SOUTHERN COMPANY Page
Combined Management's Discussion and Analysis of Financial Condition and Results of Operations Overview II- 3 Results of Operations II- 7Southern Company II- 7Alabama Power II- 17Georgia Power II- 21Mississippi Power II- 26Southern Power II- 30Southern Company Gas II- 32 Future Earnings Potential II- 38 Accounting Policies II- 46 Financial Condition and Liquidity II- 53 This section generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 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, 2021 , which was filed with theSEC onFebruary 16, 2022 . 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.
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OVERVIEW
Business Activities
Southern Company is a holding company that owns all of the common stock of three traditional electric operating companies,Southern 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 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 three reportable segments - gas distribution operations, gas pipeline investments, 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. Prior to the sale of Sequent onJuly 1, 2021 ,Southern Company Gas' reportable segments also included wholesale gas services. See Notes 7, 15, and 16 to the financial statements for additional information.
See FUTURE EARNINGS POTENTIAL herein for a discussion of the many factors that could impact the Registrants' future results of operations, financial condition, and liquidity. Recent DevelopmentsAlabama Power
On
•Alabama Power's petition for a certificate of convenience and necessity authorizingAlabama Power to complete the acquisition of theCalhoun Generating Station . The transaction closed onSeptember 30, 2022 and the related costs are being recovered through Rate CNP New Plant, which reflected an increase in annual revenues of$34 million , or 0.6%, effective withNovember 2022 billings. •An increase to Rate ECR effective withAugust 2022 billings, which resulted in an increase of approximately$310 million annually. The approved changes in the Rate ECR factor have no significant effect onAlabama Power's net income, but do impact the related operating cash flows.
•Modifications to Rate NDR.
•An accounting order authorizingAlabama Power to create a reliability reserve separate from the NDR and transition the previous Rate NDR authority related to reliability expenditures to the reliability reserve.Alabama Power may make accruals to the reliability reserve if the NDR balance exceeds$35 million . AtDecember 31, 2022 ,Alabama Power accrued$166 million to the reserve. II-3 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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On
OnNovember 1, 2022 , the Alabama PSC approved an increase to Rate ECR of approximately$500 million annually effective withDecember 2022 billings. The approved changes in the Rate ECR factor have no significant effect onAlabama Power's net income, but do impact operating cash flows related to fuel cost recovery.
On
OnDecember 6, 2022 , the Alabama PSC approved Rate CNP Depreciation, which allowsAlabama Power to recover changes in depreciation resulting from updates to certain depreciation rates. Rate CNP Depreciation will result in an annual revenue increase of approximately$318 million , or 4.6%, effective withJanuary 2023 billings. In addition, the Alabama PSC directedAlabama Power to accelerate the amortization of a regulatory liability associated with excess federal accumulated deferred income taxes, which is being returned to customers through bill credits of up to approximately$318 million in 2023 to offset the impact of the Rate CNP Depreciation increase. The Alabama PSC will determine the treatment of any remaining excess federal accumulated deferred income taxes at a future date. The ultimate outcome of this matter cannot be determined at this time.
During 2022,
For the year ended
See Note 2 to the financial statements under "
Plant Vogtle Units 3 and 4 Construction and Start-Up Status
Construction continues on Plant Vogtle Units 3 and 4 (with electric generating capacity of approximately 1,100 MWs each), in whichGeorgia Power currently holds a 45.7% ownership interest.Georgia Power's share of the total project capital cost forecast to complete Plant Vogtle Units 3 and 4, including contingency, through the end of the second quarter 2023 and the first quarter 2024, respectively, is$10.6 billion . OnJuly 29, 2022 , Southern Nuclear announced that all Unit 3 ITAACs had been submitted to the NRC. OnAugust 3, 2022 , the NRC published its 103(g) finding that the acceptance criteria in the combined license for Unit 3 had been met, which allowed nuclear fuel to be loaded and start-up testing to begin. Fuel load for Unit 3 was completed onOctober 17, 2022 . In early 2023, during the start-up and pre-operational testing for Unit 3, Southern Nuclear identified and is remediating certain equipment and component issues. As a result, Unit 3 is projected to be placed in service during May orJune 2023 . The projected schedule for Unit 3 primarily depends on the progression of final component and pre-operational testing and start-up, which may be impacted by further equipment, component, and/or other operational challenges. After considering the timeframe and duration of hot functional and other testing and recent experience with Unit 3 start-up and pre-operational testing, Unit 4 is now projected to be placed in service during late fourth quarter 2023 or the first quarter 2024. The projected schedule for Unit 4 primarily depends on potential impacts arising from Unit 4 testing activities overlapping with Unit 3 start-up and commissioning; maintaining overall construction productivity and production levels, particularly in subcontractor scopes of work; and maintaining appropriate levels of craft laborers. Any further delays could result in later in-service dates and cost increases. During 2022, established construction contingency and additional costs totaling$307 million were assigned to the base capital cost forecast for costs primarily associated with schedule extensions, construction productivity, the pace of system turnovers, additional craft and support resources, procurement for Units 3 and 4, and the equipment and component issues identified during Unit 3 start-up and pre-operational testing. During 2022,Georgia Power also increased its total project capital cost forecast by$125 million to replenish construction contingency and$9 million for construction monitoring costs, which were approved for recovery by the Georgia PSC in its nineteenth VCM order. 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 pre-tax charges to income in the second quarter 2022, the third quarter 2022, and the fourth quarter 2022 of$36 million ($27 million after tax),$32 million ($24 million after tax), and$148 million ($110 million after tax), respectively, for the increases in the total project capital cost forecast.Georgia Power may request the Georgia PSC to evaluate those expenditures for rate recovery during II-4 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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the prudence review following the Unit 4 fuel load pursuant to the twenty-fourth VCM stipulation described in Note 2 to the financial statements under "Georgia Power -Nuclear Construction - Regulatory Matters."Georgia Power and the other Vogtle Owners do not agree on the starting dollar amount for the determination of cost increases subject to the cost-sharing and tender provisions of the Global Amendments (as defined in Note 2 to the financial statements underGeorgia Power -Nuclear Construction - Joint Owner Contracts"). The other Vogtle Owners notifiedGeorgia Power that they believe the project capital cost forecast approved by the Vogtle Owners onFebruary 14, 2022 triggered the tender provisions. OnJune 17, 2022 andJuly 26, 2022 , OPC and Dalton, respectively, notifiedGeorgia Power of their purported exercises of their tender options.Georgia Power did not accept these purported tender exercises. OnJune 18, 2022 ,OPC and MEAG Power each filed a separate lawsuit againstGeorgia Power in theSuperior Court of Fulton County, Georgia seeking a declaratory judgment that the starting dollar amount is$17.1 billion and that the cost-sharing and tender provisions have been triggered. OnJuly 25, 2022 andJuly 28, 2022 ,Georgia Power filed its answers in the lawsuits filed byMEAG Power and OPC, respectively, and included counterclaims seeking a declaratory judgment that the starting dollar amount is$18.38 billion and that costs related to force majeure events are excluded prior to calculating the cost-sharing and tender provisions and when calculatingGeorgia Power's related financial obligations. OnSeptember 26, 2022 , Dalton filed complaints in each of these lawsuits. OnSeptember 29, 2022 ,Georgia Power andMEAG Power reached an agreement to resolve their dispute regarding the proper interpretation of the cost-sharing and tender provisions of the Global Amendments. Under the terms of the agreement, among other items, (i)MEAG Power will not exercise its tender option and will retain its full ownership interest in Plant Vogtle Units 3 and 4; (ii)Georgia Power will reimburse a portion ofMEAG Power's costs of construction for Plant Vogtle Units 3 and 4 as such costs are incurred and with no further adjustment for force majeure costs, which payments will total approximately$92 million based on the current project capital cost forecast; and (iii)Georgia Power will reimburse 20% ofMEAG Power's costs of construction with respect to any amounts over the current project capital cost forecast, with no further adjustment for force majeure costs. OnOctober 4, 2022 ,MEAG Power andGeorgia Power filed a notice of settlement and voluntary dismissal of the pending litigation described above, includingGeorgia Power's counterclaim, and, onOctober 6, 2022 , Dalton dismissed its related complaint.Georgia Power recorded pre-tax charges (credits) to income in the fourth quarter 2021, the second quarter 2022, the third quarter 2022, and the fourth quarter 2022 of approximately$440 million ($328 million after tax),$16 million ($12 million after tax),$(102) million ($(76) million after tax), and$53 million ($40 million after tax), respectively, associated with the cost-sharing and tender provisions of the Global Amendments, including the settlement withMEAG Power . A total of$407 million associated with these provisions is included in the total project capital cost forecast and will not be recovered from retail customers. The settlement withMEAG Power does not resolve the separate pending litigation with OPC, including Dalton's associated complaint, described above.Georgia Power may be required to record further pre-tax charges to income of up to approximately$345 million associated with the cost-sharing and tender provisions of the Global Amendments for OPC and Dalton based on the current project capital cost forecast.Georgia Power's ownership interest in Plant Vogtle Units 3 and 4 continues to be 45.7%.Georgia Power believes the increases in the total project capital cost forecast throughDecember 31, 2022 will trigger the tender provisions, butGeorgia Power disagrees with OPC and Dalton on the tender provisions trigger date. Valid notices of tender from OPC and Dalton would requireGeorgia Power to pay 100% of their respective remaining shares of the costs necessary to complete Plant Vogtle Units 3 and 4.Georgia Power's incremental ownership interest will be calculated and conveyed toGeorgia Power after Plant Vogtle Units 3 and 4 are placed in service. The ultimate impact of these matters on the construction schedule and project capital cost forecast and related cost recovery 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.
