817 - - - - -
Total plant in service $ 110,516 $ 31,816 $ 39,682 $ 5,011 $ 13,904 $ 17,611
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Southern Southern Southern
At December 31, 2019: Company Alabama Power Georgia Power Mississippi Power Power Company Gas
(in millions)
Electric utilities:
Generation $ 50,329 $ 15,329 $ 18,341 $ 2,786 $ 13,241 $ -
Transmission 12,157 4,719 6,590 808 - -
Distribution 19,846 7,798 11,024 1,024 - -
General/other 4,650 2,177 2,182 239 29 -
Electric utilities' plant in service 86,982 30,023 38,137 4,857 13,270 -
Southern Company Gas:
Natural gas distribution utilities
transportation and distribution 13,518 - - - - 13,518
Storage facilities 1,634 - - - - 1,634
Other 1,192 - - - - 1,192
Southern Company Gas plant in service 16,344 - - - - 16,344
Other plant in service 1,788 - - - - -
Total plant in service $ 105,114 $ 30,023 $ 38,137 $ 4,857 $ 13,270 $ 16,344
The cost of replacements of property, exclusive of minor items of property, is
capitalized. The cost of maintenance, repairs, and replacement of minor items of
property is charged to other operations and maintenance expenses as incurred or
performed with the exception of nuclear refueling costs and certain maintenance
costs including those described below.
In accordance with orders from their respective state PSCs, Alabama Power and
Georgia Power defer nuclear refueling outage operations and maintenance expenses
to a regulatory asset when the charges are incurred. Alabama Power amortizes the
costs over a subsequent 18-month period with Plant Farley's fall outage cost
amortization beginning in January of the following year and spring outage cost
amortization beginning in July of the same year. Georgia Power amortizes its
costs over each unit's operating cycle, or 18 months for Plant Vogtle Units 1
and 2 and 24 months for Plant Hatch Units 1 and 2. Georgia Power's amortization
period begins the month the refueling outage starts.
A portion of Mississippi Power's railway track maintenance costs is charged to
fuel stock and recovered through Mississippi Power's fuel clause.
The portion of Southern Company Gas' non-working gas used to maintain the
structural integrity of natural gas storage facilities that is considered to be
non-recoverable is depreciated, while the recoverable or retained portion is not
depreciated.
See Note 9 for information on finance lease right-of-use (ROU) assets, net,
which are included in property, plant, and equipment.
The Registrants have deferred certain implementation costs related to cloud
hosting arrangements. Once a hosted software is placed into service, the related
deferred costs are amortized on a straight-line basis over the remaining
expected hosting arrangement term, including any renewal options that are
reasonably certain of exercise. The amortization is reflected with the
associated cloud hosting fees, which are generally reflected in other operations
and maintenance expenses on the Registrants' statements of income. At
December 31, 2020, deferred cloud implementation costs, which are generally
included in other deferred charges and assets on the Registrants' balance
sheets, are as follows:
Southern Southern
Company Alabama Power Georgia Power Mississippi Power Southern Power Company Gas
(in millions)
At December 31, 2020:
Deferred cloud implementation costs $ 162 $ 38 $ 58 $ 7 $ 9 $ 17
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report Depreciation and Amortization The traditional electric operating companies' and Southern Company Gas' depreciation of the original cost of utility plant in service is provided primarily by using composite straight-line rates. The approximate rates for 2020, 2019, and 2018 are as follows:
2020 2019 2018
Alabama Power 2.6 % 3.1 % 3.0 %
Georgia Power 3.0 % 2.6 % 2.6 %
Mississippi Power 3.7 % 3.7 % 4.2 %
Southern Company Gas 2.8 % 2.9 % 2.9 %
Depreciation studies are conducted periodically to update the composite rates.
These studies are filed with the respective state PSC and/or other applicable
state and federal regulatory agencies for the traditional electric operating
companies and the natural gas distribution utilities. During 2020, Georgia
Power, Mississippi Power, and Atlanta Gas Light revised their depreciation rates
in accordance with base rate case approvals by their respective PSCs. The
revised rates were effective January 1, 2020 for Georgia Power and Atlanta Gas
Light and April 1, 2020 for Mississippi Power. See Note 2 for additional
information.
When property, plant, and equipment subject to composite depreciation is retired
or otherwise disposed of in the normal course of business, its original cost,
together with the cost of removal, less salvage, is charged to accumulated
depreciation. For other property dispositions, the applicable cost and
accumulated depreciation are removed from the balance sheet accounts, and a gain
or loss is recognized. Minor items of property included in the original cost of
the asset are retired when the related property unit is retired.
At December 31, 2020 and 2019, accumulated depreciation for Southern Company and
Southern Company Gas consisted of utility plant in service totaling $31.6
billion and $30.0 billion, respectively, for Southern Company and $4.6 billion
and $4.5 billion, respectively, for Southern Company Gas, as well as other plant
in service totaling $817 million and $732 million, respectively, for Southern
Company and $195 million and $155 million, respectively, for Southern Company
Gas. Other plant in service includes the non-utility assets of Southern Company
Gas, as well as, for Southern Company, certain other non-utility subsidiaries.
Depreciation of the original cost of other plant in service is provided
primarily on a straight-line basis over estimated useful lives. Useful lives for
Southern Company Gas's non-utility assets range from five to 12 years for
transportation equipment, 30 to 75 years for storage facilities, and up to 75
years for other assets. Useful lives for the assets of Southern Company's other
non-utility subsidiaries range up to 37 years.
Southern Power
Southern Power applies component depreciation, where depreciation is computed
principally by the straight-line method over the estimated useful life of the
asset. Certain of Southern Power's generation assets related to natural
gas-fired facilities are depreciated on a units-of-production basis, using hours
or starts, to better match outage and maintenance costs to the usage of, and
revenues from, these assets. The primary assets in Southern Power's property,
plant, and equipment are generating facilities, which generally have estimated
useful lives as follows:
Southern Power Generating Facility Useful life
Natural gas Up to 50 years(*)
Solar Up to 35 years
Wind Up to 30 years
(*)Effective January 1, 2020, Southern Power revised the depreciable lives of
its natural gas generating facilities from up to 45 years to up to 50 years.
This revision resulted in an immaterial decrease in depreciation for 2020.
When Southern Power's depreciable property, plant, and equipment is retired, or
otherwise disposed of in the normal course of business, the applicable cost and
accumulated depreciation is removed and a gain or loss is recognized in the
statements of income. Southern Power reviews its estimated useful lives and
salvage values on an ongoing basis. The results of these reviews could result in
changes which could have a material impact on Southern Power's net income.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
Joint Ownership Agreements
At December 31, 2020, the Registrants' percentage ownership and investment
(exclusive of nuclear fuel) in jointly-owned facilities in commercial operation
were as follows:
Percent Accumulated
Facility (Type) Ownership Plant in Service Depreciation CWIP
(in millions)
Alabama Power
Greene County (natural gas) Units
1 and 2 60.0 % (a) $ 189 $ 76 $ 2
Plant Miller (coal) Units 1 and 2 91.8 (b) 2,107 650 24
Georgia Power
Plant Hatch (nuclear) 50.1 % (c) $ 1,352 $ 624 $ 37
Plant Vogtle (nuclear) Units 1 and
2 45.7 (c) 3,592 2,221 55
Plant Scherer (coal) Units 1 and 2 8.4 (c) 279 98 1
Plant Scherer (coal) Unit 3 75.0 (c) 1,320 520 4
Plant Wansley (coal) 53.5 (c) 1,068 418 10
Rocky Mountain (pumped storage) 25.4 (d) 183 144 1
Mississippi Power
Greene County (natural gas) Units
1 and 2 40.0 % (a) $ 122 $ 54 $ 1
Plant Daniel (coal) Units 1 and 2 50.0 (e) 775 238 15
Southern Company Gas
Dalton Pipeline (natural gas
pipeline) 50.0 % (f) $ 271 $ 15 $ -
(a)Jointly owned by Alabama Power and Mississippi Power and operated and
maintained by Alabama Power.
(b)Jointly owned with PowerSouth and operated and maintained by Alabama Power.
(c)Georgia Power owns undivided interests in Plants Hatch, Vogtle Units 1 and 2,
Scherer, and Wansley in varying amounts jointly with one or more of the
following entities: OPC, MEAG Power, Dalton, Florida Power & Light Company, JEA,
and Gulf Power. Georgia Power has been contracted to operate and maintain the
plants as agent for the co-owners and is jointly and severally liable for third
party claims related to these plants.
(d)Jointly owned with OPC, which is the operator of the plant.
(e)Jointly owned by Gulf Power and Mississippi Power. In accordance with the
operating agreement, Mississippi Power acts as Gulf Power's agent with respect
to the operation and maintenance of these units. See Note 3 under "Other Matters
- Mississippi Power - Plant Daniel" for information regarding a commitment
between Mississippi Power and Gulf Power to seek a restructuring of their 50%
undivided ownership interests in Plant Daniel.
(f)Jointly owned with The Williams Companies, Inc., the Dalton Pipeline is a
115-mile natural gas pipeline that serves as an extension of the
Transcontinental Gas Pipe Line Company, LLC pipeline system into northwest
Georgia. Southern Company Gas leases its 50% undivided ownership for
approximately $26 million annually through 2042. The lessee is responsible for
maintaining the pipeline during the lease term and for providing service to
transportation customers under its FERC-regulated tariff.
Georgia Power also owns 45.7% of Plant Vogtle Units 3 and 4, which are currently
under construction and had a CWIP balance of $7.3 billion at December 31, 2020,
excluding estimated probable losses recorded in 2018 and 2020. See Note 2 under
"Georgia Power - Nuclear Construction" for additional information.
The Registrants' proportionate share of their jointly-owned facility operating
expenses is included in the corresponding operating expenses in the statements
of income and each Registrant is responsible for providing its own financing.
Assets Subject to Lien
In 2018, the Mississippi PSC approved executed agreements between Mississippi
Power and its largest retail customer, Chevron Products Company (Chevron), for
Mississippi Power to continue providing retail service to the Chevron refinery
in Pascagoula, Mississippi through 2038. The agreements grant Chevron a security
interest in the co-generation assets owned by Mississippi Power, with a lease
receivable balance of $138 million at December 31, 2020, located at the refinery
that is exercisable upon the occurrence of (i) certain bankruptcy events or (ii)
other events of default coupled with specific reductions in steam output at the
facility and a downgrade of Mississippi Power's credit rating to below
investment grade by two of the three rating agencies.
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Southern Company and Subsidiary Companies 2020 Annual Report
See Note 8 under "Long-term Debt" for information regarding debt secured by
certain assets of Georgia Power, Mississippi Power, and Southern Company Gas.
6. ASSET RETIREMENT OBLIGATIONS
AROs are computed as the present value of the estimated costs for an asset's
future retirement and are recorded in the period in which the liability is
incurred. The estimated costs are capitalized as part of the related long-lived
asset and depreciated over the asset's useful life. In the absence of quoted
market prices, AROs are estimated using present value techniques in which
estimates of future cash outlays associated with the asset retirements are
discounted using a credit-adjusted risk-free rate. Estimates of the timing and
amounts of future cash outlays are based on projections of when and how the
assets will be retired and the cost of future removal activities. Each
traditional electric operating company and natural gas distribution utility has
received accounting guidance from its state PSC or applicable state regulatory
agency allowing the continued accrual or recovery of other retirement costs for
long-lived assets that it does not have a legal obligation to retire.
Accordingly, the accumulated removal costs for these obligations are reflected
in the balance sheets as regulatory liabilities and amounts to be recovered are
reflected in the balance sheets as regulatory assets.
The ARO liabilities for the traditional electric operating companies primarily
relate to facilities that are subject to the CCR Rule and the related state
rules, principally ash ponds. In addition, Alabama Power and Georgia Power have
retirement obligations related to the decommissioning of nuclear facilities
(Alabama Power's Plant Farley and Georgia Power's ownership interests in Plant
Hatch and Plant Vogtle Units 1 and 2). See "Nuclear Decommissioning" herein for
additional information. Other significant AROs include various landfill sites
and asbestos removal for Alabama Power, Georgia Power, and Mississippi Power and
gypsum cells and mine reclamation for Mississippi Power. The ARO liability for
Southern Power primarily relates to its solar and wind facilities, which are
located on long-term land leases requiring the restoration of land at the end of
the lease.
The traditional electric operating companies and Southern Company Gas also have
identified other retirement obligations, such as obligations related to certain
electric transmission and distribution facilities, certain asbestos-containing
material within long-term assets not subject to ongoing repair and maintenance
activities, certain wireless communication towers, the disposal of
polychlorinated biphenyls in certain transformers, leasehold improvements,
equipment on customer property, and property associated with the Southern
Company system's rail lines and natural gas pipelines. However, liabilities for
the removal of these assets have not been recorded because the settlement timing
for certain retirement obligations related to these assets is indeterminable
and, therefore, the fair value of the retirement obligations cannot be
reasonably estimated. A liability for these retirement obligations will be
recognized when sufficient information becomes available to support a reasonable
estimation of the ARO.
Southern Company and the traditional electric operating companies will continue
to recognize in their respective statements of income allowed removal costs in
accordance with regulatory treatment. Any differences between costs recognized
in accordance with accounting standards related to asset retirement and
environmental obligations and those reflected in rates are recognized as either
a regulatory asset or liability in the balance sheets as ordered by the various
state PSCs.
Details of the AROs included in the balance sheets are as follows:
Southern
Company Alabama Power Georgia Power Mississippi Power Southern Power(*)
(in millions)
Balance at December 31, 2018 $ 9,394 $ 3,210 $ 5,829 $ 160 $ 84
Liabilities incurred 37 - 35 1 1
Liabilities settled (328) (127) (151) (35) -
Accretion 402 145 243 7 4
Cash flow revisions 281 312 (172) 57 -
Balance at December 31, 2019 $ 9,786 $ 3,540 $ 5,784 $ 190 $ 89
Liabilities incurred 19 - 10 - 9
Liabilities settled (442) (219) (185) (22) -
Accretion 409 152 238 8 4
Cash flow revisions 912 501 418 - (7)
Balance at December 31, 2020 $ 10,684 $ 3,974 $ 6,265 $ 176 $ 95
(*)Included in other deferred credits and liabilities on Southern Power's consolidated balance sheets.
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During 2019, Alabama Power recorded increases totaling approximately $312
million to its AROs primarily related to the CCR Rule and the related state rule
based on management's completion of closure designs during the second and third
quarters 2019 under the planned closure-in-place methodology for all but one of
its ash pond facilities. During 2019, Mississippi Power recorded an increase of
approximately $57 million to its AROs related to the CCR Rule, primarily
associated with the ash pond facility at Plant Greene County, which is jointly
owned with Alabama Power. During 2020, Alabama Power recorded increases totaling
approximately $501 million to its AROs related to the CCR Rule and the related
state rule primarily as a result of management's completion of the closure
design for the remaining ash pond and the addition of a water treatment system
to the design of another ash pond. The additional estimated costs to close these
ash ponds under the planned closure-in-place methodology primarily relate to
inputs from contractor bids, design revisions, and changes in the expected
volume of ash handling.
During the second half of 2019, Georgia Power completed an assessment of its
plans to close the ash ponds at all of its generating plants in compliance with
the CCR Rule and the related state rule. Cost estimates were revised to reflect
further refined costs for closure plans and updates to the timing of future cash
outlays. As a result, in December 2019, Georgia Power recorded a decrease of
approximately $174 million to its AROs related to the CCR Rule and the related
state rule. During the third quarter 2020, Georgia Power further refined the
related cost estimates, including updates to long-term post-closure care
requirements, market pricing, and timing of future cash outlays. As a result, in
September 2020, Georgia Power recorded an increase of approximately $411 million
to its AROs related to the CCR Rule and the related state rule.
The cost estimates for AROs related to the disposal of CCR are based on
information at December 31, 2020 using various assumptions related to closure
and post-closure costs, timing of future cash outlays, inflation and discount
rates, and the potential methods for complying with the CCR Rule and the related
state rules. The traditional electric operating companies have periodically
updated, and expect to continue periodically updating, their related cost
estimates and ARO liabilities for each CCR unit as additional information
related to these assumptions becomes available. Some of these updates have been,
and future updates may be, material. Additionally, the closure designs and plans
in the States of Alabama and Georgia are subject to approval by environmental
regulatory agencies. Absent continued recovery of ARO costs through regulated
rates, results of operations, cash flows, and financial condition for Southern
Company and the traditional electric operating companies could be materially
impacted. See Note 2 under "Georgia Power - Rate Plans" for additional
information. The ultimate outcome of these matters cannot be determined at this
time.
Nuclear Decommissioning
The NRC requires licensees of commercial nuclear power reactors to establish a
plan for providing reasonable assurance of funds for future decommissioning.
Alabama Power and Georgia Power have external trust funds (Funds) to comply with
the NRC's regulations. Use of the Funds is restricted to nuclear decommissioning
activities. The Funds are managed and invested in accordance with applicable
requirements of various regulatory bodies, including the NRC, the FERC, and
state PSCs, as well as the IRS. While Alabama Power and Georgia Power are
allowed to prescribe an overall investment policy to the Funds' managers,
neither Southern Company nor its subsidiaries or affiliates are allowed to
engage in the day-to-day management of the Funds or to mandate individual
investment decisions. Day-to-day management of the investments in the Funds is
delegated to unrelated third-party managers with oversight by the management of
Alabama Power and Georgia Power. The Funds' managers are authorized, within
certain investment guidelines, to actively buy and sell securities at their own
discretion in order to maximize the return on the Funds' investments. The Funds
are invested in a tax-efficient manner in a diversified mix of equity and fixed
income securities and are reported as trading securities.
Alabama Power and Georgia Power record the investment securities held in the
Funds at fair value, as disclosed in Note 13, as management believes that fair
value best represents the nature of the Funds. Gains and losses, whether
realized or unrealized, are recorded in the regulatory liability for AROs in the
balance sheets and are not included in net income or OCI. Fair value adjustments
and realized gains and losses are determined on a specific identification basis.
The Funds at Georgia Power participate in a securities lending program through
the managers of the Funds. Under this program, Georgia Power's Funds' investment
securities are loaned to institutional investors for a fee. Securities loaned
are fully collateralized by cash, letters of credit, and/or securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities. At
December 31, 2020 and 2019, approximately $44 million and $28 million,
respectively, of the fair market value of Georgia Power's Funds' securities were
on loan and pledged to creditors under the Funds' managers' securities lending
program. The fair value of the collateral received was approximately $45 million
and $29 million at December 31, 2020 and 2019, respectively, and can only be
sold by the borrower upon the return of the loaned securities. The collateral
received is treated as a non-cash item in the statements of cash flows.
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Investment securities in the Funds for December 31, 2020 and 2019 were as
follows:
Alabama Georgia
Southern Company Power Power
(in millions)
At December 31, 2020:
Equity securities $ 1,339 $ 842 $ 497
Debt securities 851 231 620
Other securities 111 83 28
Total investment securities in the Funds $ 2,301 $ 1,156 $ 1,145
At December 31, 2019:
Equity securities $ 1,159 $ 743 $ 416
Debt securities 798 218 580
Other securities 77 60 17
Total investment securities in the Funds $ 2,034 $ 1,021 $ 1,013
These amounts exclude receivables related to investment income and pending
investment sales and payables related to pending investment purchases. For
Southern Company and Georgia Power, these amounts include Georgia Power's
investment securities pledged to creditors and collateral received and excludes
payables related to Georgia Power's securities lending program.
The fair value increases (decreases) of the Funds, including unrealized gains
(losses) and reinvested interest and dividends and excluding the Funds'
expenses, for 2020, 2019, and 2018 are shown in the table below.
Alabama Georgia
Southern Company Power Power
(in millions)
Fair value increases (decreases)
2020 $ 280 $ 142 $ 138
2019 344 194 150
2018 (67) (38) (29)
Unrealized gains (losses)
At December 31, 2020 $ 220 $ 121 $ 99
At December 31, 2019 259 149 110
At December 31, 2018 (183) (96) (87)
The investment securities held in the Funds continue to be managed with a
long-term focus. Accordingly, all purchases and sales within the Funds are
presented separately in the statements of cash flows as investing cash flows,
consistent with the nature of the securities and purpose for which the
securities were acquired.
For Alabama Power, approximately $15 million and $16 million at December 31,
2020 and 2019, respectively, previously recorded in internal reserves is being
transferred into the Funds through 2040 as approved by the Alabama PSC. The
NRC's minimum external funding requirements are based on a generic estimate of
the cost to decommission only the radioactive portions of a nuclear unit based
on the size and type of reactor. Alabama Power and Georgia Power have filed
plans with the NRC designed to ensure that, over time, the deposits and earnings
of the Funds will provide the minimum funding amounts prescribed by the NRC.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report At December 31, 2020 and 2019, the accumulated provisions for the external decommissioning trust funds were as follows:
2020 2019
(in millions)
Alabama Power
Plant Farley $ 1,156 $ 1,021
Georgia Power
Plant Hatch $ 716 $ 634
Plant Vogtle Units 1 and 2 429 379
Total $ 1,145 $ 1,013
Site study cost is the estimate to decommission a specific facility as of the
site study year. The decommissioning cost estimates are based on prompt
dismantlement and removal of the plant from service. The actual decommissioning
costs may vary from these estimates because of changes in the assumed date of
decommissioning, changes in NRC requirements, or changes in the assumptions used
in making these estimates. The estimated costs of decommissioning at
December 31, 2020 based on the most current studies, which were each performed
in 2018, were as follows:
Plant Plant Plant Vogtle
Farley Hatch(*) Units 1 and 2(*)
Decommissioning periods:
Beginning year 2037 2034 2047
Completion year 2076 2075 2079
(in millions)
Site study costs:
Radiated structures $ 1,234 $ 734 $ 601
Spent fuel management 387 172 162
Non-radiated structures 99 56 79
Total site study costs $ 1,720 $ 962 $ 842
(*)Based on Georgia Power's ownership interests.
For ratemaking purposes, Alabama Power's decommissioning costs are based on the
site study and Georgia Power's decommissioning costs are based on the NRC
generic estimate to decommission the radioactive portion of the facilities and
the site study estimate for spent fuel management as of 2018. Significant
assumptions used to determine these costs for ratemaking were an estimated
inflation rate of 4.5% and 2.75% for Alabama Power and Georgia Power,
respectively, and an estimated trust earnings rate of 7.0% and 4.75% for Alabama
Power and Georgia Power, respectively.
Amounts previously contributed to the Funds for Plant Farley are currently
projected to be adequate to meet the decommissioning obligations. Alabama Power
will continue to provide site-specific estimates of the decommissioning costs
and related projections of funds in the external trust to the Alabama PSC and,
if necessary, would seek the Alabama PSC's approval to address any changes in a
manner consistent with NRC and other applicable requirements.
Effective January 1, 2020, in connection with the 2019 ARP, Georgia Power's
annual decommissioning cost for ratemaking is a total of $4 million for Plant
Hatch and Plant Vogtle Units 1 and 2. Georgia Power's annual decommissioning
cost for ratemaking in 2019 totaled $5 million.
7. CONSOLIDATED ENTITIES AND EQUITY METHOD INVESTMENTS
The Registrants may hold ownership interests in a number of business ventures
with varying ownership structures. Partnership interests and other variable
interests are evaluated to determine if each entity is a VIE. If a venture is a
VIE for which a Registrant is the primary beneficiary, the assets, liabilities,
and results of operations of the entity are consolidated. The Registrants
reassess the conclusion as to whether an entity is a VIE upon certain
occurrences, which are deemed reconsideration events.
For entities that are not determined to be VIEs, the Registrants evaluate
whether they have control or significant influence over the investee to
determine the appropriate consolidation and presentation. Generally, entities
under the control of a Registrant are
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Southern Company and Subsidiary Companies 2020 Annual Report
consolidated, and entities over which a Registrant can exert significant
influence, but which a Registrant does not control, are accounted for under the
equity method of accounting.
Investments accounted for under the equity method are recorded within equity
investments in unconsolidated subsidiaries in the balance sheets and, for
Southern Company and Southern Company Gas, the equity income is recorded within
earnings from equity method investments in the statements of income. See "SEGCO"
and "Southern Company Gas" herein for additional information.
SEGCO
Alabama Power and Georgia Power own equally all of the outstanding capital stock
of SEGCO, which owns electric generating units with a total rated capacity of
1,020 MWs, as well as associated transmission facilities. Alabama Power and
Georgia Power account for SEGCO using the equity method; Southern Company
consolidates SEGCO. The capacity of these units is sold equally to Alabama Power
and Georgia Power. Alabama Power and Georgia Power make payments sufficient to
provide for the operating expenses, taxes, interest expense, and a ROE. The
share of purchased power included in purchased power, affiliates in the
statements of income totaled $67 million in 2020, $93 million in 2019, and $102
million in 2018 for Alabama Power and $69 million in 2020, $95 million in 2019,
and $105 million in 2018 for Georgia Power.
SEGCO paid dividends of $12 million in 2020, $14 million in 2019, and $18
million in 2018, one half of which were paid to each of Alabama Power and
Georgia Power. In addition, Alabama Power and Georgia Power each recognize 50%
of SEGCO's net income.
Alabama Power, which owns and operates a generating unit adjacent to the SEGCO
generating units, has a joint ownership agreement with SEGCO for the ownership
of an associated gas pipeline. Alabama Power owns 14% of the pipeline with the
remaining 86% owned by SEGCO.
See Note 3 under "Guarantees" for additional information regarding guarantees of
Alabama Power and Georgia Power related to SEGCO.
Southern Power
Variable Interest Entities
Southern Power has certain subsidiaries that are determined to be VIEs. Southern
Power is considered the primary beneficiary of these VIEs because it controls
the most significant activities of the VIEs, including operating and maintaining
the respective assets, and has the obligation to absorb expected losses of these
VIEs to the extent of its equity interests.
SP Solar and SP Wind
In 2018, Southern Power sold a noncontrolling 33% limited partnership interest
in SP Solar to Global Atlantic Financial Group Limited (Global Atlantic). See
Note 15 under "Southern Power" for additional information. A wholly-owned
subsidiary of Southern Power is the general partner and holds a 1% ownership
interest in SP Solar and another wholly-owned subsidiary of Southern Power owns
the remaining 66% ownership in SP Solar. SP Solar qualifies as a VIE since the
arrangement is structured as a limited partnership and the 33% limited partner
does not have substantive kick-out rights against the general partner.
At December 31, 2020 and 2019, SP Solar had total assets of $6.1 billion and
$6.4 billion, respectively, total liabilities of $387 million and $381 million,
respectively, and noncontrolling interests of $1.1 billion. Cash distributions
from SP Solar are allocated 67% to Southern Power and 33% to Global Atlantic in
accordance with their partnership interest percentage. Under the terms of the
limited partnership agreement, distributions without limited partner consent are
limited to available cash and SP Solar is obligated to distribute all such
available cash to its partners each quarter. Available cash includes all cash
generated in the quarter subject to the maintenance of appropriate operating
reserves.
In 2018, Southern Power sold a noncontrolling tax-equity interest in SP Wind to
three financial investors. SP Wind owns eight operating wind farms. See Note 15
under "Southern Power" for additional information. Southern Power owns 100% of
the Class B membership interests and the three financial investors own 100% of
the Class A membership interests. SP Wind qualifies as a VIE since the structure
of the arrangement is similar to a limited partnership and the Class A members
do not have substantive kick-out rights against Southern Power.
At December 31, 2020 and 2019, SP Wind had total assets of $2.4 billion and $2.5
billion, respectively, total liabilities of $138 million and $128 million,
respectively, and noncontrolling interests of $43 million and $45 million,
respectively. Under the terms of the limited liability agreement, distributions
without Class A member consent are limited to available cash and SP Wind is
obligated to distribute all such available cash to its members each quarter.
Available cash includes all cash generated in the
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quarter subject to the maintenance of appropriate operating reserves. Cash
distributions from SP Wind are generally allocated 60% to Southern Power and 40%
to the three financial investors in accordance with the limited liability
agreement.