2022 ARP
OnDecember 20, 2022 , the Georgia PSC voted to approve the 2022 ARP, including estimated net rate increases totaling$216 million ,$377 million , and$403 million effectiveJanuary 1, 2023 ,January 1, 2024 , andJanuary 1, 2025 , respectively. See Note 2 to the financial statements under "Georgia Power - Rate Plans - 2022 ARP" for additional information.
Integrated Resource Plans
OnJuly 21, 2022 , the Georgia PSC approvedGeorgia Power's triennial IRP (2022 IRP), as modified by a stipulated agreement amongGeorgia Power , the staff of the Georgia PSC, and certain intervenors and as further modified by theGeorgia PSC. In the 2022 IRP decision, the Georgia PSC approved several requests, including the following: •Decertification and retirement of Plant Wansley Units 1 and 2 (926 MWs based on 53.5% ownership), which occurred onAugust 31, 2022 , and Plant Scherer Unit 3 (614 MWs based on 75% ownership) byDecember 31, 2028 , as well as the II-5 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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reclassification to regulatory asset accounts of the remaining net book values of these units and any remaining unusable materials and supplies inventories upon retirement.
•Decertification and retirement of Plant Gaston Units 1 through 4 (500 MWs based
on 50% ownership through SEGCO) by
•Georgia Power's environmental compliance strategy, including approval of
The Georgia PSC deferred a decision on the requested decertification and retirement of Plant Bowen Units 1 and 2 (1,400 MWs) to the 2025 IRP.
See Note 2 to the financial statements under "
OnJune 7, 2022 , the Mississippi PSC approvedMississippi Power's annual retail PEP filing for 2022, resulting in an annual increase in revenues of approximately$18 million , or 1.9%, effective with the first billing cycle ofApril 2022 . OnAugust 26, 2022 , theFERC accepted an amended shared service agreement (SSA) betweenMississippi Power and Cooperative Energy, effectiveJuly 1, 2022 , under which Cooperative Energy will continue to decrease its use ofMississippi Power's generation services under the MRA tariff up to 2.5% annually through 2035. AtDecember 31, 2022 ,Mississippi Power is serving approximately 400 MWs of Cooperative Energy's annual demand. Beginning in 2036, Cooperative Energy will provide 100% of its electricity requirements at the MRA delivery points under the tariff. Neither party has the option to cancel the amended SSA.Mississippi Power expects to remarket this capacity, including the potential development of future arrangements with Cooperative Energy. OnJuly 15, 2022 ,Mississippi Power filed a request with theFERC for a$23 million increase in annual wholesale base revenues under the MRA tariff. Cooperative Energy filed a complaint with theFERC challenging the new rates. OnSeptember 13, 2022 , theFERC issued an order that acceptedMississippi Power's request effectiveSeptember 14, 2022 , subject to refund, and established hearing and settlement judge procedures. The ultimate outcome of this matter cannot be determined at this time. OnNovember 15, 2022 ,Mississippi Power filed a request with the Mississippi PSC to increase retail fuel revenues by$25 million annually effective with the first billing cycle ofFebruary 2023 and an additional$25 million annually effective with the first billing cycle ofJune 2023 . OnJanuary 10, 2023 , the Mississippi PSC voted to defer approval of the filing.Mississippi Power is allowed to maintain current billing rates and continue accruing its weighted-average cost of capital on any under or over fuel recovery balance. The ultimate outcome of this matter cannot be determined at this time. OnDecember 6, 2022 , the Mississippi PSC approved an accounting order authorizingMississippi Power to create a reliability reserve for the purpose of deferring generation, transmission, and distribution reliability-related expenditures for use in a future year, under certain conditions. AtDecember 31, 2022 ,Mississippi Power accrued$25 million to the reliability reserve.
See Note 2 to the financial statements under "
Southern Power During 2022,Southern Power completed construction of and placed in service the remaining 40 MWs of the Tranquillity battery energy storage facility (72 MWs total) and the remaining 15 MWs of the Garland battery energy storage facility (88 MWs total).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 facilities' net book value (or expected in-service value for facilities under construction) as the investment amount. With the inclusion of investments associated with facilities under construction, as well as other capacity and energy contracts,Southern Power's average investment coverage ratio atDecember 31, 2022 was 96% through 2027 and 90% through 2032, with an average remaining contract duration of approximately 12 years.
See Note 15 to the financial statements under "
Southern Company Gas OnAugust 1, 2022 ,Virginia Natural Gas filed a general base rate case with theVirginia Commission seeking an increase in annual base rate revenues of$69 million , including$15 million related to the recovery of investments under the SAVE program, primarily to recover investments and increased costs associated with infrastructure, technology, and workforce development. The requested increase is based on a projected 12-month period beginningJanuary 1, 2023 , a ROE of 10.35%, and an equity ratio of II-6 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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53.2%. Rate adjustments became effectiveJanuary 1, 2023 , subject to refund.The Virginia Commission is expected to rule on the requested increase in the third quarter 2023. The ultimate outcome of this matter cannot be determined at this time. OnSeptember 7, 2022 , certain affiliates ofSouthern Company Gas entered into agreements to sell two natural gas storage facilities located inCalifornia andTexas for an aggregate purchase price of$186 million , plus working capital and certain other adjustments. The sale of theTexas facility was completed onNovember 18, 2022 and completion of the sale of theCalifornia facility is expected later in 2023. The ultimate outcome of this matter cannot be determined at this time.Southern Company Gas recorded pre-tax impairment charges totaling approximately$131 million ($99 million after tax) in the fourth quarter 2022 related to the facilities. See Note 15 to the financial statements under "Southern Company Gas " for additional information.
On
OnJanuary 3, 2023 ,Nicor Gas filed a general base rate case with theIllinois Commission requesting a$321 million increase in annual base rate revenues, including$59 million related to the recovery of investments under the Investing inIllinois program throughDecember 31, 2023 . The requested increase is based on a projected test year for the 12-month period endingDecember 31, 2024 , a return on equity of 10.35%, and an equity ratio of 54.5%. Further,Nicor Gas is seeking to recover an additional$32 million under three proposed riders related to recovery of vehicle fuel costs, company use gas, and customer payment fees.The Illinois Commission is expected to rule on the requested increase within the 11-month statutory time limit, after which rate adjustments will be effective. The ultimate outcome of this matter cannot be determined at this time.
Key Performance Indicators
In striving to achieve attractive risk-adjusted returns while providing cost-effective energy to approximately 8.8 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
Consolidated net income attributable toSouthern Company was$3.5 billion in 2022, an increase of$1.1 billion , or 47.3%, from 2021. The increase was primarily due to a$1.1 billion decrease in after-tax charges related to the construction of Plant Vogtle Units 3 and 4, increases in retail electric revenues associated with rates and pricing, warmer weather, primarily in the second quarter 2022, and sales growth, and increases in natural gas revenues from base rate increases and continued infrastructure replacement, partially offset by higher non-fuel operations and maintenance costs and higher interest expense. See Note 2 to the financial statements under "Georgia Power -Nuclear Construction " for additional information. Basic EPS was$3.28 in 2022 and$2.26 in 2021. Diluted EPS, which factors in additional shares related to stock-based compensation, was$3.26 in 2022 and$2.24 in 2021. EPS for 2022 and 2021 was negatively impacted by$0.04 and$0.01 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$2.70 in 2022 and$2.62 in 2021. InJanuary 2023 ,Southern Company declared a quarterly dividend of68 cents per share. For 2022, the dividend payout ratio was 82% compared to 116% for 2021. II-7 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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Discussion ofSouthern Company's results of operations is divided into three parts -the Southern Company system's primary business of electricity sales, its gas business, and its other business activities. 2022 2021 (in millions) Electricity business$ 3,672 $ 2,247 Gas business 572 539 Other business activities (720) (393) Net Income$ 3,524 $ 2,393
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 2022 2021 (in millions) Electric operating revenues$ 22,873 $ 4,573 Fuel 6,835 2,825 Purchased power 1,593 615 Cost of other sales 114 5 Other operations and maintenance 5,268 459 Depreciation and amortization 3,029 76 Taxes other than income taxes 1,125 63 Estimated loss on Plant Vogtle Units 3 and 4 183 (1,509) Impairment charges - (2) Gain on dispositions, net (39) 20 Total electric operating expenses 18,108 2,552 Operating income 4,765 2,021 Allowance for equity funds used during construction 210 31 Interest expense, net of amounts capitalized 1,067 99 Other income (expense), net 516 89 Income taxes 848 629 Net income 3,576 1,413 Less: Dividends on preferred stock of subsidiaries 11 (4) Net loss attributable to noncontrolling interests (107) (8) Net Income Attributable to Southern Company$ 3,672 $ 1,425 II-8 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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Electric Operating Revenues
Electric operating revenues for 2022 were$22.9 billion , reflecting a$4.6 billion , or 25.0%, increase from 2021. Details of electric operating revenues were as follows: 2022 2021 (in millions) Retail electric - prior year$ 14,852 Estimated change resulting from - Rates and pricing 451 Sales growth 165 Weather 244 Fuel and other cost recovery 2,485 Retail electric - current year$ 18,197 $ 14,852 Wholesale electric revenues 3,641 2,455 Other electric revenues 747 718 Other revenues 288 275 Electric operating revenues$ 22,873 $ 18,300 Retail electric revenues increased$3.3 billion , or 22.5%, in 2022 as compared to 2021. The significant factors driving this change are shown in the preceding table. The increase in rates and pricing in 2022 was primarily due to increases atGeorgia Power resulting from higher contributions by commercial and industrial customers with variable demand-driven pricing, base tariff increases in accordance with the 2019 ARP, and pricing effects associated with customer usage. In addition,Alabama Power made a larger Rate RSE customer refund in 2021. These increases were partially offset by revenue reductions resulting fromGeorgia Power's retail ROE exceeding the allowed retail ROE range in 2022. 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 from power sales were as follows:
2022 2021
(in millions)
Capacity and other $ 625 $ 550
Energy 3,016 1,905
Total $ 3,641 $ 2,455
In 2022, wholesale electric revenues increased $1.2 billion , or 48.3%, as
compared to 2021 due to increases of $1.1 billion in energy revenues and $75
million in capacity revenues. Energy revenues increased $744 million at Southern
Power primarily due to fuel and purchased power increases compared to 2021 and
an increase in the volume of KWHs sold primarily associated with natural gas
PPAs. Energy revenues increased $367 million at the traditional electric
operating companies primarily due to higher natural gas and coal prices. The
increase in capacity revenues was primarily due to a net increase in natural gas
PPAs at Southern Power and increased opportunity sales at Alabama Power due to
warmer weather.
Wholesale electric revenues consist of revenues from 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
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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 atMississippi Power includeFERC -regulated MRA sales under cost-based tariffs as well as market-based sales. Short-term opportunity sales are made at market-based rates that generally provide a margin abovethe Southern Company system's variable cost to produce the energy.
Other Electric Revenues
Other electric revenues increased$29 million , or 4.0%, in 2022 as compared to 2021. The increase was primarily due to increases of$54 million in transmission revenues primarily associated with open access transmission tariff sales,$18 million in outdoor lighting sales atGeorgia Power ,$13 million in cogeneration steam revenues associated with higher natural gas prices atAlabama Power , and$11 million in rent revenues at the traditional electric operating companies, partially offset by a decrease of$32 million resulting from the termination of a transmission service contract, an increase of$18 million in realized losses associated with price stability products for retail customers on variable demand-driven pricing tariffs, and a decrease of$17 million from retail solar programs as a result of higher avoided cost credits to customers, all atGeorgia Power . Energy Sales Changes in revenues are influenced heavily by the change in the volume of energy sold from year to year. KWH sales for 2022 and the percent change from 2021 were as follows: 2022 Total Total KWH Weather-Adjusted KWHs Percent Change Percent Change(*) (in billions) Residential 49.6 4.8 % 0.2 % Commercial 48.3 3.5 2.0 Industrial 49.5 1.5 1.5 Other 0.6 (4.8) (4.8) Total retail 148.0 3.2 1.2 % Wholesale 56.3 12.6 Total energy sales 204.3 5.6 % (*)Weather-adjusted KWH sales are estimated using statistical models of the historical relationship between temperatures and energy sales, and then removing the estimated effect of deviations from normal temperature conditions. 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 increased 1.8 billion KWHs in 2022 as compared to 2021. Weather-adjusted residential KWH sales and weather-adjusted commercial KWH sales increased 0.2% and 2.0%, respectively, in 2022 when compared to 2021 largely due to customer growth. In addition, commercial customer usage increased and residential customer usage decreased in 2022 when compared to 2021 as customers returned to pre-pandemic levels of activity outside the home. Industrial KWH sales increased 1.5% in 2022 when compared to 2021 primarily due to increases in the pipeline and paper sectors, partially offset by a decrease in the chemicals sector.
See "Electric Operating Revenues" above for a discussion of significant changes in wholesale revenues related to changes in price and KWH sales.
Other Revenues
Other revenues increased$13 million , or 4.7%, in 2022 as compared to 2021. The increase was primarily due to increases of$10 million in unregulated lighting sales atAlabama Power and$7 million associated with energy conservation projects atGeorgia Power . II-10 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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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 ofthe Southern Company system's generation and purchased power were as follows: 2022 2021 Total generation (in billions of KWHs)(a) 186
179
Total purchased power (in billions of KWHs) 25
18
Sources of generation (percent) - Gas 51 48 Coal 22 22 Nuclear 16 18 Hydro 3 4 Wind, Solar, and Other 8 8 Cost of fuel, generated (in cents per net KWH) - Gas(a) 5.29 3.07 Coal 3.67 2.85 Nuclear 0.72 0.75
Average cost of fuel, generated (in cents per net KWH)(a) 4.05 2.55 Average cost of purchased power (in cents per net KWH)(b) 7.66 5.85
(a)Excludes Central Alabama Generating Station KWHs and associated cost of fuel throughJuly 12, 2022 as its fuel was previously provided by the purchaser under a power sales agreement. See Note 15 to the financial statements under "Alabama Power " for additional information.
(b)Average cost of purchased power includes fuel purchased by
In 2022, total fuel and purchased power expenses were$8.4 billion , an increase of$3.4 billion , or 69.0%, as compared to 2021. The increase was primarily the result of a$2.8 billion increase in the average cost of fuel generated and purchased and a$653 million increase in the volume of KWHs generated and purchased. 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 2022, fuel expense was$6.8 billion , an increase of$2.8 billion , or 70.4%, as compared to 2021. The increase was primarily due to a 72.3% increase in the average cost of natural gas per KWH generated, a 28.8% increase in the average cost of coal per KWH generated, an 11.1% decrease in the volume of KWHs generated by hydro, and a 9.0% increase in the volume of KWHs generated by natural gas.
In 2022, purchased power expense was$1.6 billion , an increase of$615 million , or 62.9%, as compared to 2021. The increase was primarily due to a 38.2% increase in the volume of KWHs purchased and a 30.9% increase in the average cost per KWH purchased primarily due to higher natural gas and coal prices. 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.
Other Operations and Maintenance Expenses
Other operations and maintenance expenses increased$459 million , or 9.5%, in 2022 as compared to 2021. The increase was primarily associated with increases of$247 million in transmission and distribution expenses,$95 million in generation expenses primarily related to scheduled outage and maintenance costs,$25 million for a reliability reserve accrual in 2022 atMississippi II-11 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS
Power, and$22 million in amortization of cloud software. The transmission and distribution increase was primarily due to increased line maintenance, as well as the net impact ofAlabama Power accruals of$166 million to the reliability reserve in 2022 and an incremental$65 million to the NDR in 2021. See Note 1 to the financial statements under "Storm Damage and Reliability Reserves" for additional information.
Depreciation and Amortization
Depreciation and amortization increased
Taxes Other Than Income Taxes
Taxes other than income taxes increased
Estimated Loss on Plant Vogtle Units 3 and 4
Georgia Power recorded pre-tax charges to income for the estimated probable loss on Plant Vogtle Units 3 and 4 totaling$183 million and$1.7 billion in 2022 and 2021, respectively. The charges to income in each year 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 on Dispositions,Net Gain on dispositions, net decreased$20 million , or 33.9%, in 2022 as compared to 2021 primarily due to a net decrease of$39 million in gains atSouthern Power related to contributions of wind turbine equipment to various equity method investments in 2021, partially offset by$17 million in gains from sales of integrated transmission system assets atGeorgia Power in 2022. See Notes 7 and 15 to the financial statements under "Southern Power " for additional information.
Allowance for
Allowance for equity funds used during construction increased$31 million , or 17.3%, in 2022 as compared to 2021. The increase was primarily associated with an increase in capital expenditures related to Plant Barry Unit 8 construction atAlabama Power and an increase in capital expenditures subject to AFUDC atGeorgia Power . See Note 2 to the financial statements under "Alabama Power - Certificates of Convenience and Necessity" for additional information.