Southern Power consolidates both SP Solar and SP Wind, as the primary
beneficiary, since it controls the most significant activities of each entity,
including operating and maintaining their assets. Certain transfers and sales of
the assets in the VIEs are subject to partner consent and the liabilities are
non-recourse to the general credit of Southern Power. Liabilities consist of
customary working capital items and do not include any long-term debt.
Other Variable Interest Entities
Southern Power has other consolidated VIEs that relate to certain subsidiaries
that have either sold noncontrolling interests to tax-equity investors or
acquired less than a 100% interest from facility developers. These entities are
considered VIEs because the arrangements are structured similar to a limited
partnership and the noncontrolling members do not have substantive kick-out
rights.
At December 31, 2020 and 2019, the other VIEs had total assets of $1.1 billion,
total liabilities of $110 million and $104 million, respectively, and
noncontrolling interests of $454 million and $409 million, respectively. Under
the terms of the partnership agreements, distributions of all available cash are
required each month or quarter and additional distributions require partner
consent.
Equity Method Investments
At December 31, 2020 and 2019, Southern Power had equity method investments in
wind and battery storage projects totaling $19 million and $28 million,
respectively.
Southern Company Gas
Equity Method Investments
The carrying amounts of Southern Company Gas' equity method investments at
December 31, 2020 and 2019 and related income from those investments for the
years ended December 31, 2020, 2019, and 2018 were as follows:
Investment Balance 2020 2019(a)
(in millions)
SNG(b) $ 1,167 $ 1,137
PennEast Pipeline(c) 91 82
Other 32 32
Total $ 1,290 $ 1,251
(a)Excludes investments in Atlantic Coast Pipeline and Pivotal JAX LNG
classified as held for sale at December 31, 2019. See Note 15 under "Assets Held
for Sale" for additional information.
(b)Increase primarily relates to a capital contribution, partially offset by the
continued amortization of deferred tax assets established upon acquisition.
(c)See Note 3 under "Other Matters - Southern Company Gas" for additional
information.
Earnings from Equity Method Investments 2020 2019 2018
(in millions)
SNG $ 129 $ 141 $ 131
Atlantic Coast Pipeline(a)(b) 3 13 7
PennEast Pipeline(a) 7 6 5
Other(c) 2 (3) 5
Total $ 141 $ 157 $ 148
(a)Earnings primarily result from AFUDC equity recorded by the project entity.
(b)On March 24, 2020, Southern Company Gas completed the sale of its interest in
Atlantic Coast Pipeline. See Note 15 under "Southern Company Gas" for additional
information.
(c)In May 2019, Southern Company Gas sold its investment in Triton, a cargo
container leasing company that was aggregated into Southern Company Gas' all
other segment. On March 24, 2020, Southern Company Gas completed the sale of its
interest in Pivotal LNG. See Note 15 under "Southern Company Gas" for additional
information.
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8. FINANCING
Long-term Debt
Details of long-term debt at December 31, 2020 and 2019 are provided in the
following table:
Balance Outstanding at
At December 31, 2020 December 31,
Weighted Average
Maturity Interest Rate 2020 2019
(in millions)
Southern Company
Senior notes(a) 2021-2050 3.78% $ 30,850 $ 30,023
Junior subordinated notes 2024-2080 4.30% 7,295 5,295
FFB loans(b) 2021-2044 2.92% 4,618 3,843
Pollution control revenue bonds(c) 2021-2053 1.11% 2,675 2,963
First mortgage bonds(d) 2023-2060 3.71% 1,900 1,575
Other revenue bonds(e) 2021-2040 6.45% 320 320
Debt payable to affiliated trusts(f) 2042 3.33% 206 206
Medium-term notes 2021-2027 7.88% 160 160
Other long-term debt 2021-2023 0.83% 370 145
Finance lease obligations(g) 231 226
Unamortized fair value adjustment 393 430
Unamortized debt premium (discount), net (201) (152)
Unamortized debt issuance expenses (237) (247)
Total long-term debt 48,580 44,787
Less: Amount due within one year 3,507 2,989
Total long-term debt excluding amount due
within one year $ 45,073 $ 41,798
Alabama Power
Senior notes 2021-2049 4.03% $ 7,625 $ 7,275
Pollution control revenue bonds(c) 2021-2038 0.53% 1,060 1,060
Debt payable to affiliated trusts(f) 2042 3.33% 206 206
Other long-term debt 2021 1.20% 45 45
Finance lease obligations(g) 5 4
Unamortized debt premium (discount), net (16) (14)
Unamortized debt issuance expenses (56) (55)
Total long-term debt 8,869 8,521
Less: Amount due within one year 311 251
Total long-term debt excluding amount due
within one year $ 8,558 $ 8,270
Georgia Power
Senior notes 2021-2050 3.59% $ 6,400 $ 5,850
Junior subordinated notes 2077 5.00% 270 270
FFB loans(b) 2021-2044 2.92% 4,618 3,843
Pollution control revenue bonds(c) 2025-2053 1.47% 1,538 1,821
Other long-term debt 2021 0.65% 125 -
Finance lease obligations(g) 145 156
Unamortized debt premium (discount), net (12) (7)
Unamortized debt issuance expenses (114) (117)
Total long-term debt 12,970 11,816
Less: Amount due within one year 542 1,025
Total long-term debt excluding amount due
within one year $ 12,428 $ 10,791
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Balance Outstanding at
At December 31, 2020 December 31,
Weighted Average
Maturity Interest Rate 2020 2019
(in millions)
Mississippi Power
Senior notes 2028-2042 4.23% $ 900 $ 1,175
Pollution control revenue bonds(c) 2025-2028 1.86% 76 83
Other revenue bonds(e) 2021-2040 6.45% 320 320
Other long-term debt 2021-2023 1.00% 100 -
Finance lease obligations(g) 19 -
Unamortized debt premium (discount), net 11 19
Unamortized debt issuance expenses (7) (8)
Total long-term debt 1,419 1,589
Less: Amount due within one year 406 281
Total long-term debt excluding amount due
within one year $ 1,013 $ 1,308
Southern Power
Senior notes(a) 2021-2046 3.96% $ 3,714 $ 4,425
Unamortized debt premium (discount), net (6) (8)
Unamortized debt issuance expenses (16) (19)
Total long-term debt 3,692 4,398
Less: Amount due within one year 299 824
Total long-term debt excluding amount due
within one year $ 3,393 $ 3,574
Southern Company Gas
Senior notes 2021-2047 4.01% $ 4,200 $ 3,700
First mortgage bonds(d) 2023-2060 3.71% 1,900 1,575
Medium-term notes 2021-2027 7.88% 160 160
Unamortized fair value adjustment 393 430
Unamortized debt premium (discount), net (27) (20)
Total long-term debt 6,626 5,845
Less: Amount due within one year 333 -
Total long-term debt excluding amount due
within one year $ 6,293 $ 5,845
(a)Includes a fair value gain (loss) of $109 million and $(5) million at
December 31, 2020 and 2019, respectively, related to Southern Power's foreign
currency hedge on its €1.1 billion senior notes.
(b)Secured by a first priority lien on (i) Georgia Power's 45.7% undivided
ownership interest in Plant Vogtle Units 3 and 4 (primarily the units under
construction, the related real property, and any nuclear fuel loaded in the
reactor core) and (ii) Georgia Power's rights and obligations under the
principal contracts relating to Plant Vogtle Units 3 and 4. See "DOE Loan
Guarantee Borrowings" for additional information.
(c)Pollution control revenue bond obligations represent loans to the traditional
electric operating companies from public authorities of funds derived from sales
by such authorities of revenue bonds issued to finance pollution control and
solid waste disposal facilities. In some cases, the pollution control revenue
bond obligations represent obligations under installment sales agreements with
respect to facilities constructed with the proceeds of revenue bonds issued by
public authorities. The traditional electric operating companies are required to
make payments sufficient for the authorities to meet principal and interest
requirements of such bonds. Proceeds from certain issuances are restricted until
qualifying expenditures are incurred.
(d)Secured by substantially all of Nicor Gas' properties.
(e)At December 31, 2020 and 2019, Mississippi Power had $270 million aggregate
principal amount outstanding of Mississippi Business Finance Corporation Taxable
Revenue Bonds, 7.13% Series 1999A due October 20, 2021, which are secured by
Plant Daniel Units 3 and 4 and certain related personal property. Mississippi
Power assumed the obligations in 2011 in connection with its election under its
operating lease of Plant Daniel Units 3 and 4 to purchase the assets and
recorded the bonds at fair value. At December 31, 2020 and 2019, Mississippi
Power also had $50 million of tax-exempt revenue bond obligations outstanding
representing loans to Mississippi Power through the Mississippi Business Finance
Corporation issued to finance a portion of the costs of constructing the Kemper
County energy facility.
(f)Alabama Power has formed a wholly-owned trust subsidiary for the purpose of
issuing preferred securities. The proceeds of the related equity investments and
preferred security sales were loaned back to Alabama Power through the issuance
of junior subordinated notes, which constitute substantially all of the assets
of this trust. Alabama Power considers that the mechanisms and obligations
relating to the preferred securities issued for its benefit, taken together,
constitute a full and unconditional guarantee by it of the trust's payment
obligations with respect to these securities. See Note 1 under "Variable
Interest Entities" for additional information on the accounting treatment for
this trust and the related securities.
(g)Secured by the underlying lease ROU asset. See Note 9 for additional
information.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report Maturities of long-term debt for the next five years are as follows:
Southern Georgia Mississippi Southern Company
Company(a) Alabama Power Power(b) Power(c) Southern Power(d) Gas
(in millions)
2021 $ 3,506 $ 311 $ 542 $ 406 $ 300 $ 330
2022 3,707 751 488 16 677 46
2023 3,131 301 889 1 290 400
2024 509 22 491 1 - -
2025 1,191 250 138 12 500 300
(a)Amount for 2022 includes junior subordinated notes totaling $1.725 billion at
the parent entity with final maturity dates in 2024 and 2027 (one half in each
year); however, in connection with related stock purchase contracts, Southern
Company has agreed to remarket the notes in 2022. See "Equity Units" herein for
additional information. Also see notes (b), (c), and (d) below.
(b)Amounts include principal amortization related to the FFB borrowings;
however, the final maturity date is February 20, 2044. See "DOE Loan Guarantee
Borrowings" herein for additional information.
(c)Amount for 2021 includes $50 million and $25 million of long-term debt with
final maturity dates in 2040 and 2023, respectively, that Mississippi Power
intends to repay in 2021.
(d)Southern Power's 2022 maturity represents euro-denominated debt at the U.S.
dollar denominated hedge settlement amount.
DOE Loan Guarantee Borrowings
Pursuant to the loan guarantee program established under Title XVII of the
Energy Policy Act of 2005 (Title XVII Loan Guarantee Program), Georgia Power and
the DOE entered into a loan guarantee agreement in 2014 and the Amended and
Restated Loan Guarantee Agreement in March 2019. Under the Amended and Restated
Loan Guarantee Agreement, the DOE agreed to guarantee the obligations of Georgia
Power under the FFB Credit Facilities. Under the FFB Credit Facilities, Georgia
Power may make term loan borrowings through the FFB in an amount up to
approximately $5.130 billion, provided that total aggregate borrowings under the
FFB Credit Facilities may not exceed 70% of (i) Eligible Project Costs minus
(ii) approximately $1.492 billion (reflecting the amounts received by Georgia
Power under the Guarantee Settlement Agreement less the related customer
refunds).
In June and December 2020, Georgia Power made borrowings under the FFB Credit
Facilities in an aggregate principal amount of $519 million and $329 million,
respectively, at an interest rate of 1.652% and 1.737%, respectively, through
the final maturity date of February 20, 2044. During 2020, Georgia Power made
principal amortization payments of $73 million under the FFB Credit Facilities.
At December 31, 2020 and 2019, Georgia Power had $4.6 billion and $3.8 billion
of borrowings outstanding under the FFB Credit Facilities, respectively.
All borrowings under the FFB Credit Facilities are full recourse to Georgia
Power, and Georgia Power is obligated to reimburse the DOE for any payments the
DOE is required to make to the FFB under its guarantee. Georgia Power's
reimbursement obligations to the DOE are full recourse and secured by a first
priority lien on (i) Georgia Power's 45.7% undivided ownership interest in Plant
Vogtle Units 3 and 4 (primarily the units under construction, the related real
property, and any nuclear fuel loaded in the reactor core) and (ii) Georgia
Power's rights and obligations under the principal contracts relating to Plant
Vogtle Units 3 and 4. There are no restrictions on Georgia Power's ability to
grant liens on other property.
In addition to the conditions described above, future advances are subject to
satisfaction of customary conditions, as well as certification of compliance
with the requirements of the Title XVII Loan Guarantee Program, including
accuracy of project-related representations and warranties, delivery of updated
project-related information, and evidence of compliance with the prevailing wage
requirements of the Davis-Bacon Act of 1931, as amended, and certification from
the DOE's consulting engineer that proceeds of the advances are used to
reimburse Eligible Project Costs.
Upon satisfaction of all conditions described above, advances may be requested
on a quarterly basis through 2023. The final maturity date for each advance
under the FFB Credit Facilities is February 20, 2044. Interest is payable
quarterly and principal payments began on February 20, 2020. Borrowings under
the FFB Credit Facilities will bear interest at the applicable U.S. Treasury
rate plus a spread equal to 0.375%.
Under the Amended and Restated Loan Guarantee Agreement, Georgia Power is
subject to customary borrower affirmative and negative covenants and events of
default. In addition, Georgia Power is subject to project-related reporting
requirements and other project-specific covenants and events of default.
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In the event certain mandatory prepayment events occur, the FFB's commitment to
make further advances under the FFB Credit Facilities will terminate and Georgia
Power will be required to prepay the outstanding principal amount of all
borrowings under the FFB Credit Facilities over a period of five years (with
level principal amortization). Among other things, these mandatory prepayment
events include (i) the termination of the Vogtle Services Agreement or rejection
of the Vogtle Services Agreement in any Westinghouse bankruptcy if Georgia Power
does not maintain access to intellectual property rights under the related
intellectual property licenses; (ii) termination of the Bechtel Agreement,
unless the Vogtle Owners enter into a replacement agreement; (iii) cancellation
of Plant Vogtle Units 3 and 4 by the Georgia PSC or by Georgia Power; (iv)
failure of the holders of 90% of the ownership interests in Plant Vogtle Units 3
and 4 to vote to continue construction following certain schedule extensions;
(v) cost disallowances by the Georgia PSC that could have a material adverse
effect on completion of Plant Vogtle Units 3 and 4 or Georgia Power's ability to
repay the outstanding borrowings under the FFB Credit Facilities; or (vi) loss
of or failure to receive necessary regulatory approvals. Under certain
circumstances, insurance proceeds and any proceeds from an event of taking must
be applied to immediately prepay outstanding borrowings under the FFB Credit
Facilities. Georgia Power also may voluntarily prepay outstanding borrowings
under the FFB Credit Facilities. Under the FFB Credit Facilities, any prepayment
(whether mandatory or optional) will be made with a make-whole premium or
discount, as applicable.
In connection with any cancellation of Plant Vogtle Units 3 and 4, the DOE may
elect to continue construction of Plant Vogtle Units 3 and 4. In such an event,
the DOE will have the right to assume Georgia Power's rights and obligations
under the principal agreements relating to Plant Vogtle Units 3 and 4 and to
acquire all or a portion of Georgia Power's ownership interest in Plant Vogtle
Units 3 and 4.
Secured Debt
Each of Southern Company's subsidiaries is organized as a legal entity, separate
and apart from Southern Company and its other subsidiaries. There are no
agreements or other arrangements among the Southern Company system companies
under which the assets of one company have been pledged or otherwise made
available to satisfy obligations of Southern Company or any of its other
subsidiaries.
As discussed under "Long-term Debt" herein, the Registrants had secured debt
outstanding at December 31, 2020 and 2019. Each Registrant's senior notes,
junior subordinated notes, pollution control and other revenue bond obligations,
bank term loans, credit facility borrowings, and notes payable are effectively
subordinated to all secured debt of each respective Registrant.
Equity Units
In August 2019, Southern Company issued 34.5 million 2019 Series A Equity Units
(Equity Units), initially in the form of corporate units (Corporate Units), at a
stated amount of $50 per Corporate Unit, for a total stated amount of $1.725
billion. Net proceeds from the issuance were approximately $1.682 billion. The
proceeds were used to repay short-term indebtedness and for other general
corporate purposes, including investments in Southern Company's subsidiaries.
Each Corporate Unit is comprised of (i) a 1/40 undivided beneficial ownership
interest in $1,000 principal amount of Southern Company's Series 2019A
Remarketable Junior Subordinated Notes (Series 2019A RSNs) due 2024, (ii) a 1/40
undivided beneficial ownership interest in $1,000 principal amount of Southern
Company's Series 2019B Remarketable Junior Subordinated Notes (together with the
Series 2019A RSNs, the RSNs) due 2027, and (iii) a stock purchase contract,
which obligates the holder to purchase from Southern Company, no later than
August 1, 2022, a certain number of shares of Southern Company's common stock
for $50 in cash (Stock Purchase Contract). Southern Company has agreed to
remarket the RSNs in 2022, at which time each interest rate on the RSNs will
reset at the applicable market rate. Holders may choose to either remarket their
RSNs, receive the proceeds, and use those funds to settle the related Stock
Purchase Contract or retain the RSNs and use other funds to settle the related
Stock Purchase Contract. If the remarketing is unsuccessful, holders will have
the right to put their RSNs to Southern Company at a price equal to the
principal amount. The Corporate Units carry an annual distribution rate of 6.75%
of the stated amount, which is comprised of a quarterly interest payment on the
RSNs of 2.70% per year and a quarterly purchase contract adjustment payment of
4.05% per year.
Each Stock Purchase Contract obligates the holder to purchase, and Southern
Company to sell, for $50 a number of shares of Southern Company common stock
determined based on the applicable market value (as determined under the related
Stock Purchase Contract) in accordance with the conversion ratios set forth
below (subject to anti-dilution adjustments):
•If the applicable market value is equal to or greater than $68.64, 0.7284
shares.
•If the applicable market value is less than $68.64 but greater than $57.20, a
number of shares equal to $50 divided by the applicable market value.
•If the applicable market value is less than or equal to $57.20, 0.8741 shares.
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A holder's ownership interest in the RSNs is pledged to Southern Company to
secure the holder's obligation under the related Stock Purchase Contract. If a
holder of a Stock Purchase Contract chooses at any time to have its RSNs
released from the pledge, such holder's obligation under such Stock Purchase
Contract must be secured by a U.S. Treasury security equal to the aggregate
principal amount of the RSNs. At the time of issuance, the RSNs were recorded on
Southern Company's consolidated balance sheet as long-term debt and the present
value of the contract adjustment payments of $198 million was recorded as a
liability, representing the obligation to make contract adjustment payments,
with an offsetting reduction to paid-in capital. The liability balance at
December 31, 2020 was $119 million, of which $67 million was classified as
current. The difference between the face value and present value of the contract
adjustment payments is being accreted to interest expense on the consolidated
statements of income over the three-year period ending in 2022. The liability
recorded for the contract adjustment payments is considered non-cash and
excluded from the consolidated statements of cash flows. To settle the Stock
Purchase Contracts, Southern Company will be required to issue a maximum of 30.2
million shares of common stock (subject to anti-dilution adjustments and a
make-whole adjustment if certain fundamental changes occur).
Bank Credit Arrangements
At December 31, 2020, committed credit arrangements with banks were as follows:
Expires
Due within
Company 2021 2022 2023 2024 Total Unused One Year
(in millions)
Southern Company parent $ - $ - $ - $ 2,000 $ 2,000 $ 1,999 $ -
Alabama Power 3 525 - 800 1,328 1,328 3
Georgia Power - - - 1,750 1,750 1,728 -
Mississippi Power - 150 125 - 275 250 -
Southern Power(a) - - - 600 600 591 -
Southern Company Gas(b) - - - 1,750 1,750 1,745 -
SEGCO 30 - - - 30 30 30
Southern Company $ 33 $ 675 $ 125 $ 6,900 $ 7,733 $ 7,671 $ 33
(a)Does not include Southern Power Company's $75 million and $60 million
continuing letter of credit facilities for standby letters of credit expiring in
2023, of which $5 million and $11 million, respectively, was unused at
December 31, 2020. In December 2020, Southern Power amended its $120 million
letter of credit facility, which, among other things, extended the expiration
date from 2021 to 2023 and reduced the amount to $75 million. Southern Power's
subsidiaries are not parties to its bank credit arrangements or letter of credit
facilities.
(b)Southern Company Gas, as the parent entity, guarantees the obligations of
Southern Company Gas Capital, which is the borrower of $1.25 billion of this
arrangement. Southern Company Gas' committed credit arrangement also includes
$500 million for which Nicor Gas is the borrower and which is restricted for
working capital needs of Nicor Gas. Pursuant to this multi-year credit
arrangement, the allocations between Southern Company Gas Capital and Nicor Gas
may be adjusted. See "Structural Considerations" herein for additional
information.
The bank credit arrangements require payment of commitment fees based on the
unused portion of the commitments. Commitment fees average less than 1/4 of 1%
for the Registrants and Nicor Gas. Subject to applicable market conditions,
Southern Company and its subsidiaries expect to renew or replace their bank
credit arrangements as needed, prior to expiration. In connection therewith,
Southern Company and its subsidiaries may extend the maturity dates and/or
increase or decrease the lending commitments thereunder.
These bank credit arrangements, as well as the term loan arrangements of the
Registrants and SEGCO, contain covenants that limit debt levels and contain
cross-acceleration or, in the case of Southern Power, cross-default provisions
to other indebtedness (including guarantee obligations) that are restricted only
to the indebtedness of the individual company. Such cross-default provisions to
other indebtedness would trigger an event of default if Southern Power defaulted
on indebtedness or guarantee obligations over a specified threshold. Such
cross-acceleration provisions to other indebtedness would trigger an event of
default if the applicable borrower defaulted on indebtedness, the payment of
which was then accelerated. Southern Company's, Southern Company Gas', and Nicor
Gas' credit arrangements contain covenants that limit debt levels to 70% of
total capitalization, as defined in the agreements, and the other subsidiaries'
bank credit arrangements contain covenants that limit debt levels to 65% of
total capitalization, as defined in the agreements. For purposes of these
definitions, debt excludes the long-term debt payable to affiliated trusts and,
in certain arrangements, other hybrid securities. Additionally, for Southern
Company and Southern Power, for purposes of these definitions, debt excludes any
project debt incurred by certain subsidiaries of Southern Power to the extent
such debt is non-recourse to Southern Power and capitalization excludes the
capital stock or other equity attributable to such
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Southern Company and Subsidiary Companies 2020 Annual Report
subsidiaries. At December 31, 2020, the Registrants, Nicor Gas, and SEGCO were
in compliance with all such covenants. None of the bank credit arrangements
contain material adverse change clauses at the time of borrowings.
A portion of the unused credit with banks is allocated to provide liquidity
support to the revenue bonds of the traditional electric operating companies and
the commercial paper programs of the Registrants and Nicor Gas. The amount of
variable rate revenue bonds of the traditional electric operating companies
outstanding requiring liquidity support at December 31, 2020 was approximately
$1.4 billion (comprised of approximately $854 million at Alabama Power, $550
million at Georgia Power, and $34 million at Mississippi Power). In addition, at
December 31, 2020, Georgia Power and Mississippi Power had approximately $174
million and $50 million, respectively, of fixed rate revenue bonds outstanding
that are required to be remarketed within the next 12 months.
At December 31, 2020 and 2019, Southern Power had $105 million and $104 million,
respectively, of cash collateral posted related to PPA requirements, which is
included in other deferred charges and assets on Southern Power's consolidated
balance sheets.
Notes Payable
The Registrants, Nicor Gas, and SEGCO make short-term borrowings primarily
through commercial paper programs that have the liquidity support of the
committed bank credit arrangements described above under "Bank Credit
Arrangements." Southern Power's subsidiaries are not parties or obligors to its
commercial paper program. Southern Company Gas maintains commercial paper
programs at Southern Company Gas Capital and at Nicor Gas. Nicor Gas' commercial
paper program supports working capital needs at Nicor Gas as Nicor Gas is not
permitted to make money pool loans to affiliates. All of Southern Company Gas'
other subsidiaries benefit from Southern Company Gas Capital's commercial paper
program. See "Structural Considerations" herein for additional information.
In addition, Southern Company and certain of its subsidiaries have entered into
various bank term loan agreements. Unless otherwise stated, the proceeds of
these loans were used to repay existing indebtedness and for general corporate
purposes, including working capital and, for the subsidiaries, their continuous
construction programs.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report Commercial paper and short-term bank term loans are included in notes payable in the balance sheets. Details of short-term borrowings for the applicable Registrants were as follows:
Notes Payable at December 31, 2020 Notes Payable at December 31, 2019
Amount Weighted Average Amount Weighted Average
Outstanding Interest Rate Outstanding Interest Rate
(in millions) (in millions)
Southern Company
Commercial paper $ 609 0.3 % $ 1,705 2.1 %
Short-term bank debt - - % 350 2.3 %
Total $ 609 0.3 % $ 2,055 2.1 %
Georgia Power
Commercial paper $ 60 0.3 % $ 115 2.1 %
Short-term bank debt - - % 250 2.2 %
Total $ 60 0.3 % $ 365 2.2 %
Mississippi Power
Commercial paper $ 25 0.4 % $ - - %
Southern Power
Commercial paper $ 175 0.3 % $ 449 2.1 %
Short-term bank debt - - % 100 2.6 %
Total $ 175 0.3 % $ 549 2.2 %
Southern Company Gas
Commercial paper:
Southern Company Gas Capital $ 220 0.3 % $ 372 2.1 %
Nicor Gas 104 0.2 % 278 1.8 %
Total $ 324 0.2 % $ 650 2.0 %
See "Bank Credit Arrangements" herein for information on bank term loan
covenants that limit debt levels and cross-acceleration or cross-default
provisions.
Outstanding Classes of Capital Stock
Southern Company
Common Stock
Stock Issued
During 2020, Southern Company issued approximately 3.3 million shares of common
stock through employee equity compensation plans and received proceeds of
approximately $74 million.
See "Equity Units" herein for additional information.
Shares Reserved
At December 31, 2020, a total of 88 million shares were reserved for issuance
pursuant to the Southern Investment Plan, employee savings plans, the Outside
Directors Stock Plan, the Omnibus Incentive Compensation Plan (which includes
stock options and performance share units as discussed in Note 12), and an
at-the-market program. Of the total 88 million shares reserved, 6.8 million
shares are available for awards under the Omnibus Incentive Compensation Plan at
December 31, 2020.
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Southern Company and Subsidiary Companies 2020 Annual Report
Diluted Earnings Per Share
For Southern Company, the only differences in computing basic and diluted
earnings per share (EPS) are attributable to awards outstanding under
stock-based compensation plans and the Equity Units. Earnings per share dilution
resulting from stock-based compensation plans and the Equity Units issuance is
determined using the treasury stock method. Shares used to compute diluted EPS
were as follows:
Average Common Stock Shares
2020 2019 2018
(in millions)
As reported shares 1,058 1,046 1,020
Effect of stock-based compensation 7 8 5
Diluted shares 1,065 1,054 1,025
In all years presented, an immaterial number of stock-based compensation awards
was not included in the diluted EPS calculation because the awards were
anti-dilutive.
The Equity Units were excluded from the calculation of diluted EPS for 2020 and
2019 as the dilutive stock price threshold was not met.
Redeemable Preferred Stock of Subsidiaries
As discussed further under "Alabama Power" herein, the preferred stock of
Alabama Power is presented as "Redeemable Preferred Stock of Subsidiaries" on
Southern Company's balance sheets in a manner consistent with temporary equity
under applicable accounting standards.
In 2018, Mississippi Power completed the redemption of all outstanding shares
and depository shares of its redeemable preferred stock totaling $33 million, as
described further under "Mississippi Power" herein.
Alabama Power
Alabama Power has preferred stock, Class A preferred stock, and common stock
outstanding. Alabama Power also has authorized preference stock, none of which
is outstanding. Alabama Power's preferred stock and Class A preferred stock,
without preference between classes, rank senior to Alabama Power's common stock
with respect to payment of dividends and voluntary and involuntary dissolution.
The preferred stock and Class A preferred stock of Alabama Power contain a
feature that allows the holders to elect a majority of Alabama Power's board of
directors if preferred dividends are not paid for four consecutive quarters.
Because such a potential redemption-triggering event is not solely within the
control of Alabama Power, the preferred stock and Class A preferred stock is
presented as "Redeemable Preferred Stock" on Alabama Power's balance sheets in a
manner consistent with temporary equity under applicable accounting standards.
Alabama Power's preferred stock is subject to redemption at a price equal to the
par value plus a premium. Alabama Power's Class A preferred stock is subject to
redemption at a price equal to the stated capital. All series of Alabama Power's
preferred stock currently are subject to redemption at the option of Alabama
Power. The Class A preferred stock is subject to redemption on or after October
1, 2022, or following the occurrence of a rating agency event. Information for
each outstanding series is in the table below:
Par Value/Stated Redemption
Preferred Stock Capital Per Share Shares Outstanding Price Per Share
4.92% Preferred Stock $100 80,000 $103.23
4.72% Preferred Stock $100 50,000 $102.18
4.64% Preferred Stock $100 60,000 $103.14
4.60% Preferred Stock $100 100,000 $104.20
4.52% Preferred Stock $100 50,000 $102.93
4.20% Preferred Stock $100 135,115 $105.00
5.00% Class A Preferred Stock $25 10,000,000 $25.00(*)
(*)$25.50 if prior to October 1, 2022
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Southern Company and Subsidiary Companies 2020 Annual Report
Georgia Power
Georgia Power has preferred stock, Class A preferred stock, preference stock,
and common stock authorized, but only common stock outstanding as of
December 31, 2020 and 2019.
Mississippi Power
Mississippi Power has preferred stock and common stock authorized, but only
common stock outstanding as of December 31, 2020 and 2019. In 2018, Mississippi
Power completed the redemption of all outstanding shares and depository shares
of its Preferred Stock.
Dividend Restrictions
The income of Southern Company is derived primarily from equity in earnings of
its subsidiaries. At December 31, 2020, consolidated retained earnings included
$5.6 billion of undistributed retained earnings of the subsidiaries.
The traditional electric operating companies and Southern Power can only pay
dividends to Southern Company out of retained earnings or paid-in-capital.
See Note 7 under "Southern Power" for information regarding the distribution
requirements for certain Southern Power subsidiaries.
By regulation, Nicor Gas is restricted, to the extent of its retained earnings
balance, in the amount it can dividend or loan to affiliates and is not
permitted to make money pool loans to affiliates. At December 31, 2020, the
amount of Southern Company Gas' subsidiary retained earnings restricted for
dividend payment totaled $1.1 billion.
Structural Considerations
Since Southern Company and Southern Company Gas are holding companies, the right
of Southern Company and Southern Company Gas and, hence, the right of creditors
of Southern Company or Southern Company Gas to participate in any distribution
of the assets of any respective subsidiary of Southern Company or Southern
Company Gas, whether upon liquidation, reorganization or otherwise, is subject
to prior claims of creditors and preferred stockholders of such subsidiary.
Southern Company Gas' 100%-owned subsidiary, Southern Company Gas Capital, was
established to provide for certain of Southern Company Gas' ongoing financing
needs through a commercial paper program, the issuance of various debt, hybrid
securities, and other financing arrangements. Southern Company Gas fully and
unconditionally guarantees all debt issued by Southern Company Gas Capital.
Nicor Gas is not permitted by regulation to make loans to affiliates or utilize
Southern Company Gas Capital for its financing needs.
Southern Power Company's senior notes, bank term loan, commercial paper, and
bank credit arrangement are unsecured senior indebtedness, which rank equally
with all other unsecured and unsubordinated debt of Southern Power Company.
Southern Power's subsidiaries are not issuers, borrowers, or obligors, as
applicable, under any of these unsecured senior debt arrangements, which are
effectively subordinated to any future secured debt of Southern Power Company
and any potential claims of creditors of Southern Power's subsidiaries.
9. LEASES
On January 1, 2019, the Registrants adopted the provisions of FASB ASC Topic 842
(as amended), Leases (ASC 842), which require lessees to recognize leases with a
term of greater than 12 months on the balance sheet as lease obligations,
representing the discounted future fixed payments due, along with ROU assets
that will be amortized over the term of each lease.
The Registrants elected the transition methodology provided by ASC 842, whereby
the applicable requirements were applied on a prospective basis as of the
adoption date of January 1, 2019, without restating prior periods. The
Registrants also elected the package of practical expedients provided by ASC 842
that allows prior determinations of whether existing contracts are, or contain,
leases and the classification of existing leases to continue without
reassessment. Additionally, the Registrants applied the use-of-hindsight
practical expedient in determining lease terms as of the date of adoption and
elected the practical expedient that allows existing land easements not
previously accounted for as leases not to be reassessed.
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Southern Company and Subsidiary Companies 2020 Annual Report
Lessee
As lessee, the Registrants lease certain electric generating units (including
renewable energy facilities), real estate/land, communication towers, railcars,
and other equipment and vehicles. The major categories of lease obligations are
as follows:
Southern Alabama Georgia Mississippi Southern
Company Power Power Power Southern Power Company Gas
(in millions)
As of December 31, 2020
Electric generating units $ 941 $ 146 $ 1,368 $ - $ - $ -
Real estate/land 815 4 53 2 451 61
Communication towers 158 2 3 - - 20
Railcars 42 16 23 3 - -
Other 127 7 5 23 - 1
Total $ 2,083 $ 175 $ 1,452 $ 28 $ 451 $ 82
As of December 31, 2019
Electric generating units $ 990 $ 125 $ 1,487 $ - $ - $ -
Real estate/land 782 4 54 2 398 74
Communication towers 154 2 3 - - 18
Railcars 51 21 26 3 - -
Other 93 8 12 1 - -
Total $ 2,070 $ 160 $ 1,582 $ 6 $ 398 $ 92
Real estate/land leases primarily consist of commercial real estate leases at
Southern Company, Georgia Power, and Southern Company Gas and various land
leases primarily associated with renewable energy facilities at Southern Power.
The commercial real estate leases have remaining terms of up to 24 years while
the land leases have remaining terms of up to 46 years, including renewal
periods.
Communication towers are leased for the installation of equipment to provide
cellular phone service to customers and to support the automated meter
infrastructure programs at the traditional electric operating companies and
Nicor Gas. Communication tower leases have original terms of up to 10 years with
options to renew for periods up to 20 years.
Renewal options exist in many of the leases. Except as otherwise noted, the
expected term used in calculating the lease obligation generally reflects only
the noncancelable period of the lease as it is not considered reasonably certain
that the lease will be extended. Land leases associated with renewable energy
facilities at Southern Power and communication tower leases for automated meter
infrastructure at Southern Company Gas include renewal periods reasonably
certain of exercise resulting in an expected lease term at least equal to the
expected life of the renewable energy facilities and the automated meter
infrastructure, respectively.
Contracts that Contain a Lease
While not specifically structured as a lease, some of the PPAs at Alabama Power
and Georgia Power are deemed to represent a lease of the underlying electric
generating units when the terms of the PPA convey the right to control the use
of the underlying assets. Amounts recorded for leases of electric generating
units are generally based on the amount of scheduled capacity payments due over
the remaining term of the PPA, which varies between three and 17 years. Georgia
Power has several PPAs with Southern Power that Georgia Power accounts for as
leases with a lease obligation of $575 million and $624 million at December 31,
2020 and 2019, respectively. The amount paid for energy under these affiliate
PPAs reflects a price that would be paid in an arm's-length transaction as
reviewed and approved by the Georgia PSC.
Short-term Leases
Leases with an initial term of 12 months or less are not recorded on the balance
sheet; the Registrants generally recognize lease expense for these leases on a
straight-line basis over the lease term.
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Southern Company and Subsidiary Companies 2020 Annual Report
Residual Value Guarantees
Residual value guarantees exist primarily in railcar leases at Alabama Power and
Georgia Power and the amounts probable of being paid under those guarantees are
included in the lease payments. All such amounts are immaterial as of
December 31, 2020 and 2019.
Lease and Nonlease Components
For all asset categories, with the exception of electric generating units, gas
pipelines, and real estate leases, the Registrants combine lease payments and
any nonlease components, such as asset maintenance, for purposes of calculating
the lease obligation and the right-of-use asset.
Balance sheet amounts recorded for operating and finance leases are as follows:
Southern Alabama Georgia Mississippi Southern
Company Power Power Power Southern Power Company Gas
(in millions)
As of December 31, 2020
Operating Leases
Operating lease ROU assets, net $ 1,802 $ 151 $ 1,308 $ 9 $ 415 $ 81
Operating lease obligations - current $ 241 $ 51 $ 151 $ 2 $
25 $ 15
Operating lease obligations -
non-current 1,611 119 1,156 7 426 67
Total operating lease obligations $ 1,852 $ 170 $ 1,307 $ 9 $ 451 $ 82
Finance Leases
Finance lease ROU assets, net $ 218 $ 5 $ 115 $ 19 $ - $ -
Finance lease obligations - current $ 17 $ 1 $ 9 $ 1 $
- $ -
Finance lease obligations - non-current 214 4 136 18 - -
Total finance lease obligations $ 231 $ 5 $ 145 $ 19 $
- $ -
As of December 31, 2019
Operating Leases
Operating lease ROU assets, net $ 1,800 $ 132 $ 1,428 $ 6 $ 369 $ 93
Operating lease obligations - current $ 229 $ 49 $ 144 $ 2 $
22 $ 14
Operating lease obligations -
non-current 1,615 107 1,282 4 376 78
Total operating lease obligations $ 1,844 $ 156 $ 1,426 $ 6 $ 398 $ 92
Finance Leases
Finance lease ROU assets, net $ 216 $ 4 $ 130 $ - $ - $ -
Finance lease obligations - current $ 21 $ 1 $ 11 $ - $
- $ -
Finance lease obligations - non-current 205 3 145 - - -
Total finance lease obligations $ 226 $ 4 $ 156 $ - $
- $ -
If not presented separately on the Registrants' balance sheets, amounts related
to leases are presented as follows: operating lease ROU assets, net are included
in "other deferred charges and assets"; operating lease obligations are included
in "other current liabilities" and "other deferred credits and liabilities," as
applicable; finance lease ROU assets, net are included in "plant in service";
and finance lease obligations are included in "securities due within one year"
and "long-term debt," as applicable.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report Lease costs for 2020 and 2019, which includes both amounts recognized as operations and maintenance expense and amounts capitalized as part of the cost of another asset, are as follows:
Southern Alabama Georgia Mississippi Southern
Company Power Power Power Southern Power Company Gas
(in millions)
2020
Lease cost
Operating lease cost $ 309 $ 55 $ 212 $ 3 $ 29 $ 19
Finance lease cost:
Amortization of ROU assets 26 1 15 - - -
Interest on lease obligations 11 - 16 - - -
Total finance lease cost 37 1 31 - - -
Short-term lease costs 39 11 26 - - -
Variable lease cost 91 4 76 - 7 -
Sublease income - (1) - - - -
Total lease cost $ 476 $ 70 $ 345 $ 3 $ 36 $ 19
2019
Lease cost
Operating lease cost $ 310 $ 54 $ 206 $ 3 $ 28 $ 18
Finance lease cost:
Amortization of ROU assets 28 1 15 - - -
Interest on lease obligations 12 - 18 - - -
Total finance lease cost 40 1 33 - - -
Short-term lease costs 48 19 22 - - -
Variable lease cost 105 6 85 - 7 -
Sublease income - (1) - - - -
Total lease cost $ 503 $ 79 $ 346 $ 3 $ 35 $ 18
Georgia Power has variable lease payments that are based on the amount of energy
produced by certain renewable generating facilities subject to PPAs, including
$39 million and $42 million in 2020 and 2019, respectively, from finance leases
which are included in purchased power on Georgia Power's statements of income,
$20 million of which was included in purchased power, affiliates in both 2020
and 2019.
Rent expense and PPA capacity expense related to leases for 2018, prior to the
adoption of ASC 842, were as follows:
Southern Alabama Georgia Mississippi Southern Southern
Company(a)(b)(c) Power Power(a) Power(b) Power(c) Company Gas
(in millions)
2018:
Rent expense $ 192 $ 23 $ 34 $ 4 $ 31 $ 15
PPA capacity expense 231 44 206 - - -
(a)Georgia Power's energy-only solar PPAs accounted for as leases contained
contingent rent expense of $72 million, of which $29 million related to solar
PPAs with Southern Power.
(b)Mississippi Power's energy-only solar PPAs accounted for as operating leases
contained contingent rent expense of $10 million.
(c)Rent expense includes contingent rent expense related to Southern Power's
land leases based on wind production and escalation in the Consumer Price Index
for All Urban Consumers.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report Other information with respect to cash and noncash activities related to leases, as well as weighted-average lease terms and discount rates, is as follows:
Southern Alabama Georgia Mississippi Southern
Company Power Power Power Southern Power Company Gas
(in millions)
2020
Other information
Cash paid for amounts included in the
measurements of lease obligations:
Operating cash flows from operating leases $ 310 $ 55 $ 215 $ 3 $ 28 $ 18
Operating cash flows from finance leases 9 - 18 - - -
Financing cash flows from finance leases 22 1 11 - - -
ROU assets obtained in exchange for new
operating lease obligations 227 63 32 - 51 4
ROU assets obtained in exchange for new
finance lease obligations 10 2 - - - -
2019
Other information
Cash paid for amounts included in the
measurements of lease obligations:
Operating cash flows from operating leases $ 323 $ 54 $ 210 $ 3 $ 27 $ 18
Operating cash flows from finance leases 10 - 19 - - -
Financing cash flows from finance leases 32 1 13 - - -
ROU assets obtained in exchange for new
operating lease obligations 118 7 21 - 2 19
ROU assets obtained in exchange for new
finance lease obligations 35 2 24 - - -
Southern Alabama Georgia Mississippi Southern Company
Company Power Power Power Southern Power Gas
As of December 31, 2020
Weighted-average remaining lease term in
years:
Operating leases 14.5 7.8 9.4 6.5 32.1 9.8
Finance leases 18.2 9.7 9.5 14.9 N/A N/A
Weighted-average discount rate:
Operating leases 4.44 % 4.14 % 4.37 % 3.26 % 5.45 % 3.67 %
Finance leases 4.79 % 3.20 % 10.81 % 2.74 % N/A N/A
As of December 31, 2019
Weighted-average remaining lease term in
years:
Operating leases 14.2 3.1 10.2 7.0 32.8 9.9
Finance leases 18.8 12.1 10.5 N/A N/A N/A
Weighted-average discount rate:
Operating leases 4.53 % 3.33 % 4.46 % 4.02 % 5.66 % 3.7 %
Finance leases 5.04 % 3.60 % 10.76 % N/A N/A N/A
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report Maturities of lease liabilities are as follows:
As of December 31, 2020
Southern Alabama Georgia Mississippi Southern
Company Power Power Power Southern Power Company Gas
(in millions)
Maturity Analysis
Operating leases:
2021 $ 300 $ 57 $ 205 $ 2 $ 30 $ 18
2022 287 58 202 4 25 14
2023 230 9 200 1 27 12
2024 187 6 164 1 27 11
2025 165 6 137 - 27 10
Thereafter 1,546 74 701 2 873 35
Total 2,715 210 1,609 10 1,009 100
Less: Present value discount 863 40 302 1 558 18
Operating lease obligations $ 1,852 $ 170 $ 1,307 $ 9 $ 451 $ 82
Finance leases:
2021 $ 28 $ 1 $ 24 $ 2 $ - $ -
2022 25 1 25 1 - -
2023 22 1 25 2 - -
2024 19 1 25 1 - -
2025 16 - 25 2 - -
Thereafter 246 1 109 15 - -
Total 356 5 233 23 - -
Less: Present value discount 125 - 88 4 - -
Finance lease obligations $ 231 $ 5 $ 145 $ 19 $ - $ -
Payments made under PPAs at Georgia Power for energy generated from certain
renewable energy facilities accounted for as operating and finance leases are
considered variable lease costs and are therefore not reflected in the above
maturity analysis.
As of December 31, 2020, Southern Power has additional leases that have not yet
commenced, as detailed in the following table:
Southern
Power
Lease category Land
Expected commencement date 2021
Longest lease term expiration 30 years
Estimated total obligations (in millions) $12
Lessor
The Registrants are each considered lessors in various arrangements that have
been determined to contain a lease due to the customer's ability to control the
use of the underlying asset owned by the applicable Registrant. For the
traditional electric operating companies, these arrangements consist of outdoor
lighting contracts accounted for as operating leases with initial terms of up to
seven years, after which the contracts renew on a month-to-month basis at the
customer's option. For Mississippi Power, these arrangements also include a
tolling arrangement related to an electric generating unit accounted for as a
sales-type lease with a remaining term of 18 years. For Southern Power, these
arrangements consist of PPAs related to electric generating units, including
renewable energy facilities, accounted for as operating leases with remaining
terms of up to 26 years. Southern Company Gas is the lessor in operating leases
related to gas pipelines with remaining terms of up to 22 years. For Southern
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report Company, these arrangements also include PPAs related to fuel cells accounted for as operating leases with remaining terms of up to 14 years. Lease income for 2020 and 2019 is as follows:
Southern Mississippi Southern
Company Alabama Power Georgia Power Power Southern Power Company Gas
(in millions)2020
Lease income - interest income on sales-type
leases $ 16 $ - $ - $ 12 $ - $ -
Lease income - operating leases 208 45 58 2 87 35
Variable lease income 419 - - - 449 -
Total lease income $ 643 $ 45 $ 58 $ 14 $ 536 $ 35
2019
Lease income - interest income on sales-type
leases $ 9 $ - $ - $ 9 $ - $ -
Lease income - operating leases 273 24 71 - 160 35
Variable lease income 403 - - - 434 -
Total lease income $ 685 $ 24 $ 71 $ 9 $ 594 $ 35
Lease payments received under tolling arrangements and PPAs consist of either
scheduled payments or variable payments based on the amount of energy produced
by the underlying electric generating units. Lease income for Alabama Power and
Southern Power is included in wholesale revenues. Scheduled payments to be
received under outdoor lighting contracts, tolling arrangements, and PPAs
accounted for as leases are presented in the following maturity analyses.
No profit or loss was recognized by Mississippi Power upon commencement of a
tolling arrangement accounted for as a sales-type lease during the first quarter
2019. Mississippi Power completed construction of additional leased assets under
the lease during 2020 and, upon completion, the book value of $26 million was
transferred from CWIP to lease receivables, of which $24 million and $2 million
is included in other property and investments and other accounts and notes
receivable, respectively, at December 31, 2020. The transfer represented a
non-cash investing transaction for purposes of the statements of cash flows.
Construction of additional leased assets is ongoing and will be transferred to a
lease receivable as completed. The undiscounted cash flows to be received by
Mississippi Power for in-service leased assets under the lease are as follows:
At December 31, 2020
(in millions)
2021 $ 20
2022 19
2023 19
2024 18
2025 17
Thereafter 162
Total undiscounted cash flows $ 255
Lease receivable(*) 138Difference between undiscounted cash flows and discounted cash flows
$ 117
(*)Included in other current assets and other property and investments on the balance sheets.
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Southern Company and Subsidiary Companies 2020 Annual Report
The undiscounted cash flows to be received under operating leases and contracts
accounted for as operating leases (adjusted for intercompany eliminations) are
as follows:
At December 31, 2020
Southern Alabama Southern
Company Power Georgia Power Power Southern Company Gas
(in millions)
2021 $ 207 $ 83 $ 19 $ 86 $ 35
2022 187 76 8 87 35
2023 138 32 2 88 34
2024 106 4 - 90 33
2025 99 3 - 74 28
Thereafter 978 23 - 313 435
Total $ 1,715 $ 221 $ 29 $ 738 $ 600
Southern Power receives payments for renewable energy under PPAs accounted for
as operating leases that are considered contingent rents and are therefore not
reflected in the table above. Alabama Power and Southern Power allocate revenue
to the nonlease components of PPAs based on the stand-alone selling price of
capacity and energy. The undiscounted cash flows to be received under outdoor
lighting contracts accounted for as operating leases at Mississippi Power are
immaterial.
10. INCOME TAXES
Southern Company files a consolidated federal income tax return and the
Registrants file various state income tax returns, some of which are combined or
unitary. Under a joint consolidated income tax allocation agreement, each
Southern Company subsidiary's current and deferred tax expense is computed on a
stand-alone basis and each subsidiary is allocated an amount of tax similar to
that which would be paid if it filed a separate income tax return. In accordance
with IRS regulations, each company is jointly and severally liable for the
federal tax liability.
Federal Tax Reform Legislation
Following the enactment of the Tax Reform Legislation, the SEC staff issued
Staff Accounting Bulletin 118 - "Income Tax Accounting Implications of the Tax
Cuts and Jobs Act" (SAB 118), which provided for a measurement period of up to
one year from the enactment date to complete accounting under GAAP for the tax
effects of the legislation. Following the 2017 tax return filing in the fourth
quarter 2018, each of the Registrants considered the measurement of impacts from
the Tax Reform Legislation on deferred income tax assets and liabilities,
primarily due to the impact of the reduction of the corporate income tax rate,
to be complete as of December 31, 2018.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report Current and Deferred Income Taxes Details of income tax provisions are as follows:
2020
Georgia Southern Company
Southern Company Alabama Power Power Mississippi Power Southern Power Gas
(in millions)
Federal -
Current $ 199 $ 198 $ 365 $ 18 $ (303) $ 82
Deferred 70 44 (224) (14) 299 53
269 242 141 4 (4) 135
State -
Current 100 61 60 - (4) 35
Deferred 24 34 (49) 10 11 3
124 95 11 10 7 38
Total $ 393 $ 337 $ 152 $ 14 $ 3 $ 173
2019
Georgia Southern Company
Southern Company Alabama Power Power Mississippi Power Southern Power Gas
(in millions)
Federal -
Current $ 156 $ 61 $ 264 $ (6) $ (717) $ (120)
Deferred 1,237 125 180 26 647 195
1,393 186 444 20 (70) 75
State -
Current 275 12 6 (1) 1 37
Deferred 130 72 22 11 13 18
405 84 28 10 14 55
Total $ 1,798 $ 270 $ 472 $ 30 $ (56) $ 130
2018
Southern Company Alabama Power Georgia Mississippi Southern Power Southern Company
Power Power Gas
(in millions)
Federal -
Current $ 167 $ 91 $ 393 $ (567) $ 85 $ 334
Deferred 231 123 (249) 575 (154) 33
398 214 144 8 (69) 367
State -
Current 188 26 81 (10) (9) 131
Deferred (137) 51 (11) (100) (86) (34)
51 77 70 (110) (95) 97
Total $ 449 $ 291 $ 214 $ (102) $ (164) $ 464
Southern Company's and Southern Power's ITCs and PTCs generated in the current
tax year and carried forward from prior tax years that cannot be utilized in the
current tax year are reclassified from current to deferred taxes in federal
income tax expense in the tables above. Southern Power's ITCs and PTCs
reclassified in this manner include $5 million for 2020, $51 million for 2019,
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
and $128 million for 2018. Southern Power received $340 million, $734 million,
and $5 million of cash related to federal ITCs under renewable energy
initiatives in 2020, 2019, and 2018, respectively. See "Deferred Tax Assets and
Liabilities" and "Tax Credit Carryforwards" herein for additional information.
In accordance with regulatory requirements, deferred federal ITCs for the
traditional electric operating companies are deferred and amortized over the
average life of the related property, with such amortization normally applied as
a credit to reduce depreciation and amortization in the statements of income.
Southern Power's and the natural gas distribution utilities' deferred federal
ITCs, as well as certain state ITCs for Nicor Gas, are deferred and amortized to
income tax expense over the life of the respective asset. ITCs amortized in
2020, 2019, and 2018 were immaterial for the traditional electric operating
companies and Southern Company Gas and were as follows for Southern Company and
Southern Power:
Southern Company Southern Power
(in millions)
2020 $ 84 $ 59
2019 181 151
2018 87 58
When Southern Power recognizes tax credits, the tax basis of the asset is
reduced by 50% of the ITCs received, resulting in a net deferred tax asset.
Southern Power has elected to recognize the tax benefit of this basis difference
as a reduction to income tax expense in the year in which the plant reaches
commercial operation. The tax benefit of the related basis differences reduced
income tax expense by $5 million and $1 million in 2019 and 2018, respectively.
State ITCs and other state credits, which are recognized in the period in which
the credits are generated, reduced Georgia Power's income tax expense by $67
million in 2020, $51 million in 2019, and $21 million in 2018.
Southern Power's federal and state PTCs, which are recognized in the period in
which the credits are generated, reduced Southern Power's income tax expense by
$15 million in 2020, $12 million in 2019, and $141 million in 2018.
Legal Entity Reorganizations
In 2018, Southern Power completed the final stage of a legal entity
reorganization of various direct and indirect subsidiaries that own and operate
substantially all of its solar facilities, including certain subsidiaries owned
in partnership with various third parties, and also completed a legal entity
reorganization of eight operating wind facilities under a new holding company,
SP Wind. The reorganizations resulted in net state tax benefits related to
certain changes in apportionment rates totaling approximately $65 million, which
were recorded in 2018.