Interest Expense, Net of Amounts Capitalized
Interest expense, net of amounts capitalized increased$99 million , or 10.2%, in 2022 as compared to 2021. The increase reflects approximately$54 million related to higher average outstanding borrowings and$43 million related to higher interest rates. See Note 8 to the financial statements for additional information. Other Income (Expense), Net
Other income (expense), net increased
Income Taxes
Income taxes increased$629 million in 2022 as compared to 2021. The increase was primarily due to higher pre-tax earnings largely resulting from a decrease in charges associated with the construction of Plant Vogtle Units 3 and 4 and an increase in a valuation allowance and other adjustments related to certain state tax credit carryforwards atGeorgia Power . See Note 2 to the financial statements under "Georgia Power -Nuclear Construction " and Note 10 to the financial statements for additional information.
Net Loss Attributable to Noncontrolling Interests
Substantially all noncontrolling interests relate to renewable projects atSouthern Power . Net loss attributable to noncontrolling interests increased$8 million , or 8.1%, in 2022 as compared to 2021. The increased loss was primarily due to$28 million in higher HLBV loss allocations toSouthern Power's tax equity partners in 2022, largely offset by$23 million in loss allocations associated with the Garland and Tranquillity battery energy storage facilities being placed in service in 2021. See Notes 9 and 15 to the financial statements under "Lessor" and "Southern Power ," respectively, for additional information. II-12 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS
Gas Business
Southern 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 (until the sale of Sequent onJuly 1, 2021 ), and gas marketing services.
A condensed statement of income for the gas business follows:
Increase
(Decrease) from
2022 2021
(in millions)
Operating revenues $ 5,962 $ 1,582
Cost of natural gas 3,004 1,385
Other operations and maintenance 1,176 104
Depreciation and amortization 559 23
Taxes other than income taxes 282 57
Impairment charges 131 131
Gain on dispositions, net (4) 123
Total operating expenses 5,148 1,823
Operating income 814 (241)
Earnings from equity method investments 148 98
Interest expense, net of amounts capitalized 263 25
Other income (expense), net 53 106
Income taxes 180 (95)
Net income $ 572 $ 33
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 to Southern Company Gas' distribution systems and natural gas usage is
higher in periods of colder weather. Prior to the sale of Sequent, wholesale gas
services' operating revenues were occasionally 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 2022, the percentage of operating
revenues and net income generated during the Heating Season (January through
March and November through December) were 67% and 66%, respectively. For 2021,
the percentage of operating revenues and net income generated during the Heating
Season were 70% and 102%, respectively.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS
Operating Revenues
Operating revenues in 2022 were
2022
(in millions)
Operating revenues - prior year $ 4,380
Estimated change resulting from -
Infrastructure replacement programs and base rate changes 252
Gas costs and other cost recovery 1,468
Gas marketing services 15
Wholesale gas services (187)
Other 34
Operating revenues - current year $ 5,962
Revenues at the natural gas distribution utilities increased in 2022 compared to
2021 due to rate increases at Nicor Gas , Atlanta Gas Light , and Chattanooga Gas
and continued investment in infrastructure replacement. See Note 2 to the
financial statements under "Southern Company Gas " for additional information.
Revenues associated with gas costs and other cost recovery increased in 2022
compared to 2021 primarily due to higher natural gas cost recovery as a result
of higher volumes of natural gas sold and an increase in natural gas prices. 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.
The change in 2022 revenues related to wholesale gas services was due to the
sale of Sequent on July 1, 2021 . See Note 15 to the financial statements under
"Southern Company Gas " for additional information.
Cost of Natural Gas
ExcludingAtlanta Gas Light , which does not sell natural gas to end-use customers, the natural gas distribution utilities 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 Note 2 to the financial statements under "Southern Company Gas - Natural Gas Cost Recovery" for additional information. Cost of natural gas at the natural gas distribution utilities represented 87.5% of the total cost of natural gas for 2022. 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
Other Operations and Maintenance Expenses
Other operations and maintenance expenses increased$104 million , or 9.7%, in 2022 compared to 2021. Excluding$66 million of expenses related to Sequent in 2021, other operations and maintenance expenses increased approximately$174 million . The increase was primarily due to increases of$64 million in compensation and benefit expenses,$43 million in expenses passed through directly to customers primarily related to bad debt at the natural gas distribution utilities,$31 million primarily related to bad debt, customer service, and sales expenses, and$18 million primarily related to pipeline compliance. II-14 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS
Depreciation and Amortization
Depreciation and amortization increased$23 million , or 4.3%, in 2022 compared to 2021. The 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.
Taxes Other Than Income Taxes
Taxes other than income taxes increased$57 million , or 25.3%, in 2022 compared to 2021. The increase was primarily due to a$39 million increase in revenue tax expenses as a result of higher natural gas revenues and an$11 million increase in invested capital tax expense atNicor Gas . Revenue tax expenses are passed through directly to customers and have no impact on net income.
Impairment Charges
In 2022,
Gain on Dispositions, Net
In 2021,
Earnings from Equity Method Investments
Earnings from equity method investments increased$98 million in 2022 compared to 2021. The increase was primarily due to pre-tax impairment charges totaling$84 million in 2021 related to the PennEast Pipeline project and higher earnings at SNG resulting from higher revenues primarily due to increased demand. See Note 7 to the financial statements under "Southern Company Gas " for additional information.
Interest Expense, Net of Amounts Capitalized
Interest expense, net of amounts capitalized increased$25 million , or 10.5%, in 2022 compared to 2021. The increase reflects approximately$16 million related to higher average outstanding borrowings and$8 million related to higher interest rates. See Note 8 to the financial statements for additional information.
Other Income (Expense), Net
Other income (expense), net increased$106 million in 2022 compared to 2021. The increase was largely due to charitable contributions by Sequent prior to its sale totaling$101 million in 2021 and an increase of$10 million primarily related to non-service cost-related retirement benefits income. See Note 11 to the financial statements under "Southern Company Gas " for additional information.
Income Taxes
Income taxes decreased$95 million , or 34.5%, in 2022 compared to 2021. The decrease was primarily due to additional tax benefit of$110 million resulting from the sale of Sequent in 2021 and$32 million as a result of the impairment related to the agreement to sell two natural gas storage facilities in 2022. The decrease was partially offset by$17 million of tax benefits in 2021 resulting from the impairment charge related to the PennEast Pipeline project and higher pre-tax earnings in 2022. See Notes 7 and 15 to the financial statements under "Southern Company Gas " and Note 10 to the financial statements for additional information. Other Business ActivitiesSouthern Company's other business activities primarily include the parent company (which does not allocate operating expenses to business units); PowerSecure, which provides distributed energy and resilience solutions and deploys microgrids for commercial, industrial, governmental, and utility customers;Southern Holdings , which invests in various projects; and Southern Linc, which provides digital wireless communications for use bythe Southern Company system and also markets these services to the public and provides fiber optics services within the Southeast. II-15 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS
A condensed statement of operations forSouthern Company's other business activities follows: 2022 Increase (Decrease) from 2021 (in millions) Operating revenues$ 444 $ 11 Cost of other sales 268 19 Other operations and maintenance 201 (6) Depreciation and amortization 75 - Taxes other than income taxes 4 - Impairment charges 119 119 Gain on dispositions, net (14) (14) Total operating expenses 653 118 Operating income (loss) (209) (107) Earnings from equity method investments 3
(23)
Interest expense 692
61
Impairment of leveraged leases - (7) Other income (expense), net (55) (149) Income taxes (benefit) (233) (6) Net loss$ (720) $ (327) Cost of Other Sales Cost of other sales for these other business activities increased$19 million , or 7.6%, in 2022 as compared to 2021 primarily due to distributed infrastructure projects at PowerSecure. Impairment Charges
In 2022, a goodwill impairment charge of
Gain on Dispositions, Net
In 2022, a$14 million gain was recorded at the parent company as a result of the early termination of the transition services agreement related to the 2019 sale ofGulf Power .