Effective Tax Rate
Southern Company's effective tax rate is typically lower than the statutory rate
due to employee stock plans' dividend deduction, non-taxable AFUDC equity at the
traditional electric operating companies, flowback of excess deferred income
taxes at the regulated utilities, and federal income tax benefits from ITCs and
PTCs primarily at Southern Power.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:
2020
Georgia Southern Company
Southern Company Alabama Power Power Mississippi Power Southern Power Gas Federal statutory rate
21.0 % 21.0 % 21.0 % 21.0 % 21.0 % 21.0 %
State income tax, net of federal
deduction 2.8 5.0 0.5 4.8 2.7 4.0
Employee stock plans' dividend deduction (0.7) - - - - -
Non-deductible book depreciation 0.7 0.6 0.8 0.5 - -
Flowback of excess deferred income taxes (8.8) (3.1) (12.0) (18.5) - (2.7)
AFUDC-Equity (0.8) (0.6) (1.1) (0.1) - -
Federal PTCs - - - - (2.5) -
Amortization of ITC (1.6) (0.1) (0.1) (0.1) (22.1) (0.1)
Noncontrolling interests - - - - 3.1 -
Leveraged lease impairments (1.6) - - - - -
Other 0.2 (0.3) (0.3) 0.9 (0.9) 0.5
Effective income tax (benefit) rate 11.2 % 22.5 % 8.8 % 8.5 % 1.3 % 22.7 %
2019
Georgia Southern Company
Southern Company Alabama Power Power Mississippi Power Southern Power Gas Federal statutory rate
21.0 % 21.0 % 21.0 % 21.0 % 21.0 % 21.0 %
State income tax, net of federal
deduction 4.9 4.9 1.0 4.3 4.0 6.1
Employee stock plans' dividend deduction (0.4) - - - - -
Non-deductible book depreciation 0.3 0.6 0.5 0.4 - -
Flowback of excess deferred income taxes (2.1) (5.3) - (12.6) - (6.0)
AFUDC-Equity (0.4) (0.8) (0.6) (0.1) - -
ITC basis difference (0.1) - - - (1.9) -
Amortization of ITC (0.8) (0.1) (0.1) (0.1) (16.1) (0.1)
Tax impact from sale of subsidiaries 5.1 - - - (27.6) (1.4)
Noncontrolling interests - - - - 0.8 -
Other - (0.4) (0.3) 4.9 (0.6) (1.4)
Effective income tax (benefit) rate 27.5 % 19.9 % 21.5 % 17.8 % (20.4) % 18.2 %
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report
2018
Georgia Southern Company
Southern Company Alabama Power Power Mississippi Power Southern Power Gas Federal statutory rate
21.0 % 21.0 % 21.0 % 21.0 % 21.0 % 21.0 %
State income tax, net of federal
deduction 1.8 5.0 5.5 (65.1) (90.8) 9.2
Employee stock plans' dividend deduction (1.0) - - - - -
Non-deductible book depreciation 0.8 0.6 1.2 0.7 - -
Flowback of excess deferred income taxes (4.0) (1.8) - (4.1) - (3.0)
AFUDC-Equity (1.0) (1.0) (1.4) - - -
ITC basis difference (0.6) - - - (0.2) -
Federal PTCs (4.7) - - - (156.6) -
Amortization of ITC (2.0) (0.1) (0.2) (0.2) (55.4) (0.1)
Tax impact from sale of subsidiaries 8.6 - - - - 28.5
Tax Reform Legislation (1.4) - (4.9) (26.3) 96.1 (0.4)
Noncontrolling interests (0.4) - - - (14.9) -
Other (0.8) (0.1) 0.1 (1.4) 2.0 0.3
Effective income tax (benefit) rate 16.3 % 23.6 % 21.3 % (75.4) % (198.8) % 55.5 %
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
Deferred Tax Assets and Liabilities
The tax effects of temporary differences between the carrying amounts of assets
and liabilities in the financial statements of the Registrants and their
respective tax bases, which give rise to deferred tax assets and liabilities,
are as follows:
December 31, 2020
Southern Alabama Georgia Southern Southern
Company Power Power Mississippi Power Power Company Gas
(in millions)
Deferred tax liabilities -
Accelerated depreciation $ 8,950 $ 2,453 $ 3,228 $ 319 $ 1,389 $ 1,349
Property basis differences 1,999 1,010 689 148 - 135
Federal effect of net state deferred tax assets - - - 25 - -
Leveraged lease basis differences 142 - - - - -
Employee benefit obligations 739 250 362 39 12 26
Premium on reacquired debt 78 12 66 - - -
Regulatory assets -
Storm damage reserves 80 - 80 - - -
Employee benefit obligations 1,313 348 438 62 - 45
Remaining book value of retired assets 270 123 141 6 - -
AROs 1,969 764 1,165 40 - -
AROs 804 328 429 - - -
Other 437 128 82 66 12 138
Total deferred income tax liabilities 16,781 5,416 6,680 705 1,413 1,693
Deferred tax assets -
Federal effect of net state deferred tax
liabilities 284 151 59 - 26 70
State effect of federal deferred taxes 126 126 - - - -
Employee benefit obligations 1,511 369 522 80 6 100
Other property basis differences 223 - 72 - 134 -
ITC and PTC carryforward 1,853 12 539 - 1,110 -
Long-term debt fair value adjustment 86 - - - - 86
Other partnership basis difference 166 - - - 166 -
Other comprehensive losses 128 7 17 - 25 -
AROs 2,773 1,092 1,594 40 - -
Estimated loss on plants under construction 369 - 369 - - -
Other deferred state tax attributes 357 - 9 250 68 10
Regulatory liability associated with the Tax
Reform Legislation (not subject to normalization) 338 243 76 19 - -
Other 660 143 186 39 52 166
Total deferred income tax assets 8,874 2,143 3,443 428 1,587 432
Valuation allowance (136) - (35) (41) (35) (4)
Net deferred income tax assets 8,738 2,143 3,408 387 1,552 428
Net deferred income taxes (assets)/liabilities $ 8,043 $ 3,273 $ 3,272 $
318 $ (139) $ 1,265
Recognized in the balance sheets: Accumulated deferred income taxes - assets $ (132) $ - $ - $
(129) $ (262) $ -
Accumulated deferred income taxes - liabilities $ 8,175 $ 3,273 $ 3,272 $
447 $ 123 $ 1,265
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report
December 31, 2019
Southern Alabama Georgia Southern Southern
Company Power Power Mississippi Power Power Company Gas
(in millions)
Deferred tax liabilities -
Accelerated depreciation $ 8,711 $ 2,402 $ 3,058 $ 315 $ 1,422 $ 1,288
Property basis differences 1,843 912 643 143 - 133
Federal effect of net state deferred tax assets - - - 24 - -
Leveraged lease basis differences 236 - - - - -
Employee benefit obligations 704 242 351 38 12 12
Premium on reacquired debt 83 13 70 - - -
Regulatory assets -
Storm damage reserves 109 - 109 - - -
Employee benefit obligations 1,174 311 403 55 - 45
Remaining book value of retired assets 341 174 159 8 - -
AROs 1,723 613 1,066 44 - -
AROs 814 360 405 - - -
Other 523 134 81 68 11 198
Total deferred income tax liabilities 16,261 5,161 6,345 695 1,445 1,676
Deferred tax assets -
Federal effect of net state deferred tax
liabilities 277 162 63 - 24 56
Employee benefit obligations 1,385 334 488 72 5 111
Other property basis differences 230 - 65 - 146 -
ITC and PTC carryforward 2,098 11 435 - 1,445 -
Long-term debt fair value adjustment 97 - - - - 97
Other partnership basis difference 169 - - - 169 -
Other comprehensive losses 112 8 18 - 10 -
AROs 2,537 973 1,471 44 - -
Estimated loss on plants under construction 283 - 283 - - -
Other deferred state tax attributes 402 - 13 251 72 8
Regulatory liability associated with the Tax
Reform Legislation (not subject to normalization) 401 240 133 28 - -
Other 689 173 154 56 46 190
Total deferred income tax assets 8,680 1,901 3,123 451 1,917 462
Valuation allowance (137) - (35) (41) (36) (5)
Net deferred income tax assets 8,543 1,901 3,088 410 1,881 457
Net deferred income taxes (assets)/liabilities $ 7,718 $ 3,260 $ 3,257 $
285 $ (436) $ 1,219
Recognized in the balance sheets: Accumulated deferred income taxes - assets $ (170) $ - $ - $
(139) $ (551) $ -
Accumulated deferred income taxes - liabilities $ 7,888 $ 3,260 $ 3,257 $
424 $ 115 $ 1,219
The traditional electric operating companies and the natural gas distribution
utilities have tax-related regulatory assets (deferred income tax charges) and
regulatory liabilities (deferred income tax credits). The regulatory assets are
primarily attributable to tax benefits flowed through to customers in prior
years, deferred taxes previously recognized at rates lower than the current
enacted tax law, and taxes applicable to capitalized interest. The regulatory
liabilities are primarily attributable to deferred taxes previously recognized
at rates higher than the current enacted tax law and to unamortized ITCs. See
Note 2 for each Registrant's related balances at December 31, 2020 and 2019.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report Tax Credit Carryforwards Federal ITC/PTC carryforwards at December 31, 2020 were as follows:
Alabama Georgia Southern
Southern Company Power Power Power
(in millions)
Federal ITC/PTC carryforwards $ 1,428 $ 12 $ 114 $ 1,110
Tax Year in which federal ITC/PTC
carryforwards begin expiring 2031 2032 2031 2035
Year by which federal ITC/PTC
carryforwards are expected to be utilized 2024 2023 2023 2024
The estimated tax credit utilization reflects the various sale transactions
described in Note 15 and could be further delayed by numerous factors, including
the acquisition of additional renewable projects, the purchase of rights to
additional PTCs of Plant Vogtle Units 3 and 4 pursuant to certain joint
ownership agreements, potential impacts of the COVID-19 pandemic, and changes in
taxable income projections. See Note 2 under "Georgia Power - Nuclear
Construction" for additional information on Plant Vogtle Units 3 and 4.
At December 31, 2020, Georgia Power also had approximately $343 million in net
state investment and other net state tax credit carryforwards for the State of
Georgia that will expire between tax years 2021 and 2030 and are not expected to
be fully utilized. Georgia Power has a net state valuation allowance of $28
million associated with these carryforwards.
The ultimate outcome of these matters cannot be determined at this time.
Net Operating Loss Carryforwards
At December 31, 2020, the net state income tax benefit of state and local NOL
carryforwards for Southern Company's subsidiaries were as follows:
Approximate Net State Income
Tax Benefit of NOL Tax Year NOL
Company/Jurisdiction Carryforwards Begins Expiring
Mississippi Power
Mississippi $ 200 2031
Southern Power
Oklahoma 39 2035
Florida 11 2034
South Carolina 2 2036
Other states 1 Various
Southern Power Total $ 53
Other(*)
New York 11 2035
New York City 14 2035
Other states 21 Various
Southern Company Total $ 299
(*)Represents other Southern Company subsidiaries. Alabama Power, Georgia Power,
and Southern Company Gas did not have material state or local NOL carryforwards
at December 31, 2020.
State NOLs for Mississippi, Oklahoma, and Florida are not expected to be fully
utilized prior to expiration. At December 31, 2020, Mississippi Power had a net
state valuation allowance of $32 million for the Mississippi NOL and Southern
Power had net state valuation allowances of $16 million for the Oklahoma NOL and
$11 million for the Florida NOL.
The ultimate outcome of these matters cannot be determined at this time.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report Unrecognized Tax Benefits Changes in unrecognized tax benefits for the periods presented were as follows:
Southern Company
(in millions)
Unrecognized tax benefits at December 31, 2017 $ 18
Tax position changes - decrease from prior periods (18)
Unrecognized tax benefits at December 31, 2018 and 2019 $ -
Tax positions changes - increase from prior periods 44
Unrecognized tax benefits at December 31, 2020 $ 44
The unrecognized tax positions increase from prior periods for 2020 and the
balance of unrecognized tax benefits at December 31, 2020 relate to a 2019 state
tax filing position to exclude certain gains from 2019 dispositions from
taxation in a certain unitary state. If accepted by the state, this position
would decrease Southern Company's annual effective tax rate. The ultimate
outcome of this unrecognized tax benefit is dependent on completion of the
related state audit, which is not expected to be resolved within the next 12
months.
All of the Registrants classify interest on tax uncertainties as interest
expense. Accrued interest for all tax positions was immaterial for all years
presented. None of the Registrants accrued any penalties on uncertain tax
positions.
The IRS has finalized its audits of Southern Company's consolidated federal
income tax returns through 2019. Southern Company is a participant in the
Compliance Assurance Process of the IRS. The audits for the Registrants' state
income tax returns have either been concluded, or the statute of limitations has
expired, for years prior to 2015.
11. RETIREMENT BENEFITS
The Southern Company system has a qualified defined benefit, trusteed pension
plan covering substantially all employees, with the exception of PowerSecure
employees. The qualified pension plan is funded in accordance with requirements
of the Employee Retirement Income Security Act of 1974, as amended (ERISA). No
contributions to the qualified pension plan were made for the year ended
December 31, 2020 and no mandatory contributions to the qualified pension plan
are anticipated for the year ending December 31, 2021. The Southern Company
system also provides certain non-qualified defined benefits for a select group
of management and highly compensated employees, which are funded on a cash
basis. In addition, the Southern Company system provides certain medical care
and life insurance benefits for retired employees through other postretirement
benefit plans. The traditional electric operating companies fund other
postretirement trusts to the extent required by their respective regulatory
commissions. Southern Company Gas has a separate unfunded supplemental
retirement health care plan that provides medical care and life insurance
benefits to employees of discontinued businesses. For the year ending
December 31, 2021, no contributions to any other postretirement trusts are
expected.
On January 1, 2019, Southern Company completed the sale of Gulf Power to NextEra
Energy. See Note 15 under "Southern Company" for additional information. All
amounts presented in this note reflect the benefit plan obligations and related
plan assets for the Southern Company system's pension and other postretirement
benefit plans, including the amounts attributable to Gulf Power prior to January
1, 2019.
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Southern Company and Subsidiary Companies 2020 Annual Report
Actuarial Assumptions
The weighted average rates assumed in the actuarial calculations used to
determine both the net periodic costs for the pension and other postretirement
benefit plans for the following year and the benefit obligations as of the
measurement date are presented below.
2020
Assumptions used to determine net Georgia Southern Company
periodic costs: Southern Company Alabama Power Power Mississippi Power Southern Power Gas Pension plans Discount rate - benefit obligations
3.41 % 3.44 % 3.40 % 3.41 % 3.52 % 3.39 %
Discount rate - interest costs 2.99 3.01 2.96 2.99 3.18 2.99
Discount rate - service costs 3.66 3.69 3.67 3.67 3.70 3.53
Expected long-term return on plan
assets 8.25 8.25 8.25 8.25 8.25 8.25
Annual salary increase 4.73 4.73 4.73 4.73 4.73 4.73
Other postretirement benefit plans
Discount rate - benefit obligations 3.24 % 3.28 % 3.22 % 3.22 % 3.39 % 3.19 %
Discount rate - interest costs 2.80 2.84 2.79 2.76 2.97 2.71
Discount rate - service costs 3.57 3.61 3.57 3.57 3.57 3.52
Expected long-term return on plan
assets 7.25 7.36 7.05 7.07 - 6.69
Annual salary increase 4.73 4.73 4.73 4.73 4.73 4.73
2019
Assumptions used to determine net Alabama Georgia Southern Company
periodic costs: Southern Company Power Power Mississippi Power Southern Power Gas Pension plans Discount rate - benefit obligations
4.49 % 4.51 % 4.48 % 4.49 % 4.65 % 4.47 %
Discount rate - interest costs 4.12 4.14 4.10 4.12 4.35 4.11
Discount rate - service costs 4.70 4.73 4.72 4.73 4.75 4.57
Expected long-term return on plan
assets 7.75 7.75 7.75 7.75 7.75 7.75
Annual salary increase 4.34 4.46 4.46 4.46 4.46 3.07
Other postretirement benefit plans
Discount rate - benefit obligations 4.37 % 4.40 % 4.36 % 4.35 % 4.50 % 4.32 %
Discount rate - interest costs 3.98 4.01 3.97 3.95 4.14 3.91
Discount rate - service costs 4.63 4.67 4.64 4.64 4.65 4.56
Expected long-term return on plan
assets 6.86 6.76 6.85 6.79 - 6.49
Annual salary increase 4.34 4.46 4.46 4.46 4.46 3.07
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report
2018
Assumptions used to determine net Alabama Georgia Southern Company
periodic costs: Southern Company Power Power Mississippi Power Southern Power Gas Pension plans Discount rate - benefit obligations
3.80 % 3.81 % 3.79 % 3.80 % 3.94 % 3.74 %
Discount rate - interest costs 3.45 3.45 3.42 3.46 3.69 3.41
Discount rate - service costs 3.98 4.00 3.99 3.99 4.01 3.84
Expected long-term return on plan
assets 7.95 7.95 7.95 7.95 7.95 7.95
Annual salary increase 4.34 4.46 4.46 4.46 4.46 3.07
Other postretirement benefit plans
Discount rate - benefit obligations 3.68 % 3.71 % 3.68 % 3.68 % 3.81 % 3.62 %
Discount rate - interest costs 3.29 3.31 3.29 3.29 3.47 3.21
Discount rate - service costs 3.91 3.93 3.91 3.91 3.93 3.82
Expected long-term return on plan
assets 6.83 6.83 6.80 6.99 - 5.89
Annual salary increase 4.34 4.46 4.46 4.46 4.46 3.07
2020
Assumptions used to determine benefit Southern Company
obligations: Southern Company Alabama Power Georgia Power Mississippi Power Southern Power Gas
Pension plans
Discount rate 2.81 % 2.85 % 2.79 % 2.80 % 2.99 % 2.75 %
Annual salary increase 4.80 4.80 4.80 4.80 4.80 4.80
Other postretirement benefit plans
Discount rate 2.56 % 2.63 % 2.52 % 2.53 % 2.78 % 2.46 %
Annual salary increase 4.80 4.80 4.80 4.80 4.80 4.80
2019
Assumptions used to determine benefit Southern Company
obligations: Southern Company Alabama Power Georgia Power Mississippi Power Southern Power Gas
Pension plans
Discount rate 3.41 % 3.44 % 3.40 % 3.41 % 3.52 % 3.39 %
Annual salary increase 4.73 4.73 4.73 4.73 4.73 4.73
Other postretirement benefit plans
Discount rate 3.24 % 3.28 % 3.22 % 3.22 % 3.39 % 3.19 %
Annual salary increase 4.73 4.73 4.73 4.73 4.73 4.73
The Registrants estimate the expected rate of return on pension plan and other
postretirement benefit plan assets using a financial model to project the
expected return on each current investment portfolio. The analysis projects an
expected rate of return on each of the different asset classes in order to
arrive at the expected return on the entire portfolio relying on each trust's
target asset allocation and reasonable capital market assumptions. The financial
model is based on four key inputs: anticipated returns by asset class (based in
part on historical returns), each trust's target asset allocation, an
anticipated inflation rate, and the projected impact of a periodic rebalancing
of each trust's portfolio. Prior to 2020, the Registrants set the expected rate
of return assumption using asset return modeling based on geometric returns that
reflect the compound average returns for dependent annual periods. Beginning in
2020, the Registrants set the expected rate of return assumption using an
arithmetic mean which represents the expected simple average return to be earned
by the pension plan assets over any one year. The Registrants believe the use of
the arithmetic mean is more compatible with the expected rate of return's
function of estimating a single year's investment return.
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Southern Company and Subsidiary Companies 2020 Annual Report
An additional assumption used in measuring the accumulated other postretirement
benefit obligations (APBO) was a weighted average medical care cost trend rate.
The weighted average medical care cost trend rates used in measuring the APBO
for the Registrants at December 31, 2020 were as follows:
Initial Cost Trend Ultimate Cost Trend Year That Ultimate
Rate Rate Rate is Reached
Pre-65 6.00 % 4.50 % 2027
Post-65 medical 5.00 4.50 2027
Post-65 prescription 6.25 4.50 2028
Pension Plans
The total accumulated benefit obligation for the pension plans at December 31,
2020 and 2019 was as follows:
Southern Southern
Company Alabama Power Georgia Power Mississippi Power Southern Power Company Gas
(in millions)
December 31, 2020 $ 14,922 $ 3,414 $ 4,657 $ 683 $ 175 $ 1,072
December 31, 2019 13,391 3,053 4,222 615 151 963
Actuarial losses of $1.7 billion and $2.3 billion were recorded in the
remeasurement of the Southern Company system pension plans at December 31, 2020
and 2019, respectively, primarily due to decreases of 60 and 108 basis points,
respectively, in the overall discount rate used to calculate the benefit
obligation as a result of lower market interest rates.
Changes in the projected benefit obligations and the fair value of plan assets
during the plan years ended December 31, 2020 and 2019 were as follows:
2020
Southern Georgia Southern
Company Alabama Power Power Mississippi Power Southern Power Company Gas
(in millions)
Change in benefit obligation
Benefit obligation at beginning of
year $ 14,788 $ 3,404 $ 4,610 $ 671 $ 185 $ 1,067
Service cost 376 89 96 15 8 33
Interest cost 432 100 133 20 6 31
Benefits paid (629) (132) (202) (27) (6) (69)
Actuarial (gain) loss 1,679 393 490 75 24 127
Balance at end of year 16,646 3,854 5,127 754 217 1,189
Change in plan assets
Fair value of plan assets at beginning
of year 14,057 3,357 4,442 641 169 1,050
Actual return (loss) on plan assets 1,881 450 594 85 22 139
Employer contributions 58 9 10 2 1 3
Benefits paid (629) (132) (202) (27) (6) (69)
Fair value of plan assets at end of
year 15,367 3,684 4,844 701 186 1,123
Accrued liability $ (1,279) $ (170) $ (283) $ (53) $ (31) $ (66)
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2019
Southern Georgia Southern
Company Alabama Power Power Mississippi Power Southern Power Company Gas
(in millions)
Change in benefit obligation
Benefit obligation at beginning of
year $ 12,763 $ 2,816 $ 3,905 $ 557 $ 123 $ 907
Dispositions (509) - - - - -
Service cost 292 69 74 12 7 25
Interest cost 492 114 156 22 5 36
Benefits paid (596) (125) (194) (26) (4) (64)
Actuarial (gain) loss 2,346 530 669 106 54 163
Balance at end of year 14,788 3,404 4,610 671 185 1,067
Change in plan assets
Fair value of plan assets at beginning
of year 11,611 2,575 3,663 505 123 798
Dispositions (509) - - - - -
Actual return (loss) on plan assets 2,343 524 730 103 43 172
Employer contributions 1,208 383 243 59 7 144
Benefits paid (596) (125) (194) (26) (4) (64)
Fair value of plan assets at end of
year 14,057 3,357 4,442 641 169 1,050
Accrued liability $ (731) $ (47) $ (168) $ (30) $ (16) $ (17)
The projected benefit obligations for the qualified and non-qualified pension
plans at December 31, 2020 are shown in the following table. All pension plan
assets are related to the qualified pension plan.
Southern Southern
Company Alabama Power Georgia Power Mississippi Power Southern Power Company Gas
(in millions)
Projected benefit obligations:
Qualified pension plan $ 15,818 $ 3,719 $ 4,977 $ 718 $ 187 $ 1,114
Non-qualified pension plan 828 135 150 36 30 75
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report Amounts recognized in the balance sheets at December 31, 2020 and 2019 related to the Registrants' pension plans consist of the following:
Southern Georgia Southern
Company Alabama Power Power Mississippi Power Southern Power Company Gas
(in millions)
December 31, 2020:
Other regulatory assets,
deferred(*) $ 4,655 $ 1,286 $ 1,598 $ 235 $ - $ 205
Other deferred charges and assets - - - - - 70
Other current liabilities (52) (9) (10) (2) (2) (2)
Employee benefit obligations (1,227) (161) (273) (51) (29) (134)
Other regulatory liabilities,
deferred (34) - - - - -
AOCI 245 - - - 60 1
December 31, 2019:
Prepaid pension costs $ 2 $ 71 $ - $ 2 $ 10 $ -
Other regulatory assets,
deferred(*) 4,072 1,130 1,416 204 - 172
Other deferred charges and assets - - - - - 82
Other current liabilities (54) (8) (11) (2) (2) (2)
Employee benefit obligations (679) (110) (157) (30) (24) (97)
Other regulatory liabilities,
deferred (79) - - - - -
AOCI 185 - - - 46 (14)
(*)Amounts for Southern Company exclude regulatory assets of $224 million and
$252 million at December 31, 2020 and 2019, respectively, associated with
unamortized amounts in Southern Company Gas' pension plans prior to its
acquisition by Southern Company.
Presented below are the amounts included in regulatory assets at December 31,
2020 and 2019 related to the portion of the defined benefit pension plan
attributable to Southern Company, the traditional electric operating companies,
and Southern Company Gas that had not yet been recognized in net periodic
pension cost.
Southern Georgia Southern
Company Alabama Power Power Mississippi Power Company Gas
(in millions)
Balance at December 31, 2020
Regulatory assets:
Prior service cost $ 11 $ 5 $ 9 $ 2 $ (13)
Net (gain) loss 4,610 1,281 1,589 233 135
Regulatory amortization - - - - 83
Total regulatory assets(*) $ 4,621 $ 1,286 $ 1,598 $ 235 $ 205
Balance at December 31, 2019
Regulatory assets:
Prior service cost $ 13 $ 6 $ 10 $ 2 $ (15)
Net (gain) loss 3,980 1,124 1,406 201 113
Regulatory amortization - - - - 74
Total regulatory assets(*) $ 3,993 $ 1,130 $ 1,416 $ 203 $ 172
(*)Amounts for Southern Company exclude regulatory assets of $224 million and $252 million at December 31, 2020 and 2019, respectively, associated with unamortized amounts in Southern Company Gas' pension plans prior to its acquisition by Southern Company.
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Southern Company and Subsidiary Companies 2020 Annual Report
The changes in the balance of regulatory assets related to the portion of the
defined benefit pension plan attributable to Southern Company, the traditional
electric operating companies, and Southern Company Gas for the years ended
December 31, 2020 and 2019 are presented in the following table:
Southern Georgia Southern
Company Alabama Power Power Mississippi Power Company Gas
(in millions)
Regulatory assets (liabilities):(*)
Balance at December 31, 2018 $ 3,458 $ 955 $ 1,230 $ 167 $ 160
Net (gain) loss 801 213 231 42 30
Dispositions (144) - - - -
Reclassification adjustments:
Amortization of prior service costs (3) (1) (1) - 2
Amortization of net gain (loss) (119) (37) (44) (6) -
Amortization of regulatory assets(*) - - - - (20)
Total reclassification adjustments (122) (38) (45) (6) (18)
Total change 535 175 186 36 12
Balance at December 31, 2019 $ 3,993 $ 1,130 $ 1,416 $ 203 $ 172
Net (gain) loss 884 228 269 45 45
Reclassification adjustments:
Amortization of prior service costs (1) (1) (1) - 2
Amortization of net gain (loss) (255) (71) (86) (13) (8)
Amortization of regulatory assets(*) - - - - (6)
Total reclassification adjustments (256) (72) (87) (13) (12)
Total change 628 156 182 32 33
Balance at December 31, 2020 $ 4,621 $ 1,286 $ 1,598 $ 235 $ 205
(*)Amounts for Southern Company exclude regulatory assets of $224 million and
$252 million at December 31, 2020 and 2019, respectively, associated with
unamortized amounts in Southern Company Gas' pension plans prior to its
acquisition by Southern Company.
Presented below are the amounts included in AOCI at December 31, 2020 and 2019
related to the portion of the defined benefit pension plan attributable to
Southern Company, Southern Power, and Southern Company Gas that had not yet been
recognized in net periodic pension cost.
Southern Southern Southern Company
Company Power Gas
(in millions)
Balance at December 31, 2020
AOCI:
Prior service cost $ (3) $ - $ (4)
Net (gain) loss 248 60 5
Total AOCI $ 245 $ 60 $ 1
Balance at December 31, 2019
AOCI:
Prior service cost $ (3) $ - $ (6)
Net (gain) loss 188 46 (8)
Total AOCI $ 185 $ 46 $ (14)
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
The components of OCI related to the portion of the defined benefit pension plan
attributable to Southern Company, Southern Power, and Southern Company Gas for
the years ended December 31, 2020 and 2019 are presented in the following table:
Southern Southern Company
Southern Company Power Gas
(in millions)
AOCI:
Balance at December 31, 2018 $ 97 $ 26 $ (44)
Net (gain) loss 88 20
30
Balance at December 31, 2019 $ 185 $ 46 $
(14)
Net (gain) loss 74 16
15
Reclassification adjustments: Amortization of prior service costs - -
1
Amortization of net gain (loss) (14) (2)
(1)
Total reclassification adjustments (14) (2) -
Total change 60 14 15
Balance at December 31, 2020 $ 245 $ 60 $ 1
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Southern Company and Subsidiary Companies 2020 Annual Report
Components of net periodic pension cost for the Registrants were as follows:
Southern Georgia Southern
Company Alabama Power Power Mississippi Power Southern Power Company Gas
(in millions)
2020
Service cost $ 376 $ 89 $ 96 $ 15 $ 8 $ 33
Interest cost 432 100 133 20 6 31
Expected return on plan assets (1,100) (264) (347) (51) (13) (75)
Recognized net (gain) loss 269 71 86 13 2 6
Net amortization 1 1 1 - - 15
Prior service cost - - - - - (3)
Net periodic pension cost $ (22) $ (3) $ (31) $ (3) $ 3 $ 7
2019
Service cost $ 292 $ 69 $ 74 $ 12 $ 7 $ 25
Interest cost 492 114 156 22 5 36
Expected return on plan assets (885) (206) (292) (40) (10) (60)
Recognized net (gain) loss 120 37 44 6 1 2
Net amortization 2 - 1 - - 14
Prior service cost - - - - - (3)
Net periodic pension cost $ 21 $ 14 $ (17) $ - $ 3 $ 14
2018
Service cost $ 359 $ 78 $ 87 $ 17 $ 9 $ 34
Interest cost 464 101 139 20 5 39
Expected return on plan assets (943) (207) (296) (41) (10) (75)
Recognized net (gain) loss 213 54 69 10 1 12
Net amortization 4 1 2 - - 15
Prior service cost - - - - - (2)
Net periodic pension cost $ 97 $ 27 $ 1 $ 6 $ 5 $ 23
The service cost component of net periodic pension cost is included in
operations and maintenance expenses and all other components of net periodic
pension cost are included in other income (expense), net in the Registrants'
statements of income.