Earnings from Equity Method Investments
Earnings from equity method investments for these other business activities
decreased
Interest Expense
Interest expense for these other business activities increased$61 million , or 9.7%, in 2022 as compared to 2021. The increase primarily results from parent company financing activities and includes approximately$52 million related to higher average outstanding borrowings,$15 million related to fair value hedge amortization,$11 million related to higher interest rates, and$7 million in fees associated with remarketing the 2019 Series A Equity Units (Equity Units), partially offset by a$23 million loss in 2021 associated with the extinguishment of debt. See Note 8 to the financial statements for additional information. Other Income (Expense), Net Other income (expense), net for these other business activities decreased$149 million in 2022 as compared to 2021 primarily due to a$93 million pre-tax gain ($99 million gain after tax) recorded atSouthern Holdings in 2021 related to the termination of two leveraged leases and a$24 million decrease in leveraged lease income as a result of the terminations. 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
Alabama Power's 2022 net income after dividends on preferred stock was$1.34 billion , representing a$102 million , or 8.2%, increase from 2021. The increase was primarily due to an increase in retail revenues associated with a larger Rate RSE customer refund in 2021, warmer weather inAlabama Power's service territory in 2022 compared to 2021, and sales growth. Also contributing to the increase in net income were increases in other operating revenues associated with transmission revenues and unregulated lighting sales, as well as an increase in AFUDC, partially offset by higher non-fuel operations and maintenance costs associated with a reliability reserve accrual and higher interest expense.
A condensed income statement for
Increase
(Decrease)
2022 from 2021
(in millions)
Operating revenues $ 7,817 $ 1,404
Fuel 1,840 605
Purchased power 801 433
Other operations and maintenance 1,935 200
Depreciation and amortization 875 16
Taxes other than income taxes 424 14
Total operating expenses 5,875 1,268
Operating income 1,942 136
Allowance for equity funds used during construction 70 18
Interest expense, net of amounts capitalized 382
42
Other income (expense), net 144 37 Income taxes 423 51 Net income 1,351 98 Dividends on preferred stock 11
(4)
Net income after dividends on preferred stock
Operating Revenues
Operating revenues for 2022 were
2022 2021
(in millions)
Retail - prior year $ 5,499
Estimated change resulting from -
Rates and pricing 138
Sales growth 53
Weather 100
Fuel and other cost recovery 680
Retail - current year $ 6,470 $ 5,499
Wholesale revenues -
Non-affiliates 726 377
Affiliates 202 171
Total wholesale revenues 928 548
Other operating revenues 419 366
Total operating revenues $ 7,817 $ 6,413
II-17
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS
Retail revenues increased$971 million , or 17.7%, in 2022 as compared to 2021. The significant factors driving this change are shown in the preceding table. The increase was primarily due to an increase in fuel and other cost recovery, as well as an increase in revenue driven by a larger Rate RSE customer refund in 2021, warmer weather in 2022 compared to 2021, and sales growth in all major retail classes. See Note 2 to the financial statements under "Alabama Power - Rate ECR," " - 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 growth 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 " for additional information.
Wholesale revenues from sales to non-affiliated utilities were as follows:
2022 2021
(in millions)
Capacity and other $ 213 $ 173
Energy 513 204
Total non-affiliated $ 726 $ 377
In 2022, wholesale revenues from sales to non-affiliates increased $349 million ,
or 92.6%, as compared to 2021 due to a $309 million increase in energy revenues
primarily related to higher natural gas prices and a $40 million increase in
capacity revenues primarily related to increased opportunity sales due to warmer
weather in 2022 as compared to 2021.
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 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 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 2022, wholesale revenues from sales to affiliates increased $31 million , or
18.1%, as compared to 2021. The revenue increase reflects a 64.7% increase in
the price of energy due to higher natural gas prices, partially offset by a
28.1% decrease in KWH sales due to the availability of lower cost Southern
Company system resources compared to Alabama Power's generation.
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 2022, other operating revenues increased
II-18
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS
Energy Sales
Changes in revenues are influenced heavily by the change in the volume of energy
sold from year to year. KWH sales for 2022 and the percent change from 2021 were
as follows:
2022
Total Total KWH Weather-Adjusted
KWHs Percent Change Percent Change(*)
(in billions)
Residential 18.4 5.4 % 0.1 %
Commercial 13.1 2.6 0.1
Industrial 20.9 0.5 0.5
Other 0.1 (10.1) (10.1)
Total retail 52.5 2.7 0.2 %
Wholesale
Non-affiliates 12.7 29.1
Affiliates 3.7 (28.1)
Total wholesale 16.4 9.3
Total energy sales 68.9 4.2 %
(*)Weather-adjusted KWH sales are estimated using statistical models of the
historical relationship between temperatures and energy sales, and then removing
the estimated effect of deviations from the normal temperature conditions.
Normal temperature conditions are defined as those experienced in Alabama
Power's 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. Revenues
attributable to changes in sales increased in 2022 when compared to 2021. In
2022, weather-adjusted residential and commercial KWH sales were flat compared
to 2021. Industrial KWH sales increased 0.5% as a result of an increase in
demand resulting from changes in production levels primarily in the forest
product and pipeline sectors.
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 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS
2022 2021
Total generation (in billions of KWHs)(a) 58.3
58.5
Total purchased power (in billions of KWHs) 11.6
6.4
Sources of generation (percent)(a) - Coal 46 46 Nuclear 22 26 Gas 24 19 Hydro 8 9 Cost of fuel, generated (in cents per net KWH) - Coal 3.39 2.77 Nuclear 0.67 0.70 Gas(a) 5.12 2.89
Average cost of fuel, generated (in cents per net KWH)(a) 3.19 2.22 Average cost of purchased power (in cents per net KWH)(b) 8.00 6.52
(a)Excludes Central Alabama Generating Station KWHs and associated cost of fuel throughJuly 12, 2022 as its fuel was previously provided by the purchaser under a power sales agreement. See Note 15 to the financial statements under "Alabama Power " for additional information.
(b)Average cost of purchased power includes fuel, energy, and transmission
purchased by
Fuel and purchased power expenses were$2.6 billion in 2022, an increase of$1.0 billion , or 64.8%, compared to 2021. The increase was primarily due to a$648 million increase in the average cost of fuel and purchased power and a$390 million increase related to the volume of KWHs generated and purchased. 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 expense was$1.8 billion in 2022, an increase of$605 million , or 49.0%, compared to 2021. The increase was primarily due to a 77.2% increase in the average cost of natural gas per KWH generated, which excludes tolling agreements, a 22.4% increase in the average cost of coal per KWH generated, a 24.1% increase in the volume of KWHs generated by natural gas, and a 9.7% decrease in the volume of KWHs generated by hydro, partially offset by a 13.3% decrease in the volume of KWHs generated by nuclear as a result of the extension of a planned outage.
Purchased power expense from non-affiliates was$441 million in 2022, an increase of$220 million , or 99.5%, compared to 2021. The increase was primarily due to a 90.8% increase in the volume of KWHs purchased as a result of higher weather-related demand in 2022 compared to 2021 and a 10.3% increase in the average cost per KWH purchased due to higher natural gas and coal prices.
Energy purchases from non-affiliates will vary depending on the market prices of
wholesale energy as compared to the cost of
Purchased power expense from affiliates was$360 million in 2022, an increase of$213 million , or 144.9%, compared to 2021. The increase was primarily due to a 58.3% increase in the volume of KWHs purchased as a result of higher weather-related demand in 2022 compared to 2021 and a 54.4% increase in the average cost per KWH purchased due to higher natural gas and coal prices. II-20 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS
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 .
Other Operations and Maintenance Expenses
Other operations and maintenance expenses increased$200 million , or 11.5%, in 2022 as compared to 2021. The increase was primarily due to increases of$147 million in transmission and distribution expenses primarily associated with a$166 million reliability reserve accrual in 2022, partially offset by an incremental$65 million NDR accrual in 2021, as well as other line maintenance,$33 million in generation expenses primarily associated with maintenance and Rate CNP Compliance-related expenses, and$17 million in customer accounts, customer service, and sales expenses primarily associated with labor and bad debt expense. See Note 2 to the financial statements under "Alabama Power - Reliability Reserve Accounting Order" and " - Rate CNP Compliance" for additional information.
Depreciation and Amortization
Depreciation and amortization increased$16 million , or 1.9%, in 2022 as compared to 2021 primarily due to an increase of$28 million in depreciation related to an increase in additional plant in service, largely offset by a decrease of$16 million in amortization of regulatory assets associated with the retirement of certain generating plants.
Allowance for
Allowance for equity funds used during construction increased$18 million , or 34.6%, in 2022 as compared to 2021 primarily due to an increase in capital expenditures related to Plant Barry Unit 8 construction, as well as an increase in capital expenditures related to hydro production. See Note 2 to the financial statements under "Alabama Power - Certificates of Convenience and Necessity" for additional information.