Net periodic pension cost is the sum of service cost, interest cost, and other
costs netted against the expected return on plan assets. The expected return on
plan assets is determined by multiplying the expected rate of return on plan
assets and the market-related value of plan assets. In determining the
market-related value of plan assets, the Registrants have elected to amortize
changes in the market value of return-seeking plan assets over five years and to
recognize the changes in the market value of liability-hedging plan assets
immediately. Given the significant concentration in return-seeking plan assets,
the accounting value of plan assets that is used to calculate the expected
return on plan assets differs from the current fair value of the plan assets.
Effective January 1, 2020, Southern Company changed its method of calculating
the market-related value of the liability-hedging securities included in its
pension plan assets. The market-related value is used to determine the expected
return on plan assets component of net periodic pension cost. Southern Company
previously used the calculated value approach for all plan assets, which
smoothed asset returns and deferred gains and losses by amortizing them into the
calculation of the market-related value over five years. Southern Company
changed to the fair value approach for liability-hedging securities, which
includes measuring the market-related value of that portion of the plan assets
at fair value for purposes of determining the expected return on plan assets.
The remaining asset classes of plan assets will continue to be valued using the
calculated value approach. Southern Company considers the fair value approach to
be preferable for liability-hedging securities because it results in a current
reflection of changes in the value of plan assets in the measurement of net
periodic pension cost more consistent with the change in the related
obligations. Southern Company determined the effect of this change in accounting
method was immaterial to the historical
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Southern Company and Subsidiary Companies 2020 Annual Report
and current financial statements of all Registrants; therefore, the effect of
the change was recorded through earnings as a prior period adjustment for the
amounts related to the unregulated businesses of Southern Company and Southern
Power. Amounts related to the traditional electric operating companies and the
natural gas distribution utilities were reflected as adjustments to regulatory
assets, consistent with the expected regulatory treatment.
Future benefit payments reflect expected future service and are estimated based
on assumptions used to measure the projected benefit obligation for the pension
plans. At December 31, 2020, estimated benefit payments were as follows:
Georgia Southern Company
Southern Company Alabama Power Power Mississippi Power Southern Power Gas
(in millions)
Benefit Payments:
2021 $ 651 $ 141 $ 208 $ 29 $ 6 $ 66
2022 678 147 215 30 6 66
2023 702 154 222 31 6 66
2024 725 158 229 32 6 65
2025 748 165 235 33 7 65
2026 to 2030 4,024 895 1,244 181 38 330
Other Postretirement Benefits
Changes in the APBO and the fair value of the Registrants' plan assets during
the plan years ended December 31, 2020 and 2019 were as follows:
2020
Southern Georgia Southern
Company Alabama Power Power Mississippi Power Southern Power Company Gas
(in millions)
Change in benefit obligation
Benefit obligation at beginning of
year $ 1,985 $ 462 $ 742 $ 87 $ 11 $ 250
Service cost 22 6 6 1 1 2
Interest cost 54 13 20 2 - 7
Benefits paid (126) (29) (46) (6) - (17)
Actuarial (gain) loss 7 9 (26) (3) - 6
Retiree drug subsidy 6 2 3 - - -
Balance at end of year 1,948 463 699 81 12 248
Change in plan assets
Fair value of plan assets at beginning
of year 1,061 413 403 26 - 115
Actual return (loss) on plan assets 145 60 50 3 - 18
Employer contributions 72 12 17 4 - 12
Benefits paid (120) (27) (43) (6) - (17)
Fair value of plan assets at end of
year 1,158 458 427 27 - 128
Accrued liability $ (790) $ (5) $ (272) $ (54) $ (12) $ (120)
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2019
Southern Georgia Southern
Company Alabama Power Power Mississippi Power Southern Power Company Gas
(in millions)
Change in benefit obligation
Benefit obligation at beginning of
year $ 1,865 $ 403 $ 675 $ 81 $ 9 $ 244
Dispositions (69) - - - - -
Service cost 18 5 5 1 1 1
Interest cost 69 16 26 3 - 9
Benefits paid (126) (27) (47) (6) (1) (17)
Actuarial (gain) loss 223 63 80 8 2 13
Retiree drug subsidy 5 2 3 - - -
Balance at end of year 1,985 462 742 87 11 250
Change in plan assets
Fair value of plan assets at beginning
of year 928 360 344 23 - 98
Dispositions (18) - - - - -
Actual return (loss) on plan assets 189 76 68 4 - 21
Employer contributions 83 2 35 5 1 13
Benefits paid (121) (25) (44) (6) (1) (17)
Fair value of plan assets at end of
year 1,061 413 403 26 - 115
Accrued liability $ (924) $ (49) $ (339) $ (61) $ (11) $ (135)
Amounts recognized in the balance sheets at December 31, 2020 and 2019 related
to the Registrants' other postretirement benefit plans consist of the following:
Georgia Southern Southern
Southern Company Alabama Power Power Mississippi Power Power Company Gas
(in millions)
December 31, 2020:
Other regulatory assets,
deferred(a) $ 137 $ - $ 47 $ 5 $ - $ (23)
Other current liabilities (5) - - - - -
Employee benefit obligations(b) (785) (5) (272) (54) (12) (120)
Other regulatory liabilities,
deferred (86) (21) - - - -
AOCI 8 - - - 3 -
December 31, 2019:
Other regulatory assets,
deferred(a) $ 183 $ 3 $ 96 $ 10 $ - $ (11)
Other current liabilities (5) - - - - -
Employee benefit obligations(b) (919) (49) (339) (61) (11) (135)
Other regulatory liabilities,
deferred (62) (2) - - - -
AOCI 2 - - - 2 (4)
(a)Amounts for Southern Company exclude regulatory assets of $47 million and $50
million at December 31, 2020 and 2019, respectively, associated with unamortized
amounts in Southern Company Gas' other postretirement benefit plans prior to its
acquisition by Southern Company.
(b)Included in other deferred credits and liabilities on Southern Power's
consolidated balance sheets.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
Presented below are the amounts included in net regulatory assets (liabilities)
at December 31, 2020 and 2019 related to the other postretirement benefit plans
of Southern Company, the traditional electric operating companies, and Southern
Company Gas that had not yet been recognized in net periodic other
postretirement benefit cost.
Georgia Southern
Southern Company Alabama Power Power Mississippi Power Company Gas
(in millions)
Balance at December 31, 2020:
Regulatory assets (liabilities):
Prior service cost $ 12 $ 3 $ 5 $ - $ 1
Net (gain) loss 39 (24) 42 5 (49)
Regulatory amortization - - - - 25
Total regulatory assets (liabilities)(*) $ 51 $ (21) $ 47 $ 5 $ (23)
Balance at December 31, 2019:
Regulatory assets (liabilities):
Prior service cost $ 11 $ 3 $ 4 $ - $ 1
Net (gain) loss 110 (2) 92 10 (43)
Regulatory amortization - - - - 31
Total regulatory assets (liabilities)(*) $ 121 $ 1 $ 96 $ 10 $ (11)
(*)Amounts for Southern Company exclude regulatory assets of $47 million and $50
million at December 31, 2020 and 2019, respectively, associated with unamortized
amounts in Southern Company Gas' other postretirement benefit plans prior to its
acquisition by Southern Company.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
The changes in the balance of net regulatory assets (liabilities) related to the
other postretirement benefit plans for the plan years ended December 31, 2020
and 2019 are presented in the following table:
Georgia Southern
Southern Company Alabama Power Power Mississippi Power Company Gas
(in millions)
Net regulatory assets (liabilities):(*)
Balance at December 31, 2018 $ 22 $ (9) $ 60 $ 4 $ (4)
Net (gain) loss 90 14 37 6 (1)
Dispositions 5 - - - -
Change in prior service costs 5 - - - -
Reclassification adjustments:
Amortization of prior service costs (3) (4) - - -
Amortization of net gain (loss) 2 - (1) - -
Amortization of regulatory assets(*) - - - - (6)
Total reclassification adjustments (1) (4) (1) - (6)
Total change 99 10 36 6 (7)
Balance at December 31, 2019 $ 121 $ 1 $ 96 $ 10 $ (11)
Net (gain) loss (65) (22) (47) (5) (5)
Reclassification adjustments:
Amortization of prior service costs 1 - 1 - -
Amortization of net gain (loss) (6) - (3) - -
Amortization of regulatory assets(*) - - - - (7)
Total reclassification adjustments (5) - (2) - (7)
Total change (70) (22) (49) (5) (12)
Balance at December 31, 2020 $ 51 $ (21) $ 47 $ 5 $ (23)
(*)Amounts for Southern Company exclude regulatory assets of $47 million and $50
million at December 31, 2020 and 2019, respectively, associated with unamortized
amounts in Southern Company Gas' other postretirement benefit plans prior to its
acquisition by Southern Company.
Presented below are the amounts included in AOCI at December 31, 2020 and 2019
related to the other postretirement benefit plans of Southern Company, Southern
Power, and Southern Company Gas that had not yet been recognized in net periodic
other postretirement benefit cost.
Southern Southern Southern Company
Company Power Gas
(in millions)
Balance at December 31, 2020
AOCI:
Prior service cost $ 1 $ - $ 1
Net (gain) loss 7 3 (1)
Total AOCI $ 8 $ 3 $ -
Balance at December 31, 2019
AOCI:
Prior service cost $ 1 $ - $ 1
Net (gain) loss 1 2 (5)
Total AOCI $ 2 $ 2 $ (4)
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report The components of OCI related to the other postretirement benefit plans for the plan years ended December 31, 2020 and 2019 are presented in the following table:
Southern
Southern Company Power Southern Company Gas
(in millions)
AOCI:
Balance at December 31, 2018 $ (4) $ 1 $
(4)
Net (gain) loss 5 1
-
Reclassification adjustments:
Amortization of net gain (loss) 1 - -
Total change 6 1 -
Balance at December 31, 2019 $ 2 $ 2 $ (4)
Net (gain) loss 2 1 -
Reclassification adjustments:
Amortization of net gain (loss) 4 - 4
Total change 6 1 4
Balance at December 31, 2020 $ 8 $ 3 $ -
Components of the other postretirement benefit plans' net periodic cost for the
Registrants were as follows:
Georgia Southern
Southern Company Alabama Power Power Mississippi Power Southern Power Company Gas
(in millions)
2020
Service cost $ 22 $ 6 $ 6 $ 1 $ 1 $ 2
Interest cost 54 13 20 2 - 7
Expected return on plan assets (72) (29) (26) (1) - (10)
Net amortization 1 - 2 - - 6
Net periodic postretirement benefit
cost $ 5 $ (10) $ 2 $ 2 $ 1 $ 5
2019
Service cost $ 18 $ 5 $ 5 $ 1 $ 1 $ 1
Interest cost 69 16 26 3 - 9
Expected return on plan assets (65) (26) (25) (2) - (7)
Net amortization - 4 1 - - 6
Net periodic postretirement benefit
cost $ 22 $ (1) $ 7 $ 2 $ 1 $ 9
2018
Service cost $ 24 $ 6 $ 6 $ 1 $ 1 $ 2
Interest cost 75 17 28 3 - 10
Expected return on plan assets (69) (26) (25) (2) - (7)
Net amortization 21 5 10 1 - 6
Net periodic postretirement benefit
cost $ 51 $ 2 $ 19 $ 3 $ 1 $ 11
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Southern Company and Subsidiary Companies 2020 Annual Report
The service cost component of net periodic postretirement benefit cost is
included in operations and maintenance expenses and all other components of net
periodic postretirement benefit cost are included in other income (expense), net
in the Registrants' statements of income.
The Registrants' future benefit payments, including prescription drug benefits,
are provided in the table below. These amounts reflect expected future service
and are estimated based on assumptions used to measure the APBO for the other
postretirement benefit plans.
Georgia Southern Company
Southern Company Alabama Power Power Mississippi Power Southern Power Gas
(in millions)
Benefit payments:
2021 $ 115 $ 25 $ 42 $ 6 $ - $ 18
2022 113 25 41 5 - 18
2023 111 25 40 5 - 18
2024 110 24 38 4 1 17
2025 113 25 40 5 1 17
2026 to 2030 550 127 199 23 3 76
Benefit Plan Assets
Pension plan and other postretirement benefit plan assets are managed and
invested in accordance with all applicable requirements, including ERISA and the
Internal Revenue Code. The Registrants' investment policies for both the pension
plans and the other postretirement benefit plans cover a diversified mix of
assets as described below. Derivative instruments may be used to gain efficient
exposure to the various asset classes and as hedging tools. Additionally, the
Registrants minimize the risk of large losses primarily through diversification
but also monitor and manage other aspects of risk.
The investment strategy for plan assets related to the Southern Company system's
qualified pension plan is to be broadly diversified across major asset classes.
The asset allocation is established after consideration of various factors that
affect the assets and liabilities of the pension plan including, but not limited
to, historical and expected returns and interest rates, volatility, correlations
of asset classes, the current level of assets and liabilities, and the assumed
growth in assets and liabilities. Because a significant portion of the liability
of the pension plan is long-term in nature, the assets are invested consistent
with long-term investment expectations for return and risk. To manage the actual
asset class exposures relative to the target asset allocation, the Southern
Company system employs a formal rebalancing program. As additional risk
management, external investment managers and service providers are subject to
written guidelines to ensure appropriate and prudent investment practices.
Management believes the portfolio is well-diversified with no significant
concentrations of risk.
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report Investment Strategies and Benefit Plan Asset Fair Values A description of the major asset classes that the pension and other postretirement benefit plans are comprised of, along with the valuation methods used for fair value measurement, is provided below:
Description Valuation Methodology
Domestic equity: A mix of large and small Domestic and international equities such as common
capitalization stocks with generally an equal stocks, American depositary receipts, and real
distribution of value and growth attributes, managed estate investment trusts that trade on public
both actively and through passive index approaches. exchanges are classified as Level 1 investments and
are valued at the closing price in the active
International equity: A mix of large and small market. Equity funds with unpublished prices that
capitalization growth and value stocks with are comprised of publicly traded securities (such as
developed and emerging markets exposure, managed commingled/pooled funds) are also valued at the
both actively and through fundamental indexing closing price in the active market, but are
approaches. classified as Level 2.
Investments in fixed income securities, including
fixed income pooledfunds, are generally classified
as Level 2 investments and are valued based on
Fixed income: A mix of domestic and international prices reported in the market place. Additionally,
bonds. the value of fixed income securities takes into
consideration certain items such as broker quotes,
spreads, yield curves, interest rates, and discount
rates that apply to the term of a specific
instrument.
Investments in TOLI policies are classified as Level
Trust-owned life insurance (TOLI): Investments of 2 investments and are valued based on the underlying
taxable trusts aimed at minimizing the impact of investments held in the policy's separate accounts.
taxes on the portfolio. The underlying assets are equity and fixed income
pooled funds that are comprised of Level 1 and Level
2 securities.
Special situations: Investments in opportunistic
strategies with the objective of diversifying and Investments in real estate, private equity, and
enhancing returns and exploiting short-term special situations are generally classified as Net
inefficiencies, as well as investments in promising Asset Value as a Practical Expedient, since the
new strategies of a longer-term nature. underlying assets typically do not have publicly
available observable inputs. The fund manager values
Real estate: Investments in traditional private the assets using various inputs and techniques
market, equity-oriented investments in real depending on the nature of the underlying
properties (indirectly through pooled funds or investments. Techniques may include purchase
partnerships) and in publicly traded real estate multiples for comparable transactions, comparable
securities. public company trading multiples, discounted cash
flow analysis, prevailing market capitalization
Private equity: Investments in private partnerships rates, recent sales of comparable investments, and
that invest in private or public securities independent third-party appraisals. The fair value
typically through privately-negotiated and/or of partnerships is determined by aggregating the
structured transactions, including leveraged value of the underlying assets less liabilities.
buyouts, venture capital, and distressed debt.
For purposes of determining the fair value of the pension plan and other
postretirement benefit plan assets and the appropriate level designation,
management relies on information provided by the plan's trustee. This
information is reviewed and evaluated by management with changes made to the
trustee information as appropriate. The fair values presented herein exclude
cash, receivables related to investment income and pending investment sales, and
payables related to pending investment purchases. The Registrants did not have
any investments classified as Level 3 at December 31, 2020 or 2019.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
The fair values, and actual allocations relative to the target allocations, of
the Southern Company system's pension plans at December 31, 2020 and 2019 are
presented below.
Fair Value Measurements Using
Significant
Quoted Prices in Other Net Asset Value
Active Markets for Observable as a Practical
Identical Assets Inputs Expedient
At December 31, 2020: (Level 1) (Level 2) (NAV) Total Target Allocation Actual Allocation
(in millions)
Southern Company
Assets:
Equity: 51 % 56 %
Domestic equity $ 2,852 $ 1,247 $ - $ 4,099
International equity 2,660 1,497 - 4,157
Fixed income: 23 23
U.S. Treasury, government, and agency
bonds - 951 - 951
Mortgage- and asset-backed securities - 9 - 9
Corporate bonds - 1,673 - 1,673
Pooled funds - 772 - 772
Cash equivalents and other 356 5 - 361
Real estate investments 542 - 1,596 2,138 14 13
Special situations - - 166 166 3 1
Private equity - - 1,104 1,104 9 7
Total $ 6,410 $ 6,154 $ 2,866 $ 15,430 100 % 100 %
Alabama Power
Assets:
Equity: 51 % 56 %
Domestic equity $ 685 $ 299 $ - $ 984
International equity 638 359 - 997
Fixed income: 23 23
U.S. Treasury, government, and agency
bonds - 228 - 228
Mortgage- and asset-backed securities - 2 - 2
Corporate bonds - 401 - 401
Pooled funds - 185 - 185
Cash equivalents and other 85 1 - 86
Real estate investments 130 - 382 512 14 13
Special situations - - 40 40 3 1
Private equity - - 264 264 9 7
Total $ 1,538 $ 1,475 $ 686 $ 3,699 100 % 100 %
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report
Fair Value Measurements Using
Significant Net Asset
Quoted Prices in Other Value as a
Active Markets for Observable Practical
Identical Assets Inputs Expedient
At December 31, 2020: (Level 1) (Level 2) (NAV) Total Target Allocation Actual Allocation
(in millions)
Georgia Power
Assets:
Equity: 51 % 56 %
Domestic equity $ 899 $ 393 $ - $ 1,292
International equity 839 472 - 1,311
Fixed income: 23 23
U.S. Treasury, government, and agency
bonds - 300 - 300
Mortgage- and asset-backed securities - 3 - 3
Corporate bonds - 527 - 527
Pooled funds - 243 - 243
Cash equivalents and other 112 1 - 113
Real estate investments 171 - 503 674 14 13
Special situations - - 53 53 3 1
Private equity - - 348 348 9 7
Total $ 2,021 $ 1,939 $ 904 $ 4,864 100 % 100 %
Mississippi Power
Assets:
Equity: 51 % 56 %
Domestic equity $ 131 $ 57 $ - $ 188
International equity 122 68 - 190
Fixed income: 23 23
U.S. Treasury, government, and agency
bonds - 43 - 43
Corporate bonds - 76 - 76
Pooled funds - 35 - 35
Cash equivalents and other 16 - - 16
Real estate investments 25 - 73 98 14 13
Special situations - - 8 8 3 1
Private equity - - 50 50 9 7
Total $ 294 $ 279 $ 131 $ 704 100 % 100 %
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report
Fair Value Measurements Using
Significant Net Asset
Quoted Prices in Other Value as a
Active Markets for Observable Practical
Identical Assets Inputs Expedient
At December 31, 2020: (Level 1) (Level 2) (NAV) Total Target Allocation Actual Allocation
(in millions)
Southern Power
Assets:
Equity: 51 % 56 %
Domestic equity $ 35 $ 15 $ - $ 50
International equity 32 19 - 51
Fixed income: 23 23
U.S. Treasury, government, and agency
bonds - 12 - 12
Corporate bonds - 20 - 20
Pooled funds - 9 - 9
Cash equivalents and other 4 - - 4
Real estate investments 7 - 19 26 14 13
Special situations - - 2 2 3 1
Private equity - - 13 13 9 7
Total $ 78 $ 75 $ 34 $ 187 100% 100 %
Southern Company Gas
Assets:
Equity: 51 % 56 %
Domestic equity $ 209 $ 91 $ - $ 300
International equity 195 109 - 304
Fixed income: 23 23
U.S. Treasury, government, and agency
bonds - 69 - 69
Mortgage- and asset-backed securities - 1 - 1
Corporate bonds - 122 - 122
Pooled funds - 56 - 56
Cash equivalents and other 26 - - 26
Real estate investments 40 - 117 157 14 13
Special situations - - 12 12 3 1
Private equity - - 81 81 9 7
Total $ 470 $ 448 $ 210 $ 1,128 100 % 100 %
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report
Fair Value Measurements Using
Significant
Quoted Prices in Other Net Asset Value
Active Markets for Observable as a Practical
Identical Assets Inputs Expedient
At December 31, 2019: (Level 1) (Level 2) (NAV) Total Target Allocation Actual Allocation
(in millions)
Southern Company
Assets:
Equity: 51 % 51 %
Domestic equity $ 2,220 $ 898 $ - $ 3,118
International equity 2,360 1,286 - 3,646
Fixed income: 23 29
U.S. Treasury, government, and agency
bonds - 965 - 965
Mortgage- and asset-backed securities - 9 - 9
Corporate bonds - 1,315 - 1,315
Pooled funds - 684 - 684
Cash equivalents and other 1,317 - - 1,317
Real estate investments 539 - 1,418 1,957 14 12
Special situations - - 155 155 3 1
Private equity - - 953 953 9 7
Total $ 6,436 $ 5,157 $ 2,526 $ 14,119 100 % 100 %
Alabama Power
Assets:
Equity: 51 % 51 %
Domestic equity $ 530 $ 214 $ - $ 744
International equity 564 307 - 871
Fixed income: 23 29
U.S. Treasury, government, and agency
bonds - 230 - 230
Mortgage- and asset-backed securities - 2 - 2
Corporate bonds - 314 - 314
Pooled funds - 163 - 163
Cash equivalents and other 315 - - 315
Real estate investments 129 - 339 468 14 12
Special situations - - 37 37 3 1
Private equity - - 228 228 9 7
Total $ 1,538 $ 1,230 $ 604 $ 3,372 100 % 100 %
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report
Fair Value Measurements Using
Significant Net Asset
Quoted Prices in Other Value as a
Active Markets for Observable Practical
Identical Assets Inputs Expedient
At December 31, 2019: (Level 1) (Level 2) (NAV) Total Target Allocation Actual Allocation
(in millions)
Georgia Power
Assets:
Equity: 51 % 51 %
Domestic equity $ 701 $ 284 $ - $ 985
International equity 746 407 - 1,153
Fixed income: 23 29
U.S. Treasury, government, and agency
bonds - 305 - 305
Mortgage- and asset-backed securities - 3 - 3
Corporate bonds - 415 - 415
Pooled funds - 216 - 216
Cash equivalents and other 416 - - 416
Real estate investments 170 - 448 618 14 12
Special situations - - 49 49 3 1
Private equity - - 301 301 9 7
Total $ 2,033 $ 1,630 $ 798 $ 4,461 100 % 100 %
Mississippi Power
Assets:
Equity: 51 % 51 %
Domestic equity $ 101 $ 41 $ - $ 142
International equity 108 59 - 167
Fixed income: 23 29
U.S. Treasury, government, and agency
bonds - 44 - 44
Corporate bonds - 60 - 60
Pooled funds - 31 - 31
Cash equivalents and other 60 - - 60
Real estate investments 25 - 65 90 14 12
Special situations - - 7 7 3 1
Private equity - - 43 43 9 7
Total $ 294 $ 235 $ 115 $ 644 100 % 100 %
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report
Fair Value Measurements Using
Quoted Prices in Significant Net Asset
Active Markets Other Value as a
for Identical Observable Practical
Assets Inputs Expedient
At December 31, 2019: (Level 1) (Level 2) (NAV) Total Target Allocation Actual Allocation
(in millions)
Southern Power
Assets:
Equity: 51 % 51 %
Domestic equity $ 27 $ 11 $ - $ 38
International equity 28 16 - 44
Fixed income: 23 29
U.S. Treasury, government, and agency
bonds - 12 - 12
Corporate bonds - 16 - 16
Pooled funds - 8 - 8
Cash equivalents and other 16 - - 16
Real estate investments 6 - 17 23 14 12
Special situations - - 2 2 3 1
Private equity - - 11 11 9 7
Total $ 77 $ 63 $ 30 $ 170 100 % 100 %
Southern Company Gas
Assets:
Equity: 51 % 51 %
Domestic equity $ 166 $ 67 $ - $ 233
International equity 176 96 - 272
Fixed income: 23 29
U.S. Treasury, government, and agency
bonds - 72 - 72
Mortgage- and asset-backed securities - 1 - 1
Corporate bonds - 98 - 98
Pooled funds - 51 - 51
Cash equivalents and other 98 - - 98
Real estate investments 40 - 106 146 14 12
Special situations - - 12 12 3 1
Private equity - - 71 71 9 7
Total $ 480 $ 385 $ 189 $ 1,054 100 % 100 %
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report The fair values, and actual allocations relative to the target allocations, of the applicable Registrants' other postretirement benefit plan assets at December 31, 2020 and 2019 are presented below.
Fair Value Measurements Using
Significant Net Asset
Quoted Prices in Other Value as a
Active Markets for Observable Practical
Identical Assets Inputs Expedient
At December 31, 2020: (Level 1) (Level 2) (NAV) Total Target Allocation Actual Allocation
(in millions)
Southern Company
Assets:
Equity: 63 % 66 %
Domestic equity $ 113 $ 98 $ - $ 211
International equity 71 102 - 173
Fixed income: 28 27
U.S. Treasury, government, and agency bonds - 32 - 32
Corporate bonds - 44 - 44
Pooled funds - 86 - 86
Cash equivalents and other 15 - - 15
Trust-owned life insurance - 508 - 508
Real estate investments 15 - 42 57 5 5
Special situations - - 4 4 1 -
Private equity - - 29 29 3 2
Total $ 214 $ 870 $ 75 $ 1,159 100 % 100 %
Alabama Power
Assets:
Equity: 68 % 69 %
Domestic equity $ 26 $ 11 $ - $ 37
International equity 23 13 - 36
Fixed income: 24 25
U.S. Treasury, government, and agency bonds - 11 - 11
Corporate bonds - 14 - 14
Pooled funds - 7 - 7
Cash equivalents and other 5 - - 5
Trust-owned life insurance - 321 - 321
Real estate investments 5 - 13 18 4 4
Special situations - - 1 1 1 -
Private equity - - 9 9 3 2
Total $ 59 $ 377 $ 23 $ 459 100 % 100 %
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report
Fair Value Measurements Using
Significant Net Asset
Quoted Prices in Active Other Value as a
Markets for Identical Observable Practical
Assets Inputs Expedient
At December 31, 2020: (Level 1) (Level 2) (NAV) Total Target Allocation Actual Allocation
(in millions)
Georgia Power
Assets:
Equity: 60 % 64 %
Domestic equity $ 58 $ 10 $ - $ 68
International equity 21 50 - 71
Fixed income: 33 30
U.S. Treasury, government, and agency
bonds - 8 - 8
Corporate bonds - 13 - 13
Pooled funds - 46 - 46
Cash equivalents and other 5 - - 5
Trust-owned life insurance - 188 - 188
Real estate investments 5 - 13 18 4 4
Special situations - - 1 1 1 -
Private equity - - 9 9 2 2
Total $ 89 $ 315 $ 23 $ 427 100 % 100 %
Mississippi Power
Assets:
Equity: 43 % 46 %
Domestic equity $ 4 $ 2 $ - $ 6
International equity 4 2 - 6
Fixed income: 37 36
U.S. Treasury, government, and agency
bonds - 5 - 5
Corporate bonds - 2 - 2
Pooled funds - 1 - 1
Cash equivalents and other 1 - - 1
Real estate investments 1 - 2 3 11 11
Special situations - - - - 2 1
Private equity - - 2 2 7 6
Total $ 10 $ 12 $ 4 $ 26 100 % 100 %
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report
Fair Value Measurements Using
Significant Net Asset
Other Value as a
Quoted Prices in Active Observable Practical
Markets for Identical Assets Inputs Expedient
At December 31, 2020: (Level 1) (Level 2) (NAV) Total Target Allocation Actual Allocation
(in millions)
Southern Company Gas
Assets:
Equity: 72 % 76 %
Domestic equity $ 2 $ 66 $ - $ 68
International equity 2 25 - 27
Fixed income: 26 22
U.S. Treasury, government, and agency
bonds - 1 - 1
Corporate bonds - 1 - 1
Pooled funds - 25 - 25
Cash equivalents and other 1 - - 1
Real estate investments - - 1 1 1 1
Private equity - - 1 1 1 1
Total $ 5 $ 118 $ 2 $ 125 100 % 100 %
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report
Fair Value Measurements Using
Significant Net Asset
Quoted Prices in Other Value as a
Active Markets for Observable Practical
Identical Assets Inputs Expedient
At December 31, 2019: (Level 1) (Level 2) (NAV) Total Target Allocation Actual Allocation
(in millions)
Southern Company
Assets:
Equity: 63 % 64 %
Domestic equity $ 95 $ 81 $ - $ 176
International equity 69 80 - 149
Fixed income: 28 30
U.S. Treasury, government, and agency
bonds - 31 - 31
Corporate bonds - 35 - 35
Pooled funds - 82 - 82
Cash equivalents and other 42 - - 42
Trust-owned life insurance - 463 - 463
Real estate investments 15 - 38 53 5 4
Special situations - - 4 4 1 -
Private equity - - 25 25 3 2
Total $ 221 $ 772 $ 67 $ 1,060 100 % 100 %
Alabama Power
Assets:
Equity: 68 % 67 %
Domestic equity $ 26 $ 8 $ - $ 34
International equity 21 11 - 32
Fixed income: 24 27
U.S. Treasury, government, and agency
bonds - 10 - 10
Corporate bonds - 11 - 11
Pooled funds - 6 - 6
Cash equivalents and other 12 - - 12
Trust-owned life insurance - 281 - 281
Real estate investments 5 - 12 17 4 4
Special situations - - 1 1 1 -
Private equity - - 8 8 3 2
Total $ 64 $ 327 $ 21 $ 412 100 % 100 %
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report
Fair Value Measurements Using
Significant Net Asset
Quoted Prices in Active Other Value as a
Markets for Identical Observable Practical
Assets Inputs Expedient
At December 31, 2019: (Level 1) (Level 2) (NAV) Total Target Allocation Actual Allocation
(in millions)
Georgia Power
Assets:
Equity: 60 % 61 %
Domestic equity $ 48 $ 7 $ - $ 55
International equity 25 36 - 61
Fixed income: 33 34
U.S. Treasury, government, and
agency bonds - 7 - 7
Corporate bonds - 11 - 11
Pooled funds - 45 - 45
Cash equivalents and other 16 - - 16
Trust-owned life insurance - 182 - 182
Real estate investments 5 - 11 16 4 3
Special situations - - 1 1 1 -
Private equity - - 8 8 2 2
Total $ 94 $ 288 $ 20 $ 402 100 % 100 %
Mississippi Power
Assets:
Equity: 43 % 41 %
Domestic equity $ 3 $ 1 $ - $ 4
International equity 4 2 - 6
Fixed income: 37 42
U.S. Treasury, government, and agency
bonds - 6 - 6
Corporate bonds - 2 - 2
Pooled funds - 1 - 1
Cash equivalents and other 2 - - 2
Real estate investments 1 - 2 3 11 10
Special situations - - - - 2 1
Private equity - - 1 1 7 6
Total $ 10 $ 12 $ 3 $ 25 100 % 100 %
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report
Fair Value Measurements Using
Significant Net Asset
Other Value as a
Quoted Prices in Active Observable Practical
Markets for Identical Assets Inputs Expedient
At December 31, 2019: (Level 1) (Level 2) (NAV) Total Target Allocation Actual Allocation
(in millions)
Southern Company Gas
Assets:
Equity: 72 % 73 %
Domestic equity $ 2 $ 58 $ - $ 60
International equity 2 21 - 23
Fixed income: 26 25
U.S. Treasury, government, and agency
bonds - 1 - 1
Corporate bonds - 1 - 1
Pooled funds - 25 - 25
Cash equivalents and other 2 - - 2
Real estate investments - - 1 1 1 1
Private equity - - 1 1 1 1
Total $ 6 $ 106 $ 2 $ 114 100 % 100 %
Employee Savings Plan
Southern Company and its subsidiaries also sponsor 401(k) defined contribution
plans covering substantially all employees and provide matching contributions up
to specified percentages of an employee's eligible pay. Total matching
contributions made to the plans for 2020, 2019, and 2018 were as follows:
Alabama Georgia Mississippi Southern
Southern Company Power Power Power Power
Southern Company Gas
(in millions)
2020 $ 120 $ 26 $ 29 $ 5 $ 2 $ 16
2019 113 25 27 4 2 15
2018 119 24 26 5 3 18
12. STOCK COMPENSATION
Stock-Based Compensation
Stock-based compensation primarily in the form of Southern Company performance
share units (PSU) and restricted stock units (RSU) may be granted through the
Omnibus Incentive Compensation Plan to Southern Company system employees ranging
from line management to executives.
At December 31, 2020, the number of current and former employees participating
in stock-based compensation programs for the Registrants was as follows:
Southern Company Alabama Power Georgia Power Mississippi Power Southern Power Southern Company Gas
Number of employees 1,958 263 295 86 46 204
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
The majority of PSUs and RSUs awarded contain terms where employees become
immediately vested in PSUs and RSUs upon retirement. As a result, compensation
expense for employees that are retirement eligible at the grant date is
recognized immediately, while compensation expense for employees that become
retirement eligible during the vesting period is recognized over the period from
grant date to the date of retirement eligibility. In addition, the Registrants
recognize forfeitures as they occur.
All unvested PSUs and RSUs vest immediately upon a change in control where
Southern Company is not the surviving corporation.
Performance Share Units
PSUs granted to employees vest at the end of a three-year performance period.
Shares of Southern Company common stock are delivered to employees at the end of
the performance period with the number of shares issued ranging from 0% to 200%
of the target number of PSUs granted, based on achievement of the performance
goals established by the Compensation Committee of the Southern Company Board of
Directors.
Southern Company has issued three types of PSUs, each with a unique performance
goal. These types of PSUs include total shareholder return (TSR) awards based on
the TSR for Southern Company common stock during the three-year performance
period as compared to a group of industry peers; ROE awards based on Southern
Company's equity-weighted return over the performance period; and EPS awards
based on Southern Company's cumulative EPS over the performance period. EPS
awards were last granted in 2017.
The fair value of TSR awards is determined as of the grant date using a Monte
Carlo simulation model. In determining the fair value of the TSR awards issued
to employees, the expected volatility is based on the historical volatility of
Southern Company's stock over a period equal to the performance period. The
risk-free rate is based on the U.S. Treasury yield curve in effect at the time
of grant that covers the performance period of the awards. The following table
shows the assumptions used in the pricing model and the weighted average
grant-date fair value of TSR awards granted:
Year Ended December 31 2020 2019 2018
Expected volatility 15.4% 15.6% 14.9%
Expected term (in years) 3 3 3
Interest rate 1.4% 2.4% 2.4%
Weighted average grant-date fair value $77.65 $62.71 $43.75
The Registrants recognize TSR award compensation expense on a straight-line
basis over the three-year performance period without remeasurement.
The fair values of EPS awards and ROE awards are based on the closing stock
price of Southern Company common stock on the date of the grant. The weighted
average grant-date fair value of the ROE awards granted during 2020, 2019, and
2018 was $68.42, $49.38, and $43.49, respectively. Compensation expense for EPS
and ROE awards is generally recognized ratably over the three-year performance
period adjusted for expected changes in EPS and ROE performance. Total
compensation cost recognized for vested EPS awards and ROE awards reflects final
performance metrics.
Southern Company had 2.5 million unvested PSUs outstanding at December 31, 2019.
In February 2020, the PSUs that vested for the three-year performance period
ended December 31, 2019 were converted into 1.8 million shares outstanding at a
share price of $68.59. During 2020, Southern Company granted 1.2 million PSUs
and 1.5 million PSUs were vested or forfeited, resulting in 2.2 million unvested
PSUs outstanding at December 31, 2020. In February 2021, the PSUs that vested
for the three-year performance period ended December 31, 2020 were converted
into 2.5 million shares outstanding at a share price of $60.10.
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report Total PSU compensation cost, and the related tax benefit recognized in income, for the years ended December 31, 2020, 2019, and 2018 are as follows:
2020 2019 2018
(in millions)
Southern Company
Compensation cost recognized in income $ 84 $ 77 $ 91
Tax benefit of compensation cost recognized in income 22 20 24
Southern Company Gas
Compensation cost recognized in income $ 13 $ 14 $ 11
Tax benefit of compensation cost recognized in income 4 4 3
Total PSU compensation cost and the related tax benefit recognized in income
were immaterial for all periods presented for all other Registrants. The
compensation cost related to the grant of Southern Company PSUs to the employees
of each Subsidiary Registrant is recognized in each Subsidiary Registrant's
financial statements with a corresponding credit to equity representing a
capital contribution from Southern Company.
At December 31, 2020, Southern Company's total unrecognized compensation cost
related to PSUs was $32 million and is expected to be recognized over a
weighted-average period of approximately 19 months. The total unrecognized
compensation cost related to PSUs as of December 31, 2020 was immaterial for all
other Registrants.
Restricted Stock Units
The fair value of RSUs is based on the closing stock price of Southern Company
common stock on the date of the grant. The weighted average grant-date fair
values of RSUs granted during 2020, 2019, and 2018 were $67.60, $50.44, and
$43.81, respectively. For most RSU awards, one-third of the RSUs vest each year
throughout a three-year service period and compensation cost for RSUs is
generally recognized over the corresponding one-, two-, or three-year vesting
period. Shares of Southern Company common stock are delivered to employees at
the end of each vesting period.
Southern Company had 1.3 million RSUs outstanding at December 31, 2019. During
2020, Southern Company granted 0.5 million RSUs and 0.6 million RSUs were vested
or forfeited, resulting in 1.2 million unvested RSUs outstanding at December 31,
2020, including RSUs related to employee retention agreements.
For the years ended December 31, 2020, 2019, and 2018, Southern Company's total
compensation cost for RSUs recognized in income was $29 million, $28 million,
and $27 million, respectively. The related tax benefit also recognized in income
was $8 million, $7 million, and $7 million for the years ended December 31,
2020, 2019, and 2018, respectively. Total unrecognized compensation cost related
to RSUs as of December 31, 2020 for Southern Company of $11 million will be
recognized over a weighted-average period of approximately 18 months.
Total RSUs outstanding and total compensation cost and related tax benefit for
the RSUs recognized in income for the years ended December 31, 2020, 2019, and
2018, as well as the total unrecognized compensation cost as of December 31,
2020, were immaterial for all other Registrants. The compensation cost related
to the grant of Southern Company RSUs to the employees of each Subsidiary
Registrant is recognized in such Subsidiary Registrant's financial statements
with a corresponding credit to equity representing a capital contribution from
Southern Company.
Stock Options
In 2015, Southern Company discontinued granting stock options. As of
December 31, 2017, all stock option awards were vested and compensation cost
fully recognized. Stock options expire no later than 10 years after the grant
date and the latest possible exercise will occur by November 2024. As of
December 31, 2020, the weighted average remaining contractual term for the
options outstanding and exercisable was approximately two years.
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Southern Company and Subsidiary Companies 2020 Annual Report
Southern Company's activity in the stock option program for 2020 is summarized
below:
Weighted Average
Shares Subject to Option Exercise Price
(in millions)
Outstanding at December 31, 2019 5.9 $ 42.52
Exercised 1.6 41.13
Outstanding and Exercisable at December 31, 2020 4.3 $ 43.04
Southern Company's cash receipts from issuances related to stock options
exercised under the share-based payment arrangements for the years ended
December 31, 2020, 2019, and 2018 were $66 million, $482 million, and $41
million, respectively.
At December 31, 2020, the aggregate intrinsic value for the options outstanding
and exercisable was as follows:
Southern Company
Southern Company Alabama Power Georgia Power Gas
(in millions)
Total intrinsic value for outstanding and
exercisable options $ 78 $ 8 $ 25 $ 6
The aggregate intrinsic value for the options outstanding and exercisable was
immaterial for Mississippi Power and Southern Power at December 31, 2020.
Total intrinsic value of options exercised, and the related tax benefit, for the
years ended December 31, 2020, 2019, and 2018 are presented below:
Year Ended December 31 2020 2019 2018
(in millions)
Southern Company
Intrinsic value of options exercised $ 38 $ 167 $ 9
Tax benefit of options exercised 9 35 2
Alabama Power
Intrinsic value of options exercised $ 5 $ 21 $ 2
Tax benefit of options exercised 1 4 -
Georgia Power
Intrinsic value of options exercised $ 9 $ 30 $ 2
Tax benefit of options exercised 2 6 -
Total intrinsic value of options exercised, and the related tax benefit
recognized in income, for the years ended December 31, 2020, 2019, and 2018 were
immaterial for Mississippi Power, Southern Power, and Southern Company Gas.
13. FAIR VALUE MEASUREMENTS
Fair value measurements are based on inputs of observable and unobservable
market data that a market participant would use in pricing the asset or
liability. The use of observable inputs is maximized where available and the use
of unobservable inputs is minimized for fair value measurement and reflects a
three-tier fair value hierarchy that prioritizes inputs to valuation techniques
used for fair value measurement.
•Level 1 consists of observable market data in an active market for identical
assets or liabilities.
•Level 2 consists of observable market data, other than that included in Level
1, that is either directly or indirectly observable.
•Level 3 consists of unobservable market data. The input may reflect the
assumptions of each Registrant of what a market participant would use in pricing
an asset or liability. If there is little available market data, then each
Registrant's own assumptions are the best available information.
In the case of multiple inputs being used in a fair value measurement, the
lowest level input that is significant to the fair value measurement represents
the level in the fair value hierarchy in which the fair value measurement is
reported.
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Southern Company and Subsidiary Companies 2020 Annual Report
Net asset value as a practical expedient is the classification used for assets
that do not have readily determined fair values. Fund managers value the assets
using various inputs and techniques depending on the nature of the underlying
investments.
At December 31, 2020, assets and liabilities measured at fair value on a
recurring basis during the period, together with their associated level of the
fair value hierarchy, were as follows:
Fair Value Measurements Using
Net Asset
Quoted Prices in Value as a
Active Markets for Significant Other Significant Practical
Identical Assets Observable Inputs Unobservable Inputs Expedient
At December 31, 2020: (Level 1) (Level 2) (Level 3) (NAV) Total
(in millions)
Southern Company
Assets:
Energy-related derivatives(a) $ 401 $ 271 $ 32 $ - $ 704
Interest rate derivatives - 20 - - 20
Foreign currency derivatives - 87 - - 87
Investments in trusts:(b)(c)
Domestic equity 862 151 - - 1,013
Foreign equity 85 253 - - 338
U.S. Treasury and government agency
securities - 284 - - 284
Municipal bonds - 85 - - 85
Pooled funds - fixed income - 17 - - 17
Corporate bonds 13 386 - - 399
Mortgage and asset backed securities - 83 - - 83
Private equity - - - 76 76
Cash and cash equivalents 1 - - - 1
Other 28 7 - - 35
Cash equivalents 575 9 - - 584
Other investments 9 24 - - 33
Total $ 1,974 $ 1,677 $ 32 $ 76 $ 3,759
Liabilities:
Energy-related derivatives(a) $ 389 $ 204 $ 4 $ - $ 597
Foreign currency derivatives - 23 - - 23
Contingent consideration - - 17 - 17
Total $ 389 $ 227 $ 21 $ - $ 637
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Fair Value Measurements Using
Net Asset
Quoted Prices in Significant Value as a
Active Markets for Significant Other Unobservable Practical
Identical Assets Observable Inputs Inputs Expedient
At December 31, 2020: (Level 1) (Level 2) (Level 3) (NAV) Total
(in millions)
Alabama Power
Assets:
Energy-related derivatives $ - $ 12 $ - $ - $ 12 Nuclear decommissioning trusts:(b) Domestic equity
543 141 - - 684
Foreign equity 85 73 - - 158
U.S. Treasury and government agency
securities - 21 - - 21
Municipal bonds - 1 - - 1
Corporate bonds 13 167 - - 180
Mortgage and asset backed securities - 29 - - 29
Private equity - - - 76 76
Other 7 - - - 7
Cash equivalents 311 9 - - 320
Other investments - 24 - - 24
Total $ 959 $ 477 $ - $ 76 $ 1,512
Liabilities:
Energy-related derivatives $ - $ 7 $ - $ - $ 7
Georgia Power
Assets:
Energy-related derivatives $ - $ 15 $ - $ - $ 15
Nuclear decommissioning trusts:(b)(c)
Domestic equity 319 1 - - 320
Foreign equity - 177 - - 177
U.S. Treasury and government agency
securities - 263 - - 263
Municipal bonds - 84 - - 84
Corporate bonds - 219 - - 219
Mortgage and asset backed securities - 54 - - 54
Other 21 7 - - 28
Total $ 340 $ 820 $ - $ - $ 1,160
Liabilities:
Energy-related derivatives $ - $ 13 $ - $ - $ 13
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Fair Value Measurements Using
Net Asset
Quoted Prices in Value as a
Active Markets for Significant Other Significant Practical
Identical Assets Observable Inputs Unobservable Inputs Expedient
At December 31, 2020: (Level 1) (Level 2) (Level 3) (NAV) Total
(in millions)
Mississippi Power
Assets:
Energy-related derivatives $ - $ 9 $ - $ - $ 9
Cash equivalents 21 - - - 21
Total $ 21 $ 9 $ - $ - $ 30
Liabilities:
Energy-related derivatives $ - $ 9 $ - $ - $ 9
Southern Power
Assets:
Energy-related derivatives $ - $ 2 $ - $ - $ 2
Foreign currency derivatives - 87 - - 87
Total $ - $ 89 $ - $ - $ 89
Liabilities:
Energy-related derivatives $ - $ 3 $ - $ - $ 3
Foreign currency derivatives - 23 - - 23
Contingent consideration - - 17 - 17
Total $ - $ 26 $ 17 $ - $ 43
Southern Company Gas
Assets:
Energy-related derivatives(a) $ 401 $ 233 $ 32 $ - $ 666
Non-qualified deferred compensation
trusts:
Domestic equity - 9 - - 9
Foreign equity - 3 - - 3
Pooled funds - fixed income - 17 - - 17
Cash equivalents 1 - - - 1
Total $ 402 $ 262 $ 32 $ - $ 696
Liabilities:
Energy-related derivatives(a)(b) $ 389 $ 172 $ 4 $ - $ 565
(a)Excludes $6 million associated with premiums and certain weather derivatives
accounted for based on intrinsic value rather than fair value and cash
collateral of $28 million.
(b)Excludes receivables related to investment income, pending investment sales,
payables related to pending investment purchases, and currencies. See Note 6
under "Nuclear Decommissioning" for additional information.
(c)Includes investment securities pledged to creditors and collateral received
and excludes payables related to the securities lending program. See Note 6
under "Nuclear Decommissioning" for additional information.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report At December 31, 2019, assets and liabilities measured at fair value on a recurring basis during the period, together with their associated level of the fair value hierarchy, were as follows:
Fair Value Measurements Using
Net Asset
Quoted Prices in Value as a
Active Markets for Significant Other Significant Practical
Identical Assets ObservableInputs Unobservable Inputs Expedient At December 31, 2019:
(Level 1) (Level 2) (Level 3) (NAV) Total
(in millions)
Southern Company
Assets:
Energy-related derivatives(a) $ 388 $ 267 $ 22 $ - $ 677
Interest rate derivatives - 2 - - 2
Foreign currency derivatives - 16 - - 16
Investments in trusts:(b)(c)
Domestic equity 751 135 - - 886
Foreign equity 68 220 - - 288
U.S. Treasury and government agency
securities - 307 - - 307
Municipal bonds - 85 - - 85
Pooled funds - fixed income - 17 - - 17
Corporate bonds 23 297 - - 320
Mortgage and asset backed securities - 87 - - 87
Private equity - - - 56 56
Cash and cash equivalents 1 - - - 1
Other 17 5 - - 22
Cash equivalents 1,393 2 - - 1,395
Other investments 9 21 - - 30
Total $ 2,650 $ 1,461 $ 22 $ 56 $ 4,189
Liabilities:
Energy-related derivatives(a) $ 442 $ 254 $ 7 $ - $ 703
Interest rate derivatives - 24 - - 24
Foreign currency derivatives - 24 - - 24
Contingent consideration - - 19 - 19
Total $ 442 $ 302 $ 26 $ - $ 770
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Fair Value Measurements Using
Quoted Prices in Net Asset
Active Markets Significant Value as a
for Identical Significant Other Unobservable Practical
Assets Observable Inputs Inputs Expedient
At December 31, 2019: (Level 1) (Level 2) (Level 3) (NAV) Total
(in millions)
Alabama Power
Assets:
Energy-related derivatives $ - $ 4 $ - $ - $ 4 Nuclear decommissioning trusts:(b) Domestic equity
488 123 - - 611
Foreign equity 68 64 - - 132
U.S. Treasury and government agency
securities - 21 - - 21
Municipal bonds - 1 - - 1
Corporate bonds 23 144 - - 167
Mortgage and asset backed securities - 29 - - 29
Private equity - - - 56 56
Other 3 1 - - 4
Cash equivalents 691 2 - - 693
Other investments - 21 - - 21
Total $ 1,273 $ 410 $ - $ 56 $ 1,739
Liabilities:
Energy-related derivatives $ - $ 24 $ - $ - $ 24
Georgia Power
Assets:
Energy-related derivatives $ - $ 4 $ - $ - $ 4
Nuclear decommissioning trusts:(b)(c)
Domestic equity 263 1 - - 264
Foreign equity - 152 - - 152
U.S. Treasury and government agency
securities - 286 - - 286
Municipal bonds - 84 - - 84
Corporate bonds - 153 - - 153
Mortgage and asset backed securities - 57 - - 57
Other 13 4 - - 17
Total $ 276 $ 741 $ - $ - $ 1,017
Liabilities:
Energy-related derivatives $ - $ 53 $ - $ - $ 53
Interest rate derivatives - 17 - - 17
Total $ - $ 70 $ - $ - $ 70
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Fair Value Measurements Using
Quoted Prices in Net Asset
Active Markets Value as a
for Identical Significant Other Significant Practical
Assets ObservableInputs Unobservable Inputs Expedient At December 31, 2019:
(Level 1) (Level 2) (Level 3) (NAV) Total
(in millions)
Mississippi Power
Assets:
Energy-related derivatives $ - $ 1 $ - $ - $ 1
Cash equivalents 281 - - - 281
Total $ 281 $ 1 $ - $ - $ 282
Liabilities:
Energy-related derivatives $ - $ 27 $ - $ - $ 27
Southern Power
Assets:
Energy-related derivatives $ - $ 3 $ - $ - $ 3
Foreign currency derivatives - 16 - - 16
Cash equivalents 113 - - - 113
Total $ 113 $ 19 $ - $ - $ 132
Liabilities:
Energy-related derivatives $ - $ 3 $ - $ - $ 3
Foreign currency derivatives - 24 - - 24
Contingent consideration - - 19 - 19
Total $ - $ 27 $ 19 $ - $ 46
Southern Company Gas
Assets:
Energy-related derivatives(a) $ 388 $ 255 $ 22 $ - $ 665
Interest rate derivatives - 2 - - 2
Non-qualified deferred compensation
trusts:
Domestic equity - 11 - - 11
Foreign equity - 4 - - 4
Pooled funds - fixed income - 17 - - 17
Cash equivalents 1 - - - 1
Cash equivalents 8 - - - 8
Total $ 397 $ 289 $ 22 $ - $ 708
Liabilities:
Energy-related derivatives(a)(b) $ 442 $ 147 $ 7 $ - $ 596
(a)Excludes $4 million associated with premiums and certain weather derivatives
accounted for based on intrinsic value rather than fair value and cash
collateral of $99 million.
(c)Excludes receivables related to investment income, pending investment sales,
payables related to pending investment purchases, and currencies. See Note 6
under "Nuclear Decommissioning" for additional information.
(d)Includes investment securities pledged to creditors and collateral received
and excludes payables related to the securities lending program. See Note 6
under "Nuclear Decommissioning" for additional information.
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Southern Company and Subsidiary Companies 2020 Annual Report
Valuation Methodologies
The energy-related derivatives primarily consist of exchange-traded and
over-the-counter financial products for natural gas and physical power products,
including, from time to time, basis swaps. These are standard products used
within the energy industry and are valued using the market approach. The inputs
used are mainly from observable market sources, such as forward natural gas
prices, power prices, implied volatility, and overnight index swap interest
rates. Interest rate derivatives are also standard over-the-counter products
that are valued using observable market data and assumptions commonly used by
market participants. The fair value of interest rate derivatives reflects the
net present value of expected payments and receipts under the swap agreement
based on the market's expectation of future interest rates. Additional inputs to
the net present value calculation may include the contract terms, counterparty
credit risk, and occasionally, implied volatility of interest rate options. The
fair value of cross-currency swaps reflects the net present value of expected
payments and receipts under the swap agreement based on the market's expectation
of future foreign currency exchange rates. Additional inputs to the net present
value calculation may include the contract terms, counterparty credit risk, and
discount rates. The interest rate derivatives and cross-currency swaps are
categorized as Level 2 under Fair Value Measurements as these inputs are based
on observable data and valuations of similar instruments. See Note 14 for
additional information on how these derivatives are used.
For fair value measurements of the investments within the nuclear
decommissioning trusts and the non-qualified deferred compensation trusts,
external pricing vendors are designated for each asset class with each security
specifically assigned a primary pricing source. For investments held within
commingled funds, fair value is determined at the end of each business day
through the net asset value, which is established by obtaining the underlying
securities' individual prices from the primary pricing source. A market price
secured from the primary source vendor is then evaluated by management in its
valuation of the assets within the trusts. As a general approach, fixed income
market pricing vendors gather market data (including indices and market research
reports) and integrate relative credit information, observed market movements,
and sector news into proprietary pricing models, pricing systems, and
mathematical tools. Dealer quotes and other market information, including live
trading levels and pricing analysts' judgments, are also obtained when
available.
The NRC requires licensees of commissioned nuclear power reactors to establish a
plan for providing reasonable assurance of funds for future decommissioning. See
Note 6 under "Nuclear Decommissioning" for additional information.
Southern Power has contingent payment obligations related to certain
acquisitions whereby it is primarily obligated to make generation-based payments
to the seller, which commenced at the commercial operation of the respective
facility and continue through 2026. The obligations are categorized as Level 3
under Fair Value Measurements as the fair value is determined using significant
unobservable inputs for the forecasted facility generation in MW-hours, as well
as other inputs such as a fixed dollar amount per MW-hour, and a discount rate.
The fair value of contingent consideration reflects the net present value of
expected payments and any periodic change arising from forecasted generation is
expected to be immaterial.
"Other investments" include investments traded in the open market that have
maturities greater than 90 days, which are categorized as Level 2 under Fair
Value Measurements and are comprised of corporate bonds, bank certificates of
deposit, treasury bonds, and/or agency bonds.
The fair value measurements of private equity investments held in Alabama
Power's nuclear decommissioning trusts that are calculated at net asset value
per share (or its equivalent) as a practical expedient totaled $76 million and
$56 million at December 31, 2020 and 2019, respectively. Unfunded commitments
related to the private equity investments totaled $73 million and $70 million at
December 31, 2020 and 2019, respectively. Private equity investments include
high-quality private equity funds across several market sectors and funds that
invest in real estate assets. Private equity funds do not have redemption
rights. Distributions from these funds will be received as the underlying
investments in the funds are liquidated.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report At December 31, 2020 and 2019, other financial instruments for which the carrying amount did not equal fair value were as follows:
Southern Southern
Company(*) Alabama Power Georgia Power Mississippi Power Southern Power Company Gas(*)
(in millions)
At December 31, 2020:
Long-term debt, including
securities due within one year:
Carrying amount $ 48,349 $ 8,864 $ 12,825 $ 1,400 $ 3,692 $ 6,626
Fair value 56,264 10,702 15,198 1,590 4,165 7,973
At December 31, 2019:
Long-term debt, including
securities due within one year:
Carrying amount $ 44,561 $ 8,517 $ 11,660 $ 1,589 $ 4,398 $ 5,845
Fair value 48,339 9,525 12,680 1,671 4,708 6,509
(*)The long-term debt of Southern Company Gas is recorded at amortized cost,
including the fair value adjustments at the effective date of the 2016 merger
with Southern Company. Southern Company Gas amortizes the fair value adjustments
over the remaining lives of the respective bonds, the latest being through 2043.