Interest Expense, Net of Amounts Capitalized
Interest expense, net of amounts capitalized increased$42 million , or 12.4%, in 2022 as compared to 2021. The increase reflects approximately$36 million related to higher average outstanding borrowings and$12 million related to higher interest rates. See Note 8 to the financial statements for additional information. Other Income (Expense), Net Other income (expense), net increased$37 million , or 34.6%, in 2022 as compared to 2021 primarily due to increases in interest income and non-service cost-related retirement benefits income. See Note 11 to the financial statements for additional information. Income Taxes
Income taxes increased
Georgia Power's 2022 net income was$1.8 billion , representing a$1.2 billion , or 210.4%, increase from the previous year. The increase was primarily due to a$1.1 billion decrease in after-tax charges related to the construction of Plant Vogtle Units 3 and 4, as well as an increase in retail revenues associated with rates and pricing, warmer weather inGeorgia Power's service territory compared to 2021, and sales growth. These increases were partially offset by higher non-fuel operations and maintenance costs. 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. II-21 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS
A condensed income statement for
Increase
(Decrease)
2022 from 2021
(in millions)
Operating revenues $ 11,584 $ 2,324
Fuel 2,486 1,037
Purchased power 2,257 766
Other operations and maintenance 2,349 136
Depreciation and amortization 1,430
59
Taxes other than income taxes 527
51
Estimated loss on Plant Vogtle Units 3 and 4 183 (1,509) Total operating expenses 9,232 540 Operating income 2,352 1,784 Allowance for equity funds used during construction 140
13
Interest expense, net of amounts capitalized 485 64 Other income (expense), net 176 34 Income taxes (benefit) 370 538 Net income$ 1,813 $ 1,229 Operating Revenues
Operating revenues for 2022 were
2022 2021
(in millions)
Retail - prior year $ 8,478
Estimated change resulting from -
Rates and pricing 288
Sales growth 109
Weather 130
Fuel cost recovery 1,787
Retail - current year $ 10,792 $ 8,478
Wholesale revenues 235 197
Other operating revenues 557 585
Total operating revenues $ 11,584 $ 9,260
Retail revenues increased $2.3 billion , or 27.3%, in 2022 as compared to 2021.
The significant factors driving this change are shown in the preceding table.
The increase in rates and pricing was primarily due to higher contributions from
commercial and industrial customers with variable demand-driven pricing, base
tariff increases in accordance with the 2019 ARP, and pricing effects associated
with customer usage, partially offset by revenue reductions resulting from
Georgia Power's retail ROE exceeding the allowed retail ROE range in 2022. See
Note 2 to the financial statements under "Georgia Power - Rate Plans - 2019 ARP"
for additional information.
See "Energy Sales" below for a discussion of changes in the volume of energy sold, including changes related to the sales growth in 2022.
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. II-22 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS
Wholesale revenues from power sales were as follows:
2022 2021
(in millions)
Capacity and other $ 48 $ 63
Energy 187 134
Total $ 235 $ 197
In 2022, wholesale revenues increased $38 million , or 19.3%, as compared to 2021
largely due to an increase of $78 million related to the average cost of fuel
primarily due to higher natural gas and coal prices, partially offset by a $27
million decrease in KWH sales associated with lower market demand and a $10
million decrease in capacity revenues due to the expiration of a non-affiliate
PPA in 2021.
Wholesale revenues from sales to non-affiliates consist of PPAs and short-term
opportunity sales. Wholesale revenues from PPAs have both capacity and energy
components. 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 2022, other operating revenues decreased $28 million , or 4.8%, as compared to
2021 primarily due to a decrease of $32 million resulting from the termination
of a transmission service contract, an increase of $18 million in realized
losses associated with price stability products for retail customers on variable
demand-driven pricing tariffs, and decreases of $17 million from retail solar
programs as a result of higher avoided cost credits to customers and $16 million
from power delivery construction and maintenance contracts. These reductions
were largely offset by increases of $27 million associated with unregulated
outdoor lighting sales and energy conservation projects, $20 million in open
access transmission tariff sales, and $4 million from maintenance services
provided to integrated transmission system owners.
Energy Sales
Changes in revenues are influenced heavily by the change in the volume of energy
sold from year to year. KWH sales for 2022 and the percent change from 2021 were
as follows:
2022
Total Total KWH Weather-Adjusted
KWHs Percent Change Percent Change(*)
(in billions)
Residential 29.1 4.4 % 0.4 %
Commercial 32.6 3.9 2.9
Industrial 23.9 2.5 2.4
Other 0.4 (3.0) (2.9)
Total retail 86.0 3.6 1.9 %
Wholesale 2.4 (23.0)
Total energy sales 88.4 2.6 %
(*)Weather-adjusted KWH sales are estimated using statistical models of the
historical relationship between temperatures and energy sales, and then removing
the estimated effect of deviations from normal temperature conditions. Normal
temperature conditions are defined as those experienced in Georgia Power's
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. Revenues
attributable to changes in sales increased in 2022 when compared to 2021.
Weather-adjusted residential and commercial KWH sales increased 0.4% and 2.9%,
respectively, in 2022 when compared to 2021 primarily due to customer
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growth. In addition, commercial customer usage increased and residential customer usage decreased in 2022 when compared to 2021 as customers returned to pre-pandemic levels of activity outside the home. Weather-adjusted industrial KWH sales increased 2.4% primarily due to increases in the pipeline, lumber, paper, and electronic sectors, partially offset by decreases in the textiles and chemicals sectors.
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 forGeorgia 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.
2022 2021
Total generation (in billions of KWHs) 59.7
58.1
Total purchased power (in billions of KWHs) 33.6
31.7
Sources of generation (percent) - Gas 48 48 Nuclear 27 28 Coal 21 20 Hydro and other 4 4 Cost of fuel, generated (in cents per net KWH) - Gas 5.06 3.05 Nuclear 0.75 0.79 Coal 4.12 2.99
Average cost of fuel, generated (in cents per net KWH) 3.64 2.39 Average cost of purchased power (in cents per net KWH)(*) 7.88 5.07
(*) Average cost of purchased power includes fuel purchased by
Fuel and purchased power expenses were$4.7 billion in 2022, an increase of$1.8 billion , or 61.3%, compared to 2021. The increase was due to an increase of$1.7 billion related to the average cost of fuel and purchased power and an increase of$148 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$2.5 billion in 2022, an increase of$1.0 billion , or 71.6%, compared to 2021. The increase was primarily due to increases of 65.9% and 37.8% in the average cost per KWH generated by natural gas and coal, respectively, and a 10.8% increase in the volume of KWHs generated by coal.
Purchased power expense from non-affiliates was$856 million in 2022, an increase of$224 million , or 35.4%, compared to 2021. The increase was primarily due to an increase of 26.5% in the average cost per KWH purchased primarily due to higher natural gas and coal prices and an increase of 25.4% in the volume of KWHs purchased primarily due to higher demand.
Energy purchases from non-affiliates will vary depending on the market prices of
wholesale energy as compared to the cost of
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Purchased power expense from affiliates was$1.4 billion in 2022, an increase of$542 million , or 63.1%, compared to 2021. The increase was primarily due to an increase of 75.3% in the average cost per KWH purchased primarily due to higher natural gas and coal prices.
Energy purchases from affiliates will vary depending on the demand and the
availability and cost of generating resources at each company within
Other Operations and Maintenance Expenses
Other operations and maintenance expenses increased$136 million , or 6.1%, in 2022 as compared to 2021. The increase was primarily due to increases of$96 million in distribution expenses primarily associated with line maintenance,$45 million in certain compensation and benefit expenses,$11 million in amortization of cloud software, and$9 million in maintenance costs at corporate and field support facilities, partially offset by$17 million in gains from sales of integrated transmission system assets, a decrease of$15 million in generation expenses primarily related to scheduled generation outages partially offset by environmental projects, and a$12 million reduction in billing adjustments with integrated transmission system owners largely resulting from a terminated transmission service agreement.
Depreciation and Amortization
Depreciation and amortization increased$59 million , or 4.3%, in 2022 as compared to 2021 primarily due to increases of$46 million associated with additional plant in service and$12 million associated with amortization of regulatory assets related to CCR AROs under the terms of the 2019 ARP. See Note 2 to the financial statements under "Georgia Power - Integrated Resource Plans" and " - Rate Plans - 2019 ARP" for additional information.
Taxes Other Than Income Taxes
Taxes other than income taxes increased
Estimated Loss on Plant Vogtle Units 3 and 4
Georgia Power recorded pre-tax charges to income for the estimated probable loss on Plant Vogtle Units 3 and 4 totaling$183 million and$1.7 billion in 2022 and 2021, respectively. The charges to income in each year were recorded to reflect revisions to the 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.
Allowance for
Allowance for equity funds used during construction increased
Interest Expense, Net of Amounts Capitalized
Interest expense, net of amounts capitalized increased$64 million , or 15.2%, in 2022 as compared to 2021. The increase primarily reflects approximately$39 million related to higher average outstanding borrowings and$24 million related to higher interest rates. See FINANCIAL CONDITION AND LIQUIDITY - "Sources of Capital" and "Financing Activities" herein and Note 8 to the financial statements for additional information.
Other Income (Expense), Net
Other income (expense), net increased$34 million , or 23.9%, in 2022 as compared to 2021 primarily due to an increase in non-service cost-related retirement benefits income. See Note 11 to the financial statements for additional information onGeorgia Power's net periodic pension and other postretirement benefit costs. Income Taxes (Benefit) In 2022, income tax expense was$370 million compared to income tax benefit of$168 million for 2021, a change of$538 million . The change was primarily due to higher pre-tax earnings largely resulting from a decrease in charges associated with the construction of Plant Vogtle Units 3 and 4 and an increase in a valuation allowance and other adjustments related to certain state tax credit carryforwards. See Note 2 to the financial statements under "Georgia Power -Nuclear Construction " and Note 10 to the financial statements for additional information. II-25 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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A condensed income statement for
Increase
(Decrease)
2022 from 2021
(in millions)
Operating revenues $ 1,694 $ 372
Fuel and purchased power 789 293
Other operations and maintenance 376 63
Depreciation and amortization 181 1
Taxes other than income taxes 124 (4)
Total operating expenses 1,470 353
Operating income 224 19
Interest expense, net of amounts capitalized 56 (4)
Other income (expense), net 33 (2)
Income taxes 37 16
Net income $ 164 $ 5
Operating Revenues
Operating revenues for 2022 were
2022 2021
(in millions)
Retail - prior year $ 875
Estimated change resulting from -
Rates and pricing 24
Sales growth 4
Weather 13
Fuel and other cost recovery 19
Retail - current year $ 935 $ 875
Wholesale revenues -
Non-affiliates 252 230
Affiliates 460 188
Total wholesale revenues 712 418
Other operating revenues 47 29
Total operating revenues $ 1,694 $ 1,322
Total retail revenues for 2022 increased $60 million , or 6.9%, compared to 2021
primarily due to an increase in revenues in accordance with new PEP rates that
became effective for the first billing cycle of April 2022 , an increase in fuel
and other cost recovery revenues primarily as a result of higher recoverable
fuel costs, and an increase in customer usage. See Note 2 to the financial
statements under "Mississippi Power " 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 forMississippi 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 II-26 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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expenses reduced by the fuel and emissions portion of wholesale revenues from energy sold to customers outsideMississippi Power's service territory. See Note 2 to the financial statements under "Mississippi Power - Fuel Cost Recovery" for additional information.
Wholesale revenues from power sales to non-affiliated utilities, including
2022 2021
(in millions)
Capacity and other $ 3 $ 3
Energy 249 227
Total non-affiliated $ 252 $ 230
Wholesale revenues from sales to non-affiliates increased $22 million , or 9.6%,
compared to 2021. The increase was primarily due to higher fuel costs and an
increase in base revenue from MRA customers primarily due to increased demand as
a result of weather impacts in 2022.
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 requirements cost-based electric
tariffs which are subject to regulation by the FERC . The contracts with these
wholesale customers represented 12.4% of Mississippi Power's total operating
revenues in 2022. 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. See Note 2 under "Mississippi Power
- Municipal and Rural Associations Tariff" for additional information.
Wholesale revenues from sales to affiliates increased $272 million , or 144.7%,
in 2022 compared to 2021. The increase was primarily due to increases of $243
million associated with higher fuel costs, primarily for natural gas, and $29
million associated with higher KWH sales due to lower cost available Mississippi
Power resources as compared to the available affiliate company generation.
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.
In 2022, other operating revenues increased
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Energy Sales
Changes in revenues are influenced heavily by the change in the volume of energy
sold from year to year. KWH sales for 2022 and the percent change from 2021 were
as follows:
2022
Total Total KWH
KWHs Percent Change Weather-Adjusted Percent Change(*)
(in millions)
Residential 2,134 4.2 % (1.8) %
Commercial 2,632 2.9 1.4
Industrial 4,686 1.6 1.6
Other 31 (8.8) (8.8)
Total retail 9,483 2.5 % 0.7 %
Wholesale
Non-affiliated 3,465 (4.0)
Affiliated 5,489 15.8
Total wholesale 8,954 7.2
Total energy sales 18,437 4.7 %
(*)Weather-adjusted KWH sales are estimated using statistical models of the
historical relationship between temperatures and energy sales, and then removing
the estimated effect of deviations from normal temperature conditions. Normal
temperature conditions are defined as those experienced in Mississippi Power's
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. Revenues
attributable to changes in sales increased in 2022 when compared to 2021.
Weather-adjusted residential KWH sales decreased 1.8% compared to 2021 due to a
decrease in customer usage resulting from increased activity outside the home as
customers returned to pre-pandemic levels of activity. Weather-adjusted
commercial KWH sales increased 1.4% primarily due to customer growth. Industrial
KWH sales increased 1.6% primarily due to increases in the petroleum, pipeline,
and transportation sectors.
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.
2022 2021
Total generation (in millions of KWHs) 18,303
17,377
Total purchased power (in millions of KWHs) 617
675
Sources of generation (percent) - Gas 90
92
Coal 10
8
Cost of fuel, generated (in cents per net KWH) - Gas 4.34
2.85
Coal 4.13
3.24
Average cost of fuel, generated (in cents per net KWH) 4.31 2.88 Average cost of purchased power (in cents per net KWH) 6.91 3.90
Fuel and purchased power expenses were$789 million in 2022, an increase of$293 million , or 59.1%, as compared to 2021. The increase was primarily due to a$266 million increase related to the average cost of fuel and purchased power and a$27 million net increase related to the volume of KWHs generated and purchased. II-28 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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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 expense increased$276 million , or 58.8%, in 2022 compared to 2021 primarily due to a 52.3% increase in the average cost of natural gas per KWH generated, a 29.1% increase in the volume of KWHs generated by coal, a 27.5% increase in the average cost of coal per KWHs generated, and a 3.9% increase in the volume of KWHs generated by natural gas. Purchased power expense increased$16 million , or 62.0%, in 2022 compared to 2021 primarily due to a 77.2% increase in the average cost per KWH purchased, partially offset by an 8.6% decrease in the volume of KWHs 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 increased$63 million , or 20.1%, in 2022 compared to 2021. The increase was primarily due to a$25 million reliability reserve accrual in 2022 and increases of$12 million related to unregulated power delivery construction and maintenance projects,$7 million associated with storm reserve accruals,$6 million in employee compensation and benefits,$4 million in transmission and distribution line maintenance, and$4 million associated with theKemper County energy facility primarily related to sales and use taxes. See Note 2 to the financial statements under "Mississippi Power - System Restoration Rider" and " - Reliability Reserve Accounting Order" and Note 3 to the financial statements under "Other Matters -Mississippi Power " for additional information. Income Taxes Income taxes increased$16 million , or 76.2%, in 2022 compared to 2021 primarily due to an increase of$11 million in the flowback of excess deferred income taxes associated with new PEP rates that became effective inApril 2022 , as well as an increase of$5 million due to higher pre-tax earnings. See Note 2 to the financial statements under "Mississippi Power - Performance Evaluation Plan" and Note 10 to the financial statements for additional information. II-29 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS
Net income attributable toSouthern Power for 2022 was$354 million , an$88 million increase from 2021. The increase was primarily due to higher revenues driven by higher market prices of energy and new natural gas PPAs and higher income associated with tax equity partnerships, partially offset by higher other operations and maintenance expenses, gains from contributions of wind turbine equipment to various equity method investments in 2021, and a tax benefit due to a change in state apportionment methodology resulting from tax legislation enacted by theState of Alabama in 2021.
A condensed statement of income follows:
Increase
(Decrease)
2022 from 2021
(in millions)
Operating revenues $ 3,369 $ 1,153
Fuel 1,614 812
Purchased power 311 172
Other operations and maintenance 482 59
Depreciation and amortization 516 (1)
Taxes other than income taxes 49 4
Loss on sales-type leases 1 (39)
Gain on dispositions, net (2) 39
Total operating expenses 2,971 1,046
Operating income 398 107
Interest expense, net of amounts capitalized 138 (9)
Other income (expense), net 7 (3)
Income taxes (benefit) 20 33
Net income 247 80
Net loss attributable to noncontrolling interests (107) (8)
Net income attributable to Southern Power$ 354 $ 88 Operating Revenues Total operating revenues include PPA capacity revenues, which are derived primarily from long-term contracts involving natural gas facilities, 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 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 generally 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 Revenue
Southern 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. II-30 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS
See FUTURE EARNINGS POTENTIAL - "
Operating Revenues Details
Details of
2022 2021
(in millions)
PPA capacity revenues $ 451 $ 408
PPA energy revenues 2,121 1,311
Total PPA revenues 2,572 1,719
Non-PPA revenues 761 467
Other revenues 36 30
Total operating revenues $ 3,369 $ 2,216 Operating revenues for 2022 were
•PPA capacity revenues increased$43 million , or 10.5%, primarily due to a net increase in MW capacity under contract from natural gas PPAs and an increase associated with a change in rates from natural gas PPAs. •PPA energy revenues increased$810 million , or 61.8%, primarily due to a$656 million increase in sales under existing natural gas PPAs resulting from a$539 million increase in the price of fuel and purchased power and a$117 million increase in the volume of KWHs sold. Also contributing to the increase was a$164 million increase in sales associated with new natural gas PPAs, net of contractual expirations.