The fair values are determined using Level 2 measurements and are based on
quoted market prices for the same or similar issues or on the current rates
available to the Registrants.
Commodity Contracts with Level 3 Valuation Inputs
As of December 31, 2020, the fair value of Southern Company Gas' Level 3
physical natural gas forward contracts was $28 million. Since commodity
contracts classified as Level 3 typically include a combination of observable
and unobservable components, the changes in fair value may include amounts due
in part to observable market factors, or changes to assumptions on the
unobservable components. The following table includes transfers to Level 3,
which represent the fair value of Southern Company Gas' commodity derivative
contracts that include a significant unobservable component for the first time
during the period.
2020
(in millions)
Beginning balance $ 14
Transfers to Level 3 70
Transfers from Level 3 (34)
Instruments realized or otherwise settled during period (16)
Changes in fair value (6)
Ending balance $ 28
Changes in fair value of Level 3 instruments represent changes in gains and
losses for the periods that are reported on Southern Company Gas' statements of
income in natural gas revenues.
The valuation of certain commodity contracts requires the use of certain
unobservable inputs. All forward pricing used in the valuation of such contracts
is directly based on third-party market data, such as broker quotes and exchange
settlements, when that data is available. If third-party market data is not
available, then industry standard methodologies are used to develop inputs that
maximize the use of relevant observable inputs and minimize the use of
unobservable inputs. Observable inputs, including some forward prices used for
determining fair value, reflect the best available market information.
Unobservable inputs are updated using industry standard techniques such as
extrapolation, combining observable forward inputs supplemented by historical
market and other relevant data. Level 3 physical natural gas forward contracts
include unobservable forward price inputs (ranging from $(0.08) to $0.24 per
mmBtu). Forward price increases (decreases) as of December 31, 2020 would have
resulted in higher (lower) values on a net basis.
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Southern Company and Subsidiary Companies 2020 Annual Report
14. DERIVATIVES
Southern Company, the traditional electric operating companies, Southern Power,
and Southern Company Gas are exposed to market risks, including commodity price
risk, interest rate risk, weather risk, and occasionally foreign currency
exchange rate risk. To manage the volatility attributable to these exposures,
each company nets its exposures, where possible, to take advantage of natural
offsets and enters into various derivative transactions for the remaining
exposures pursuant to each company's policies in areas such as counterparty
exposure and risk management practices. Southern Company Gas' wholesale gas
operations use various contracts in its commercial activities that generally
meet the definition of derivatives. For the traditional electric operating
companies, Southern Power, and Southern Company Gas' other businesses, each
company's policy is that derivatives are to be used primarily for hedging
purposes and mandates strict adherence to all applicable risk management
policies. Derivative positions are monitored using techniques including, but not
limited to, market valuation, value at risk, stress testing, and sensitivity
analysis. Derivative instruments are recognized at fair value in the balance
sheets as either assets or liabilities and are presented on a net basis. See
Note 13 for additional fair value information. In the statements of cash flows,
any cash impacts of settled energy-related and interest rate derivatives are
recorded as operating activities. Any cash impacts of settled foreign currency
derivatives are classified as operating or financing activities to correspond
with the classification of the hedged interest or principal, respectively. See
Note 1 under "Financial Instruments" for additional information.
Energy-Related Derivatives
The traditional electric operating companies, Southern Power, and Southern
Company Gas enter into energy-related derivatives to hedge exposures to
electricity, natural gas, and other fuel price changes. However, due to
cost-based rate regulations and other various cost recovery mechanisms, the
traditional electric operating companies and the natural gas distribution
utilities have limited exposure to market volatility in energy-related commodity
prices. Each of the traditional electric operating companies and certain of the
natural gas distribution utilities of Southern Company Gas manage fuel-hedging
programs, implemented per the guidelines of their respective state PSCs or other
applicable state regulatory agencies, through the use of financial derivative
contracts, which are expected to continue to mitigate price volatility. The
traditional electric operating companies (with respect to wholesale generating
capacity) and Southern Power have limited exposure to market volatility in
energy-related commodity prices because their long-term sales contracts shift
substantially all fuel cost responsibility to the purchaser. However, the
traditional electric operating companies and Southern Power may be exposed to
market volatility in energy-related commodity prices to the extent any
uncontracted capacity is used to sell electricity. Southern Company Gas retains
exposure to price changes that can, in a volatile energy market, be material and
can adversely affect its results of operations.
Southern Company Gas also enters into weather derivative contracts as economic
hedges of operating margins in the event of warmer-than-normal weather.
Exchange-traded options are carried at fair value, with changes reflected in
operating revenues. Non-exchange-traded options are accounted for using the
intrinsic value method. Changes in the intrinsic value for non-exchange-traded
contracts are reflected in operating revenues.
Energy-related derivative contracts are accounted for under one of three
methods:
•Regulatory Hedges - Energy-related derivative contracts designated as
regulatory hedges relate primarily to the traditional electric operating
companies' and the natural gas distribution utilities' fuel-hedging programs,
where gains and losses are initially recorded as regulatory liabilities and
assets, respectively, and then are included in fuel expense as the underlying
fuel is used in operations and ultimately recovered through an approved cost
recovery mechanism.
•Cash Flow Hedges - Gains and losses on energy-related derivatives designated as
cash flow hedges (which are mainly used to hedge anticipated purchases and
sales) are initially deferred in AOCI before being recognized in the statements
of income in the same period and in the same income statement line item as the
earnings effect of the hedged transactions.
•Not Designated - Gains and losses on energy-related derivative contracts that
are not designated or fail to qualify as hedges are recognized in the statements
of income as incurred.
Some energy-related derivative contracts require physical delivery as opposed to
financial settlement, and this type of derivative is both common and prevalent
within the electric and natural gas industries. When an energy-related
derivative contract is settled physically, any cumulative unrealized gain or
loss is reversed and the contract price is recognized in the respective line
item representing the actual price of the underlying goods being delivered.
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Southern Company and Subsidiary Companies 2020 Annual Report
At December 31, 2020, the net volume of energy-related derivative contracts for
natural gas positions, together with the longest hedge date over which the
respective entity is hedging its exposure to the variability in future cash
flows for forecasted transactions and the longest non-hedge date for derivatives
not designated as hedges, were as follows:
Net Longest Longest
Purchased Hedge Non-Hedge
mmBtu Date Date
(in millions)
Southern Company(*) 835 2024 2031
Alabama Power 78 2024 -
Georgia Power 135 2023 -
Mississippi Power 89 2024 -
Southern Power 10 2022 2021
Southern Company Gas(*) 523 2022 2031
(*)Southern Company Gas' derivative instruments include both long and short
natural gas positions. A long position is a contract to purchase natural gas and
a short position is a contract to sell natural gas. Southern Company Gas' volume
represents the net of long natural gas positions of 4,421 million mmBtu and
short natural gas positions of 3,898 million mmBtu at December 31, 2020, which
is also included in Southern Company's total volume.
At December 31, 2020, the net volume of Southern Power's energy-related
derivative contracts for power to be sold was 1 million MWHs, all of which
expire in 2021.
In addition to the volumes discussed above, the traditional electric operating
companies and Southern Power enter into physical natural gas supply contracts
that provide the option to sell back excess natural gas due to operational
constraints. The maximum expected volume of natural gas subject to such a
feature is 29 million mmBtu for Southern Company, which includes 7 million mmBtu
for Alabama Power, 9 million mmBtu for Georgia Power, 4 million mmBtu for
Mississippi Power, and 9 million mmBtu for Southern Power.
For cash flow hedges of energy-related derivatives, the estimated pre-tax gains
(losses) expected to be reclassified from AOCI to earnings for the year ending
December 31, 2021 are immaterial for all Registrants.
Interest Rate Derivatives
Southern Company and certain subsidiaries may enter into interest rate
derivatives to hedge exposure to changes in interest rates. The derivatives
employed as hedging instruments are structured to minimize ineffectiveness.
Derivatives related to existing variable rate securities or forecasted
transactions are accounted for as cash flow hedges where the derivatives' fair
value gains or losses are recorded in OCI and are reclassified into earnings at
the same time and presented on the same income statement line item as the
earnings effect of the hedged transactions. Derivatives related to existing
fixed rate securities are accounted for as fair value hedges, where the
derivatives' fair value gains or losses and hedged items' fair value gains or
losses are both recorded directly to earnings on the same income statement line
item. Fair value gains or losses on derivatives that are not designated or fail
to qualify as hedges are recognized in the statements of income as incurred.
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At December 31, 2020, the following interest rate derivatives were outstanding:
Interest Weighted Average Hedge Fair Value
Notional Rate Interest Maturity Gain (Loss)
Amount Received Rate Paid Date December 31, 2020
(in millions) (in millions)
Cash Flow Hedges of Existing Debt
Mississippi Power $ 60 1-month LIBOR 0.58% December 2021 $ -Fair Value Hedges of Existing Debt
1-month LIBOR +
Southern Company parent 1,500 2.35% 0.87% July 2021 20
Southern Company $ 1,560 $ 20
For cash flow hedge interest rate derivatives, the estimated pre-tax gains
(losses) expected to be reclassified from AOCI to interest expense for the year
ending December 31, 2021 total $(25) million for Southern Company and are
immaterial for all other Registrants. Deferred gains and losses related to
interest rate derivatives are expected to be amortized into earnings through
2046 for the Southern Company parent entity, 2035 for Alabama Power, 2044 for
Georgia Power, 2028 for Mississippi Power, and 2046 for Southern Company Gas.
Foreign Currency Derivatives
Southern Company and certain subsidiaries, including Southern Power, may enter
into foreign currency derivatives to hedge exposure to changes in foreign
currency exchange rates, such as that arising from the issuance of debt
denominated in a currency other than U.S. dollars. Derivatives related to
forecasted transactions are accounted for as cash flow hedges where the
derivatives' fair value gains or losses are recorded in OCI and are reclassified
into earnings at the same time and on the same income statement line as the
earnings effect of the hedged transactions, including foreign currency gains or
losses arising from changes in the U.S. currency exchange rates. The derivatives
employed as hedging instruments are structured to minimize ineffectiveness.
At December 31, 2020, the following foreign currency derivatives were
outstanding:
Fair Value
Hedge Gain (Loss) December
Pay Notional Pay Rate Receive Notional Receive Rate Maturity Date 31, 2020
(in millions) (in millions) (in millions)
Cash Flow Hedges of Existing Debt
Southern Power $ 677 2.95% € 600 1.00% June 2022 $ 40
Southern Power 564 3.78% 500 1.85% June 2026 25
Total $ 1,241 € 1,100 $ 65
The estimated pre-tax gains (losses) related to Southern Power's foreign
currency derivatives expected to be reclassified from AOCI to earnings for the
year ending December 31, 2021 are $10 million.
Derivative Financial Statement Presentation and Amounts
Southern Company, the traditional electric operating companies, Southern Power,
and Southern Company Gas enter into derivative contracts that may contain
certain provisions that permit intra-contract netting of derivative receivables
and payables for routine billing and offsets related to events of default and
settlements. Southern Company and certain subsidiaries also utilize master
netting agreements to mitigate exposure to counterparty credit risk. These
agreements may contain provisions that permit netting across product lines and
against cash collateral. The fair value amounts of derivative assets and
liabilities on the balance sheets are presented net to the extent that there are
netting arrangements or similar agreements with the counterparties.
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Southern Company and Subsidiary Companies 2020 Annual Report
At December 31, 2020 and 2019, the fair value of energy-related derivatives,
interest rate derivatives, and foreign currency derivatives was reflected in the
balance sheets as follows:
2020 2019
Derivative Category and Balance Sheet Location Assets Liabilities Assets Liabilities
(in millions)
Southern Company
Derivatives designated as hedging instruments for
regulatory purposes
Energy-related derivatives:
Assets from risk management activities/Other current
liabilities $ 24 $ 11 $ 3 $ 70
Other deferred charges and assets/Other deferred
credits and liabilities 18 19 6 44
Total derivatives designated as hedging instruments for regulatory purposes
$ 42 $ 30 $ 9 $ 114
Derivatives designated as hedging instruments in
cash flow and fair value hedges
Energy-related derivatives:
Assets from risk management activities/Other current
liabilities $ 3 $ 5 $ 1 $ 6
Interest rate derivatives: Assets from risk management activities/Other current 20 - 2 23
liabilities
Other deferred charges and assets/Other deferred credits and liabilities - - - 1
Foreign currency derivatives: Assets from risk management activities/Other current liabilities
- 23 - 24
Other deferred charges and assets/Other deferred
credits and liabilities 87 - 16 -
Total derivatives designated as hedging instruments in cash flow and fair value hedges
$ 110 $ 28 $ 19 $ 54
Derivatives not designated as hedging instruments
Energy-related derivatives:
Assets from risk management activities/Other current
liabilities $ 388 $ 331 $ 461 $ 358
Other deferred charges and assets/Other deferred
credits and liabilities 270 232 207 225
Total derivatives not designated as hedging
instruments $ 658 $ 563 $ 668 $ 583
Gross amounts recognized $ 810 $ 621 $ 696 $ 751
Gross amounts offset(a) $ (529) $ (557) $ (463) $ (562) Net amounts recognized in the Balance Sheets(b) $ 281 $ 64 $ 233 $ 189
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2020 2019
Derivative Category and Balance Sheet Location Assets Liabilities Assets Liabilities
(in millions)
Alabama Power
Derivatives designated as hedging instruments for
regulatory purposes
Energy-related derivatives:
Other current assets/Other current liabilities $ 7 $ 2 $ 2 $ 14
Other deferred charges and assets/Other deferred
credits and liabilities 5 5 2 10
Total derivatives designated as hedging instruments
for regulatory purposes $ 12 $ 7 $ 4 $ 24
Gross amounts recognized $ 12 $ 7 $ 4 $ 24
Gross amounts offset $ (7) $ (7) $ (2) $ (2)
Net amounts recognized in the Balance Sheets $ 5 $ - $ 2 $ 22
Georgia Power Derivatives designated as hedging instruments for regulatory purposes Energy-related derivatives: Other current assets/Other current liabilities $ 7 $ 5 $ 1 $ 32 Other deferred charges and assets/Other deferred credits and liabilities 8 8 3 21
Total derivatives designated as hedging instruments for regulatory purposes
$ 15 $ 13 $ 4 $ 53
Derivatives designated as hedging instruments in
cash flow and fair value hedges
Interest rate derivatives:
Other current assets/Other current liabilities $ - $ - $ - $ 17
Gross amounts recognized $ 15 $ 13 $ 4 $ 70
Gross amounts offset $ (12) $ (12) $ (3) $ (3)
Net amounts recognized in the Balance Sheets $ 3 $ 1 $ 1 $ 67
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2020 2019
Derivative Category and Balance Sheet Location Assets Liabilities Assets Liabilities
(in millions)
Mississippi Power
Derivatives designated as hedging instruments for
regulatory purposes
Energy-related derivatives:
Other current assets/Other current liabilities $ 4 $ 3 $ - $ 15
Other deferred charges and assets/Other deferred
credits and liabilities 5 6 1 12
Total derivatives designated as hedging instruments
for regulatory purposes $ 9 $ 9 $ 1 $ 27
Gross amounts recognized $ 9 $ 9 $ 1 $ 27
Gross amounts offset $ (7) $ (7) $ (1) $ (1)
Net amounts recognized in the Balance Sheets $ 2 $ 2 $ - $ 26
Southern Power Derivatives designated as hedging instruments in cash flow and fair value hedges Energy-related derivatives: Other current assets/Other current liabilities $ 2 $
2 $ 1 $ 2
Foreign currency derivatives: Other current assets/Other current liabilities - 23 - 24 Other deferred charges and assets/Other deferred credits and liabilities 87 - 16 -
Total derivatives designated as hedging instruments in cash flow and fair value hedges
$ 89 $ 25 $ 17 $ 26
Derivatives not designated as hedging instruments
Energy-related derivatives:
Other current assets/Other current liabilities $ - $ 1 $ 2 $ 1
Net amounts recognized in the Balance Sheets $ 89 $ 26 $ 19 $ 27
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2020 2019
Derivative Category and Balance Sheet Location Assets Liabilities Assets Liabilities
(in millions)
Southern Company Gas
Derivatives designated as hedging instruments for
regulatory purposes
Energy-related derivatives:
Assets from risk management activities/Other current
liabilities $ 6 $ 1 $ - $ 9
Other deferred charges and assets/Other deferred
credits and liabilities - - - 1
Total derivatives designated as hedging instruments for regulatory purposes
$ 6 $ 1 $ - $ 10
Derivatives designated as hedging instruments in
cash flow and fair value hedges
Energy-related derivatives:
Assets from risk management activities/Other current
liabilities $ 1 $ 3 $ - $ 4
Interest rate derivatives: Assets from risk management activities/Other current liabilities
- - 2 -
Total derivatives designated as hedging instruments in cash flow and fair value hedges
$ 1 $ 3 $ 2 $ 4
Derivatives not designated as hedging instruments
Energy-related derivatives:
Assets from risk management activities/Other current
liabilities $ 388 $ 330 $ 459 $ 357
Other deferred charges and assets/Other deferred
credits and liabilities 270 232 207 225
Total derivatives not designated as hedging
instruments $ 658 $ 562 $ 666 $ 582
Gross amounts recognized $ 665 $ 566 $ 668 $ 596
Gross amounts offset(a) $ (503) $ (531) $ (456) $ (555) Net amounts recognized in the Balance Sheets (b) $ 162 $ 35 $ 212 $ 41
(a)Gross amounts offset include cash collateral held on deposit in broker margin
accounts of $28 million and $99 million at December 31, 2020 and 2019,
respectively.
(b)Net amounts of derivative instruments outstanding exclude immaterial premium
and intrinsic value associated with weather derivatives for all periods
presented.
Energy-related derivatives not designated as hedging instruments were immaterial
for the traditional electric operating companies at December 31, 2019. There
were no such instruments for the traditional electric operating companies at
December 31, 2020.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report At December 31, 2020 and 2019, the pre-tax effects of unrealized derivative gains (losses) arising from energy-related derivative instruments designated as regulatory hedging instruments and deferred were as follows:
Regulatory Hedge Unrealized Gain (Loss) Recognized in the Balance Sheet at December 31, 2020
Derivative Category and Balance Sheet Southern Alabama Georgia Mississippi Southern Company
Location Company Power Power Power Gas
(in millions)
Energy-related derivatives:
Other regulatory assets, deferred $ (2) $ - $ (1) $ (1) $
-
Other regulatory liabilities, current 12 5 2 1 4
Other regulatory liabilities,
deferred 2 1 1 - -
Total energy-related derivative gains
(losses) $ 12 $ 6 $ 2 $ - $ 4
Regulatory Hedge Unrealized Gain (Loss) Recognized in the Balance Sheet at December 31, 2019
Derivative Category and Balance Sheet Southern Alabama Georgia Mississippi Southern Company
Location Company Power Power Power Gas
(in millions)
Energy-related derivatives:
Other regulatory assets, current $ (63) $ (14) $ (31) $ (15) $ (3)
Other regulatory assets, deferred (37) (8) (18) (11) -
Other regulatory liabilities, current 6 2 - - 4
Total energy-related derivative gains
(losses) $ (94) $ (20) $ (49) $ (26) $ 1
For the years ended December 31, 2020, 2019, and 2018, the pre-tax effects of
cash flow hedge accounting on AOCI for the applicable Registrants were as
follows:
Gain (Loss) Recognized in OCI on Derivative 2020 2019 2018
(in millions)
Southern Company
Energy-related derivatives $ (8) $ (13) $ 17
Interest rate derivatives (26) (57) (1)
Foreign currency derivatives 48 (84) (78)
Total $ 14 $ (154) $ (62)
Georgia Power
Interest rate derivatives $ (3) $ (59) $ -
Southern Power
Energy-related derivatives $ (2) $ (4) $ 10
Foreign currency derivatives 48 (84) (78)
Total $ 46 $ (88) $ (68)
Southern Company Gas
Energy-related derivatives $ (6) $ (9) $ 7
Interest rate derivatives (23) 2 -
Total $ (29) $ (7) $ 7
For all years presented, the pre-tax effects of interest rate derivatives designated as cash flow hedging instruments on AOCI were immaterial for the other Registrants.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report The pre-tax effects of cash flow and fair value hedge accounting on income for the years ended December 31, 2020, 2019, and 2018 were as follows: Location and Amount of Gain (Loss) Recognized in Income on Cash Flow and Fair Value Hedging Relationships
2020 2019 2018
(in millions)
Southern Company
Total cost of natural gas $ 972 $ 1,319 $ 1,539
Gain (loss) on energy-related cash flow hedges(a) (8) (2) 2
Total depreciation and amortization 3,518 3,038 3,131
Gain (loss) on energy-related cash flow hedges(a) (3) (6) 7
Total interest expense, net of amounts capitalized (1,821) (1,736) (1,842)
Gain (loss) on interest rate cash flow hedges(a) (26) (20) (21)
Gain (loss) on foreign currency cash flow hedges(a) (23) (24) (24)
Gain (loss) on interest rate fair value hedges(b) 27 42 (12)
Total other income (expense), net 336 252 114
Gain (loss) on foreign currency cash flow hedges(a)(c) 114 (24) (60)
Southern Power
Total depreciation and amortization $ 494 $ 479 $ 493
Gain (loss) on energy-related cash flow hedges(a) (3) (6) 7
Total interest expense, net of amounts capitalized (151) (169) (183)
Gain (loss) on foreign currency cash flow hedges(a) (23) (24) (24)
Total other income (expense), net 19 47 23
Gain (loss) on foreign currency cash flow hedges(a)(c) 114 (24) (60)
(a)Reclassified from AOCI into earnings.
(b)For fair value hedges, changes in the fair value of the derivative contracts
are generally equal to changes in the fair value of the underlying debt and have
no material impact on income.
(c)The reclassification from AOCI into other income (expense), net completely
offsets currency gains and losses arising from changes in the U.S. currency
exchange rates used to record the euro-denominated notes.
The pre-tax effects of cash flow hedge accounting on income for interest rate
derivatives and energy-related derivatives were immaterial for the other
Registrants for all years presented.
At December 31, 2020 and 2019, the following amounts were recorded on the
balance sheets related to cumulative basis adjustments for fair value hedges:
Cumulative Amount of Fair Value Hedging
Adjustment included in Carrying Amount of
Carrying Amount of the Hedged Item the Hedged Item
Balance Sheet Location of Hedged At December 31, At December 31, At December 31, Items
2020 2019 2020 At December 31, 2019
(in millions) (in millions)
Southern Company
Securities due within one year $ (1,509) $ (599) $ (10) $ -
Long-term debt - (1,494) - 3
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report The pre-tax effects of energy-related derivatives not designated as hedging instruments on the statements of income of Southern Company and Southern Company Gas for the years ended December 31, 2020, 2019, and 2018 were as follows:
Gain (Loss)
Derivatives in Non-Designated
Hedging Relationships Statements of Income Location 2020 2019 2018
(in millions)
Energy-related derivatives Natural gas revenues(*) $ 134 $ 223 $ (122)
Cost of natural gas 15 10 (6)
Total derivatives in non-designated hedging relationships $ 149 $ 233 $ (128)
(*) Excludes the impact of weather derivatives recorded in natural gas revenues
of $9 million, $3 million, and $5 million for the years ended December 31, 2020,
2019, and 2018, respectively, as they are accounted for based on intrinsic value
rather than fair value.
The pre-tax effects of energy-related derivatives not designated as hedging
instruments were immaterial for all other Registrants for all years presented.
Contingent Features
Southern Company, the traditional electric operating companies, Southern Power,
and Southern Company Gas do not have any credit arrangements that would require
material changes in payment schedules or terminations as a result of a credit
rating downgrade. There are certain derivatives that could require collateral,
but not accelerated payment, in the event of various credit rating changes of
certain Southern Company subsidiaries. At December 31, 2020, the Registrants had
no collateral posted with derivative counterparties to satisfy these
arrangements.
For the Registrants with interest rate derivatives at December 31, 2020, there
were no interest rate derivative liabilities with contingent features. At
December 31, 2020, the fair value of energy-related derivative liabilities with
contingent features and the maximum potential collateral requirements arising
from the credit-risk-related contingent features, at a rating below BBB- and/or
Baa3, were immaterial for all Registrants. The maximum potential collateral
requirements arising from the credit-risk-related contingent features for the
traditional electric operating companies and Southern Power include certain
agreements that could require collateral in the event that one or more Southern
Company power pool participants has a credit rating change to below investment
grade. Following the sale of Gulf Power to NextEra Energy, Gulf Power is
continuing to participate in the Southern Company power pool for a defined
transition period that, subject to certain potential adjustments, is scheduled
to end on January 1, 2024.
Generally, collateral may be provided by a Southern Company guaranty, letter of
credit, or cash. If collateral is required, fair value amounts recognized for
the right to reclaim cash collateral or the obligation to return cash collateral
are not offset against fair value amounts recognized for derivatives executed
with the same counterparty.
Alabama Power and Southern Power maintain accounts with certain regional
transmission organizations to facilitate financial derivative transactions and
they may be required to post collateral based on the value of the positions in
these accounts and the associated margin requirements. At December 31, 2020,
cash collateral posted in these accounts was immaterial. Southern Company Gas
maintains accounts with brokers or the clearing houses of certain exchanges to
facilitate financial derivative transactions. Based on the value of the
positions in these accounts and the associated margin requirements, Southern
Company Gas may be required to deposit cash into these accounts. At December 31,
2020, cash collateral held on deposit in broker margin accounts was $28 million.
The Registrants are exposed to losses related to financial instruments in the
event of counterparties' nonperformance. The Registrants only enter into
agreements and material transactions with counterparties that have investment
grade credit ratings by Moody's and S&P or with counterparties who have posted
collateral to cover potential credit exposure. The Registrants have also
established risk management policies and controls to determine and monitor the
creditworthiness of counterparties in order to mitigate their exposure to
counterparty credit risk.
Southern Company Gas uses established credit policies to determine and monitor
the creditworthiness of counterparties, including requirements to post
collateral or other credit security, as well as the quality of pledged
collateral. Collateral or credit security is most often in the form of cash or
letters of credit from an investment-grade financial institution, but may also
include cash or U.S. government securities held by a trustee. Prior to entering
a physical transaction, Southern Company Gas assigns its counterparties an
internal credit rating and credit limit based on the counterparties' Moody's,
S&P, and Fitch ratings, commercially available credit reports, and audited
financial statements. Southern Company Gas may require counterparties to pledge
additional collateral when deemed necessary.
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Southern Company and Subsidiary Companies 2020 Annual Report
Southern Company Gas utilizes netting agreements whenever possible to mitigate
exposure to counterparty credit risk. Netting agreements enable Southern Company
Gas to net certain assets and liabilities by counterparty across product lines
and against cash collateral, provided the netting and cash collateral agreements
include such provisions. While the amounts due from, or owed to, counterparties
are settled net, they are recorded on a gross basis on the balance sheet as
energy marketing receivables and energy marketing payables.
The Registrants do not anticipate a material adverse effect on their respective
financial statements as a result of counterparty nonperformance.
15. ACQUISITIONS AND DISPOSITIONS
Southern Company
In January 2019, Southern Company completed the sale of all of the capital stock
of Gulf Power to a wholly-owned subsidiary of NextEra Energy, for an aggregate
cash purchase price of approximately $5.8 billion (less $1.3 billion of
indebtedness assumed), including the final working capital adjustments. The gain
associated with the sale of Gulf Power totaled $2.6 billion pre-tax ($1.4
billion after tax).
In July 2019, PowerSecure completed the sale of its utility infrastructure
services business for approximately $65 million, including the final working
capital adjustments. In contemplation of this sale, a goodwill impairment charge
of $32 million was recorded in the second quarter 2019. In December 2019,
PowerSecure completed the sale of its lighting business for approximately $9
million, which included cash of $4 million and a note receivable from the buyer
of $5 million. In contemplation of this sale, an impairment charge of $18
million was recorded in the third quarter 2019 related to goodwill, identifiable
intangibles, and other assets.
In December 2019, Southern Company completed the sale of one of its leveraged
lease investments for an aggregate cash purchase price of approximately $20
million. The sale resulted in an immaterial gain.
During the fourth quarter 2020, management of Southern Company initiated steps
to sell one of its leveraged leases and classified the investment in the
leveraged lease as held for sale on Southern Company's balance sheet as of
December 31, 2020. The ultimate outcome of this matter cannot be determined at
this time. See Note 3 under "Other Matters - Southern Company" and "Assets Held
for Sale" herein for additional information.
Alabama Power
On August 31, 2020, Alabama Power completed its acquisition of the Central
Alabama Generating Station, an approximately 885-MW combined cycle generation
facility in Autauga County, Alabama. The total purchase price was $461 million,
of which $452 million was related to net assets recorded within property, plant,
and equipment on the balance sheet and the remainder primarily related to
inventory, current receivables, and accounts payable. Alabama Power assumed an
existing power sales agreement under which the full output of the generating
facility remains committed to another third party for its remaining term of
approximately three years. During the remaining term, the estimated revenues
from the power sales agreement are expected to offset the associated costs of
operation. See Notes 2 and 9 under "Alabama Power" and "Lessor," respectively,
for additional information.
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Southern Company and Subsidiary Companies 2020 Annual Report
Southern Power
Southern Power's acquisition-related costs for the projects discussed under
"Asset Acquisitions" and "Construction Projects" below were expensed as incurred
and were not material for any of the years presented.
Asset Acquisitions
Southern
Power
Project Approximate Nameplate Ownership PPA
Facility Resource Seller Capacity (MW) Location Percentage COD Contract Period
Asset Acquisitions During 2020
Invenergy Renewables May
Beech Ridge II Wind LLC 56 Greenbrier County, WV 100% of Class A(a) 2020 12 years
Asset Acquisitions During 2019
DSGP(b) Fuel Cell Bloom Energy 28 Delaware 100% of Class B N/A(c) 15 years(d)
Asset Acquisitions During 2018
Recurrent Energy
Development Holdings,
Gaskell West 1 Solar LLC 20 Kern County, CA 100% of Class B(e) March 2018 20 years
(a)In May 2020, Southern Power purchased a controlling interest and now
consolidates the project's operating results in its financial statements. The
Class B member owns the noncontrolling interest.
(b)During 2019, Southern Power purchased a controlling interest and now
consolidates the project's operating results in its financial statements. The
Class A and Class C members each own a noncontrolling interest. Southern Power
records net income attributable to noncontrolling interests for approximately 10
MWs of the facility.
(c)Southern Power's 18-MW share of the facility was repowered between June and
August 2019. In December 2019, a Class C member joined the existing partnership
between the Class A member and Southern Power and made an investment to repower
the remaining 10 MWs.
(d)Remaining PPA contract period at the time of acquisition.
(e)Southern Power owns a controlling interest under a tax equity partnership.
In March 2020, Southern Power entered into an agreement to acquire a controlling
membership interest in an approximately 300-MW wind facility located in South
Dakota. The acquisition is subject to certain customary conditions to closing,
including commercial operation of the facility, which is expected to occur in
the first quarter 2021. Subsequent to the acquisition, Southern Power expects to
complete a tax equity transaction. The facility's output is contracted under two
long-term PPAs. The ultimate outcome of this matter cannot be determined at this
time.
Construction Projects
During 2020, Southern Power completed construction of and placed in service the
Reading and Skookumchuck wind facilities, commenced construction of the Garland
and Tranquillity battery energy storage facilities, and acquired and commenced
construction of the Glass Sands wind facility. Total aggregate construction
costs, excluding acquisition costs, are expected to be between $392 million and
$460 million for the facilities under construction. At December 31, 2020, the
total costs of construction incurred and included in CWIP for these projects
were $34 million. The ultimate outcome of these matters cannot be determined at
this time.
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Project Approximate Nameplate Actual/Expected
Facility Resource Capacity (MW) Location COD PPA Contract Period
Projects Under Construction at December 31, 2020
Garland Solar Storage(a) Battery energy 88 Kern County, CA Third quarter 2021 20 years
storage system
Tranquillity Solar Battery energy 72 Fresno County, CA Fourth quarter 2021 20 years
Storage(a) storage system
Glass Sands(b) Wind 118 Murray County, OK Fourth quarter 2021 12 years
Projects Completed During 2020
Skookumchuck(c) Wind 136 Lewis and Thurston November 2020 20 years
Counties, WA
Reading(d) Wind 200 Osage and Lyon May 2020 12 years
Counties, KS
Projects Completed During 2019(e)
Wildhorse Mountain(f) Wind 100 Pushmataha County, OK December 2019 20 years
(a)In December 2020, Southern Power restructured its ownership of the project by
contributing the Class A membership interests to an existing partnership and
selling 100% of the Class B membership interests while retaining the controlling
interest. Prior to commercial operation, Southern Power may restructure the
project ownership again and enter into additional partnerships, but expects to
retain the controlling interest. The ultimate outcome of this matter cannot be
determined at this time.
(b)In December 2020, Southern Power purchased 100% of the membership interests
of the Glass Sands facility.
(c)In October 2019, Southern Power purchased 100% of the membership interests of
the Skookumchuck facility pursuant to a joint development arrangement. In
November 2020, Southern Power completed a tax equity transaction whereby it
received $121 million, resulting in 100% ownership of the Class B membership
interests. Southern Power subsequently sold a noncontrolling interest in the
Class B membership interests and now retains the controlling ownership interest
in the facility.
(d)In 2018, Southern Power purchased 100% of the membership interests of the
Reading facility pursuant to a joint development arrangement. In June 2020,
Southern Power completed a tax equity transaction whereby it received
$156 million and owns 100% of the Class B membership interests.
(e)During 2019, Southern Power also completed the expansion of Plant Mankato,
which was sold to a subsidiary of Xcel on January 17, 2020. See "Sales of
Natural Gas and Biomass Plants" below for additional information.
(f)In 2018, Southern Power purchased 100% of the membership interests of the
Wildhorse Mountain facility. In December 2019, Southern Power entered into a tax
equity partnership and owns 100% of the Class B membership interests.
Development Projects
Southern Power continues to evaluate and refine the deployment of the remaining
wind turbine equipment purchased in 2016 and 2017 to development and
construction projects. Wind projects utilizing equipment purchased in 2016 and
2017, and reaching commercial operation by the end of 2021 and 2022, are
expected to qualify for 100% and 80% PTCs, respectively. The significant
majority of this equipment either has been deployed to projects that have been
completed, are under construction, or are probable of completion, or has been
sold to third parties. In 2018, as a result of a review of various options for
probable dispositions of wind turbine equipment not deployed to development or
construction projects, Southern Power recorded a $36 million asset impairment
charge on the equipment. Gains on equipment sales were immaterial in 2020 and
totaled approximately $17 million in 2019.
Sales of Renewable Facility Interests
In May 2018, Southern Power completed the sale of a noncontrolling 33% equity
interest in SP Solar, a limited partnership indirectly owning substantially all
of Southern Power's solar facilities, to Global Atlantic for approximately $1.2
billion. Since Southern Power retained control of the limited partnership, the
sale was recorded as an equity transaction. On the date of the transaction, the
noncontrolling interest was increased by $511 million to reflect 33% of the
carrying value of the partnership. This difference, partially offset by the tax
impact and other related transaction charges, also resulted in a $410 million
decrease to Southern Power's common stockholder's equity.
In December 2018, Southern Power completed the sale of a noncontrolling tax
equity interest in SP Wind, which owns a portfolio of eight operating wind
facilities, to three financial investors for approximately $1.2 billion. The tax
equity investors together will generally receive 40% of the cash distributions
from available cash and will receive 99% of the tax attributes, including future
PTCs.
Southern Power consolidates each entity, as the primary beneficiary of the VIE,
since it controls the most significant activities, including operating and
maintaining the assets.
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Southern Company and Subsidiary Companies 2020 Annual Report
Sales of Natural Gas and Biomass Plants
In December 2018, Southern Power completed the sale of all of its equity
interests in Plant Oleander and Plant Stanton Unit A (together, the Florida
Plants) to NextEra Energy for $203 million, including final working capital
adjustments. In contemplation of this sale transaction, Southern Power recorded
an asset impairment charge of approximately $119 million ($89 million after tax)
in the second quarter 2018.
In June 2019, Southern Power completed the sale of its equity interests in Plant
Nacogdoches, a 115-MW biomass facility located in Nacogdoches County, Texas, to
Austin Energy, for a purchase price of approximately $461 million, including
final working capital adjustments. Southern Power recorded a gain of $23 million
($88 million after tax) on the sale.
On January 17, 2020, Southern Power completed the sale of its equity interests
in Plant Mankato (including the 385-MW expansion unit completed in May 2019) to
a subsidiary of Xcel for a purchase price of approximately $663 million,
including final working capital adjustments. The sale resulted in a gain of
approximately $39 million ($23 million after tax). The assets and liabilities of
Plant Mankato were classified as held for sale on Southern Company's and
Southern Power's balance sheets at December 31, 2019. See "Assets Held for Sale"
herein for additional information.
Southern Company Gas
Sale of Pivotal Home Solutions
In June 2018, Southern Company Gas completed the stock sale of Pivotal Home
Solutions to American Water Enterprises LLC for a total cash purchase price of
$365 million, which includes the final working capital adjustment. This
disposition resulted in a net loss of $67 million, which includes $34 million of
income tax expense. In contemplation of the transaction, a goodwill impairment
charge of $42 million was recorded during 2018. The income tax expense included
tax on goodwill not deductible for tax purposes and for which a deferred tax
liability had not been recorded previously. Southern Company Gas and American
Water Enterprises LLC entered into a transition services agreement whereby
Southern Company Gas provided certain administrative and operational services,
which ended during 2018.
Sales of Elizabethtown Gas and Elkton Gas
In July 2018, a Southern Company Gas subsidiary, Pivotal Utility Holdings,
completed the sales of the assets of two of its natural gas distribution
utilities, Elizabethtown Gas and Elkton Gas, to South Jersey Industries, Inc.
for a total cash purchase price of $1.7 billion, which includes the final
working capital and other adjustments. This disposition resulted in a pre-tax
gain that was entirely offset by $205 million of income tax expense, resulting
in no material net income impact. The income tax expense included tax on
goodwill not deductible for tax purposes and for which a deferred tax liability
had not been recorded previously. Southern Company Gas and South Jersey
Industries, Inc. entered into transition services agreements whereby Southern
Company Gas provided certain administrative and operational services through
July 2, 2020.
Sale of Florida City Gas
In July 2018, Southern Company Gas and its wholly-owned direct subsidiary, NUI
Corporation, completed the stock sale of Pivotal Utility Holdings, which
primarily consisted of Florida City Gas, to NextEra Energy for a total cash
purchase price of $587 million, which includes the final working capital
adjustment. This disposition resulted in a net gain of $16 million, which
includes $103 million of income tax expense. The income tax expense included tax
on goodwill not deductible for tax purposes and for which a deferred tax
liability had not been recorded previously. Southern Company Gas and NextEra
Energy entered into a transition services agreement whereby Southern Company Gas
provided certain administrative and operational services through July 28, 2020.
Sale of Triton
In May 2019, Southern Company Gas sold its investment in Triton, a cargo
container leasing company that was aggregated into Southern Company Gas' all
other segment. This disposition resulted in a pre-tax loss of $6 million and a
net after-tax gain of $7 million as a result of reversing a $13 million federal
income tax valuation allowance.
Sale of Pivotal LNG and Atlantic Coast Pipeline
On March 24, 2020, Southern Company Gas completed the sale of its interests in
Pivotal LNG and Atlantic Coast Pipeline to Dominion Modular LNG Holdings, Inc.
and Dominion Atlantic Coast Pipeline, LLC, respectively, with aggregate proceeds
of $178 million, including final working capital adjustments. The loss
associated with the transactions was immaterial. Southern Company Gas also
expects to receive payments in April 2021 and August 2021 of $5 million each
contingent upon Dominion Modular LNG Holdings, Inc. meeting certain milestones
related to Pivotal LNG. During 2019, based on the terms of these
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Southern Company and Subsidiary Companies 2020 Annual Report
transactions, Southern Company Gas recorded an asset impairment charge,
exclusive of the contingent payments, for Pivotal LNG of approximately $24
million ($17 million after tax) as of December 31, 2019. The assets and
liabilities of Pivotal LNG and the interest in Atlantic Coast Pipeline were
classified as held for sale as of December 31, 2019. See Note 7 under "Southern
Company Gas" and "Assets Held for Sale" herein for additional information.
Sale of Natural Gas Storage Facility
On December 1, 2020, Southern Company Gas completed the sale of Jefferson Island
to EnLink Midstream, LLC for a total purchase price of $33 million, including
estimated working capital adjustments. The gain associated with the sale totaled
$22 million pre-tax ($16 million after tax).
Assets Held for Sale
Assets and liabilities held for sale have been classified separately on each
company's balance sheet at the lower of carrying value or fair value less costs
to sell at the time the criteria for held-for-sale classification were met. For
assets and liabilities held for sale recorded at fair value on a nonrecurring
basis, the fair value of assets held for sale is based primarily on unobservable
inputs (Level 3), which includes the agreed upon sales prices in executed sales
agreements.
Since the depreciation of the assets sold in the Gulf Power transaction and
Southern Company Gas' Elizabethtown Gas, Elkton Gas, and Florida City Gas
transactions continued to be reflected in customer rates through the closing
date of each sale and was reflected in the carryover basis of the assets when
sold, Southern Company and Southern Company Gas continued to record depreciation
on those assets through the respective closing date of each transaction. Upon
classification as held for sale in May 2018 for the Florida Plants, November
2018 for Plant Mankato, and April 2019 for Plant Nacogdoches, Southern Power
ceased recognizing depreciation and amortization on the long-lived assets being
sold.
The following table provides the major classes of assets and liabilities
classified as held for sale for Southern Company, Southern Power, and Southern
Company Gas at December 31, 2020 and/or 2019:
Southern Southern
Company Power Southern Company Gas
At December 31, At December 31, At December 31,
2020 2019 2019 2019
(in millions)
Assets Held for Sale:
Current assets $ - $ 19 $ 17 $ 2
Total property, plant, and equipment 8 565 547 18
Goodwill and other intangible assets - 40 40 -
Equity investments in unconsolidated
subsidiaries - 151 - 151
Leveraged leases 52 - - -
Other non-current assets - 14 14 -
Total Assets Held for Sale $ 60 $ 789 $ 618 $ 171
Liabilities Held for Sale (all
current): $ - $ 5 $ 3 $ 2
Southern Company, Southern Power, and Southern Company Gas each concluded that
the asset sales, both individually and combined, did not represent a strategic
shift in operations that has, or is expected to have, a major effect on its
operations and financial results; therefore, none of the assets related to the
sales have been classified as discontinued operations for any of the periods
presented.
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Southern Company and Subsidiary Companies 2020 Annual Report
Gulf Power and Southern Power's Florida Plants, Plant Nacogdoches, and Plant
Mankato represented individually significant components of Southern Company and
Southern Power, respectively. Pre-tax income for these components for the years
ended December 31, 2020, 2019, and 2018 are presented below:
2020 2019 2018
(in millions)
Earnings before income taxes:
Gulf Power N/A N/A $ 140
Southern Power's Florida Plants(a)(b) N/A N/A $ 49 Southern Power's Plant Nacogdoches(a)(c) N/A $ 13 $ 27 Southern Power's Plant Mankato(a)(d) $ 2 $ 29 N/M
N/M - Not material
(a)Earnings before income taxes reflect the cessation of depreciation and
amortization on the long-lived assets being sold upon classification as held for
sale.
(b)2018 amount represents the period from January 1, 2018 to December 4, 2018
(the divestiture date).
(c)2019 amount represents the period from January 1, 2019 to June 13, 2019 (the
divestiture date).
(d)2020 amount represents the period from January 1, 2020 to January 17, 2020
(the divestiture date).
16. SEGMENT AND RELATED INFORMATION
Southern Company
Southern Company's reportable business segments are the sale of electricity by
the traditional electric operating companies, the sale of electricity in the
competitive wholesale market by Southern Power, and the sale of natural gas and
other complementary products and services by Southern Company Gas. Revenues from
sales by Southern Power to the traditional electric operating companies were
$364 million, $398 million, and $435 million in 2020, 2019, and 2018,
respectively. Revenues from sales of natural gas from Southern Company Gas to
the traditional electric operating companies and Southern Power were immaterial
and $26 million, respectively, in 2020, $14 million and $64 million,
respectively, in 2019, and $32 million and $119 million, respectively, in 2018.
The "All Other" column includes the Southern Company parent entity, which does
not allocate operating expenses to business segments. Also, this category
includes segments below the quantitative threshold for separate disclosure.
These segments include providing energy solutions to electric utilities and
their customers in the areas of distributed generation, energy storage and
renewables, and energy efficiency, as well as investments in telecommunications
and leveraged lease projects. All other inter-segment revenues are not material.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report Financial data for business segments and products and services for the years ended December 31, 2020, 2019, and 2018 was as follows:
Electric Utilities
Traditional
Electric
Operating Southern Southern All
Companies Power Eliminations Total Company Gas Other Eliminations Consolidated
(in millions)
2020
Operating revenues $ 15,135 $ 1,733 $ (371) $ 16,497 $ 3,434 $ 596 $ (152) $ 20,375 Depreciation and amortization
2,447 494 - 2,941 500 77 - 3,518
Interest income 26 4 - 30 5 6 (4) 37
Earnings from equity method investments - - - - 141 12 - 153
Interest expense 825 151 - 976 231 614 - 1,821
Income taxes (benefit) 514 3 - 517 173 (297) - 393
Segment net income (loss)(a)(b)(c)(d)(e) 2,877 238 - 3,115 590 (592) 6 3,119
Goodwill - 2 - 2 5,015 263 - 5,280
Total assets 85,486 13,235 (680) 98,041 22,630 3,168 (904) 122,935
2019
Operating revenues $ 15,569 $ 1,938 $ (412) $ 17,095 $ 3,792 $ 690 $ (158) $ 21,419 Depreciation and amortization
1,993 479 - 2,472 487 79 - 3,038
Interest income 38 9 - 47 3 16 (6) 60
Earnings from equity method investments 2 3 - 5 157 - - 162
Interest expense 818 169 - 987 232 517 - 1,736
Income taxes (benefit) 764 (56) - 708 130 960 - 1,798
Segment net income (loss)(a)(f)(g)(h) 2,929 339 - 3,268 585 908 (22) 4,739
Goodwill - 2 - 2 5,015 263 - 5,280
Total assets 81,063 14,300 (713) 94,650 21,687 3,511 (1,148) 118,700
2018
Operating revenues $ 16,843 $ 2,205 $ (477) $ 18,571 $ 3,909 $ 1,213 $ (198) $ 23,495 Depreciation and amortization
2,072 493 - 2,565 500 66 - 3,131
Interest income 23 8 - 31 4 8 (5) 38
Earnings from equity method investments (1) - - (1) 148 2 (1) 148
Interest expense 852 183 - 1,035 228 580 (1) 1,842
Income taxes (benefit) 371 (164) - 207 464 (222) - 449
Segment net income (loss)(a)(b)(i)(j) 2,117 187 - 2,304 372 (453) 3 2,226
Goodwill - 2 - 2 5,015 298 - 5,315
Total assets 79,382 14,883 (306) 93,959 21,448 3,285 (1,778) 116,914
(a)Attributable to Southern Company.
(b)For the traditional electric operating companies, includes pre-tax charges at
Georgia Power for estimated loss on Plant Vogtle Units 3 and 4 of $325 million
($242 million after tax) in 2020 and $1.1 billion ($0.8 billion after tax) in
2018. See Note 2 under "Georgia Power - Nuclear Construction" for additional
information.
(c)For Southern Power, includes a $39 million pre-tax gain ($23 million gain
after tax) on the sale of Plant Mankato. See Note 15 under "Southern Power" for
additional information.
(d)For Southern Company Gas, includes a $22 million pre-tax gain ($16 million
gain after tax) on the sale of Jefferson Island. See Note 15 under "Southern
Company Gas" for additional information.
(e)For the "All Other" column, includes pre-tax impairment charges totaling $206
million ($105 million after tax) related to leveraged lease investments. See
Note 3 under "Other Matters - Southern Company" for additional information.
(f)For Southern Power, includes a $23 million pre-tax gain ($88 million gain
after tax) on the sale of Plant Nacogdoches. See Note 15 under "Southern Power"
for additional information.
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(g)For Southern Company Gas, includes pre-tax impairment charges totaling
$115 million ($86 million after tax). See Notes 3 and 15 under "Other Matters -
Southern Company Gas" and "Southern Company Gas - Sale of Pivotal LNG and
Atlantic Coast Pipeline," respectively, for additional information.
(h)For the "All Other" column, includes the pre-tax gain associated with the
sale of Gulf Power of $2.6 billion ($1.4 billion after tax), the pre-tax loss,
including related impairment charges, on the sales of certain PowerSecure
business units totaling $58 million ($52 million after tax), and a pre-tax
impairment charge of $17 million ($13 million after tax) related to a leveraged
lease investment. See Notes 3 and 15 under "Other Matters - Southern Company"
and "Southern Company," respectively, for additional information.
(i)For Southern Power, includes pre-tax impairment charges of $156 million ($117
million after tax). See Note 15 under "Southern Power" for additional
information.
(j)For Southern Company Gas, includes a net gain on dispositions of $291 million
($51 million loss after tax), as well as a goodwill impairment charge of $42
million related to the sale of Pivotal Home Solutions. See Note 15 under
"Southern Company Gas" for additional information.
Products and Services
Electric Utilities' Revenues
Year Retail Wholesale Other Total
(in millions)
2020 $ 13,643 $ 1,945 $ 909 $ 16,497
2019 14,084 2,152 859 17,095
2018 15,222 2,516 833 18,571
Southern Company Gas' Revenues
Gas Gas
Distribution Marketing
Year Operations Services All Other Total
(in millions)
2020 $ 2,902 $ 408 $ 124 $ 3,434
2019 3,001 456 335 3,792
2018 3,155 568 186 3,909
Southern Company Gas
Southern Company Gas manages its business through four reportable segments - gas
distribution operations, gas pipeline investments, wholesale gas services, and
gas marketing services. The non-reportable segments are combined and presented
as all other. See Note 15 under "Southern Company Gas" for additional
information on the disposition activities described herein.
Gas distribution operations is the largest component of Southern Company Gas'
business and includes natural gas local distribution utilities that construct,
manage, and maintain intrastate natural gas pipelines and gas distribution
facilities in four states. In July 2018, Southern Company Gas sold three of its
natural gas distribution utilities, Elizabethtown Gas, Elkton Gas, and Florida
City Gas.
Gas pipeline investments consists of joint ventures in natural gas pipeline
investments including a 50% interest in SNG, a 20% ownership interest in the
PennEast Pipeline project, and a 50% joint ownership interest in the Dalton
Pipeline. These natural gas pipelines enable the provision of diverse sources of
natural gas supplies to the customers of Southern Company Gas. Gas pipeline
investments also included a 5% ownership interest in the Atlantic Coast Pipeline
construction project prior to its sale on March 24, 2020. See Notes 3, 5, and 7
for additional information.
Wholesale gas services provides natural gas asset management and/or related
logistics services for each of Southern Company Gas' utilities except Nicor Gas
as well as for non-affiliated companies. Additionally, wholesale gas services
engages in natural gas storage and gas pipeline arbitrage and related
activities.
Gas marketing services provides natural gas marketing to end-use customers
primarily in Georgia and Illinois through SouthStar. In June 2018, Southern
Company Gas sold Pivotal Home Solutions, which provided home equipment
protection products and services.
The all other column includes segments and subsidiaries that fall below the
quantitative threshold for separate disclosure, including storage and fuels
operations. The all other column included Jefferson Island though its sale on
December 1, 2020, Pivotal LNG through its sale on March 24, 2020, and the
investment in Triton through its sale on May 29, 2019.
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COMBINED NOTES TO FINANCIAL STATEMENTS (continued) Southern Company and Subsidiary Companies 2020 Annual Report Financial data for business segments for the years ended December 31, 2020, 2019, and 2018 was as follows:
Gas Distribution Gas Pipeline Wholesale Gas Gas Marketing
Operations(a) Investments Services(b) Services(c) Total All Other(d) Eliminations Consolidated
(in millions)
2020
Operating revenues $ 2,952 $ 32 $ 74 $ 408 $ 3,466 $ 36 $ (68) $ 3,434
Depreciation and amortization 442 5 1 22 470 30 - 500
Operating income (loss) 655 20 20 119 814 (7) 5 812
Earnings from equity method investments - 141 - - 141 - - 141
Interest expense 192 29 4 3 228 3 - 231
Income taxes (benefit) 114 33 3 28 178 (5) - 173
Segment net income (loss) 390 99 14 89 592 (2) - 590
Total assets at December 31, 2020 19,090 1,597 850 1,503 23,040 11,336 (11,746) 22,630
2019
Operating revenues $ 3,028 $ 32 $ 294 $ 456 $ 3,810 $ 44 $ (62) $ 3,792
Depreciation and amortization 422 5 1 26 454 33 - 487
Operating income (loss) 573 20 219 112 924 (154) - 770
Earnings from equity method investments - 162 - - 162 (5) - 157
Interest expense 187 30 5 3 225 7 - 232
Income taxes (benefit) 63 58 52 27 200 (70) - 130
Segment net income (loss) 337 94 163 83 677 (92) - 585
Total assets at December 31, 2019 18,204 1,678 850 1,496 22,228 10,759 (11,300) 21,687
2018
Operating revenues $ 3,186 $ 32 $ 144 $ 568 $ 3,930 $ 55 $ (76) $ 3,909
Depreciation and amortization 409 5 2 37 453 47 - 500
Operating income (loss) 904 20 70 19 1,013 (98) - 915
Earnings from equity method investments - 145 - - 145 3 - 148
Interest expense 178 34 9 6 227 1 - 228
Income taxes (benefit) 409 28 4 54 495 (31) - 464
Segment net income (loss) 334 103 38 (40) 435 (63) - 372
Total assets at December 31, 2018 17,266 1,763 1,302 1,587 21,918 11,112 (11,582) 21,448
(a)Operating revenues for the three gas distribution operations dispositions
were $244 million for 2018. Segment net income for gas distribution operations
includes a gain on dispositions of $324 million ($16 million after tax) in 2018.
(b)The revenues for wholesale gas services are netted with costs associated with
its energy and risk management activities. A reconciliation of operating
revenues and intercompany revenues is shown in the following table.
Third Party Gross Intercompany Total Gross Less Gross Gas Operating
Revenues Revenues Revenues Costs Revenues
(in millions)
2020 $ 4,544 $ 115 $ 4,659 $ 4,585 $ 74
2019 5,703 275 5,978 5,684 294
2018 6,955 451 7,406 7,262 144
(c)Operating revenues for the gas marketing services disposition were $55
million in 2018. Segment net income for gas marketing services includes a loss
on disposition of $33 million ($67 million loss after tax) and a goodwill
impairment charge of $42 million in 2018 recorded in contemplation of the sale
of Pivotal Home Solutions.
(d)Segment net income (loss) for the "All Other" column includes a $22 million
pre-tax gain ($16 million gain after tax) on the sale of Jefferson Island in
2020 and pre-tax impairment charges totaling $115 million ($86 million after
tax) in 2019. See Note 3 under "Other Matters - Southern Company Gas" for
additional information.
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