•Non-PPA revenues increased
Fuel and Purchased Power Expenses
Details of
Total Total
KWHs Total KWH % Change KWHs
2022 2021
(in billions of KWHs)
Generation 48 44
Purchased power 3 3
Total generation and purchased power 51 8.5% 47
Total generation and purchased power (excluding solar, wind, fuel cells, and tolling agreements)
31 10.7% 28
Southern Power's PPAs for natural gas generation generally provide that the
purchasers are responsible for either procuring the fuel (tolling agreements) or
reimbursing Southern Power for substantially all of the cost of fuel relating to
the energy delivered under such PPAs. Consequently, changes in such fuel costs
are generally accompanied by a corresponding change in related fuel revenues and
do not have a significant impact on net income. Southern Power is responsible
for the cost of fuel for generating units that are not covered under PPAs. Power
from these generating units is sold into the wholesale market or into the
Southern Company power pool for capacity owned directly by Southern Power .
Purchased power expenses will vary depending on demand, availability, and the
cost of generating resources throughout the Southern Company system and other
contract resources. Load requirements are submitted to the Southern Company
power pool on an hourly basis and are fulfilled with the lowest cost
alternative, whether that is generation owned by Southern Power , an affiliate
company, or external parties. Such purchased power costs are generally recovered
through PPA revenues.
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Details ofSouthern Power's fuel and purchased power expenses were as follows: 2022 2021 (in millions) Fuel$ 1,614 $ 802 Purchased power 311 139
Total fuel and purchased power expenses
In 2022, total fuel and purchased power expenses increased$984 million , or 104.6%, compared to 2021. Fuel expense increased$812 million , or 101.2%, primarily due to a$719 million increase associated with the average cost of fuel and a$93 million increase associated with the volume of KWHs generated. Purchased power expense increased$172 million , or 123.7%, largely due to a$168 million increase associated with the average cost of purchased power.
Other Operations and Maintenance Expenses
In 2022, other operations and maintenance expenses increased$59 million , or 14.0%, compared to 2021. The increase was primarily due to increases of$42 million related to generation maintenance and outage expenses and$10 million in transmission expenses to serve new natural gas PPAs, partially offset by$6 million related to the allocation in 2021 of uncollected settlements by theEnergy Reliability Council of Texas market as a result of Winter Storm Uri.
Loss on Sales-Type Leases
In 2021, a$40 million loss on sales-type leases was recorded upon commencement of the Garland and Tranquillity battery energy storage facilities' PPAs,$26 million of which was allocated through noncontrolling interests toSouthern Power's partners in the projects. The loss was due to ITCs retained and expected to be realized bySouthern Power and its partners. See Notes 9 and 15 to the financial statements under "Lessor" and "Southern Power ," respectively, for additional information.
Gain on Dispositions, Net
In 2022, gain on dispositions, net decreased$39 million , or 95.1%, compared to 2021 primarily due to contributions of wind turbine equipment to various equity method investments in 2021. See Notes 7 and 15 to the financial statements under "Southern Power " for additional information.
Income Taxes (Benefit)
In 2022, income tax expense was$20 million compared to income tax benefit of$13 million for 2021, a change of$33 million . The change was primarily due to higher pre-tax earnings in 2022 and a change in state apportionment methodology resulting from tax legislation enacted by theState of Alabama in the first quarter 2021, partially offset by higher wind PTCs in 2022. See Notes 1 and 10 to the financial statements under "Income Taxes" and "Effective Tax Rate," respectively, for additional information.
Net Loss Attributable to Noncontrolling Interests
In 2022, net loss attributable to noncontrolling interests increased$8 million , or 8.1%, compared to 2021. The increased loss was primarily due to$28 million in higher HLBV loss allocations to tax equity partners in 2022, largely offset by$23 million in loss allocations associated with the Garland and Tranquillity battery energy storage facilities being placed in service in 2021. See Notes 9 and 15 to the financial statements under "Lessor" and "Southern Power ," respectively, for additional information.
Operating Metrics
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.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 in
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS
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. Prior to the sale of Sequent onJuly 1, 2021 , wholesale gas services' operating revenues occasionally were 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 2022 67 % 66 % 2021 70 % 102 % Net Income Net income attributable toSouthern Company Gas in 2022 was$572 million , an increase of$33 million , or 6.1%, compared to 2021. Net income increased$88 million at gas pipeline investments primarily as a result of a 2021 impairment charge related to the PennEast Pipeline project and$58 million at gas distribution operations primarily due to base rate increases and continued investment in infrastructure replacement, largely offset by after-tax impairment charges in 2022 totaling$99 million related to the sale of natural gas storage facilities. The 2021 results also included$107 million of net income from Sequent, including a$92 million after-tax gain and$85 million of additional tax expense resulting from itsJuly 1, 2021 sale. See Notes 7 and 15 to the financial statements under "Southern Company Gas " for additional information.
A condensed income statement for
Increase
(Decrease) from
2022 2021
(in millions)
Operating revenues $ 5,962 $ 1,582
Cost of natural gas 3,004 1,385
Other operations and maintenance 1,176 104
Depreciation and amortization 559 23
Taxes other than income taxes 282 57
Impairment charges 131 131
Gain on dispositions, net (4) 123
Total operating expenses 5,148 1,823
Operating income 814 (241)
Earnings from equity method investments 148 98
Interest expense, net of amounts capitalized 263 25
Other income (expense), net 53 106
Earnings before income taxes 752 (62)
Income taxes 180 (95)
Net Income $ 572 $ 33
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Operating Revenues
Operating revenues in 2022 were$6.0 billion , reflecting a$1.6 billion , or 36.1%, increase compared to 2021. Details of operating revenues were as follows: 2022 (in millions) Operating revenues - prior year $
4,380
Estimated change resulting from -
Infrastructure replacement programs and base rate changes 252
Gas costs and other cost recovery 1,468
Gas marketing services 15
Wholesale gas services (187)
Other 34
Operating revenues - current year $ 5,962
Revenues at the natural gas distribution utilities increased in 2022 due to rate increases atNicor Gas ,Atlanta Gas Light , andChattanooga Gas and continued investment in infrastructure replacement. See Note 2 to the financial statements under "Southern Company Gas " for additional information. Revenues associated with gas costs and other cost recovery increased in 2022 primarily due to higher natural gas cost recovery as a result of higher volumes of natural gas sold and an increase in natural gas prices. 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. The changes in 2022 revenues related to wholesale gas services were due to the sale of Sequent onJuly 1, 2021 . See Note 15 to the financial statements under "Southern Company Gas " for additional information.
Heating Degree Days
Southern Company Gas' natural gas distribution utilities have various regulatory mechanisms that limit their exposure to weather changes.Southern Company Gas also uses hedges for the majority of any remaining exposure to warmer-than-normal weather inIllinois for gas distribution operations and inIllinois andGeorgia for gas marketing services; therefore, weather typically does not have a significant net income impact. The following table presents Heating Degree Days information forIllinois andGeorgia , the primary locations whereSouthern Company Gas' operations are impacted by weather. Years Ended December 31, 2022 vs. normal 2022 vs. 2021 Normal(*) 2022 2021 colder colder (in thousands) Illinois 5,690 5,708 5,326 0.3 % 7.2 % Georgia 2,303 2,303 2,113 - % 9.0 % (*)Normal represents the 10-year average fromJanuary 1, 2012 throughDecember 31, 2021 forIllinois atChicago Midway International Airport and forGeorgia atAtlanta Hartsfield-Jackson International Airport , based on information obtained from theNational Oceanic and Atmospheric Administration ,National Climatic Data Center . II-34 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS
Customer Count
The following table provides the number of customers served by
2022 2021
(in thousands, except market share %)
Gas distribution operations 4,358 4,337
Gas marketing services
Energy customers(*) 622 603
Market share of energy customers in Georgia 29.3 % 28.7 %
(*)Gas marketing services' customers are primarily located in
Cost of Natural Gas
ExcludingAtlanta Gas Light , which does not sell natural gas to end-use customers, 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 Note 2 to the financial statements under "Southern Company Gas - Natural Gas Cost Recovery" for additional information. Cost of natural gas at gas distribution operations represented 87.5% of the total cost of natural gas for 2022. 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 2022, cost of natural gas was$3.0 billion , an increase of$1.4 billion , or 85.5%, compared to 2021, which reflects higher gas cost recovery in 2022 as a result of higher volumes sold and a 73.0% increase in natural gas prices compared to 2021.
Volumes of Natural Gas Sold
The following table details the volumes of natural gas sold during all periods
presented.
2022 vs. 2021
2022 2021 % Change
Gas distribution operations (mmBtu in millions)
Firm 707 656 7.8 %
Interruptible 93 98 (5.1)
Total 800 754 6.1 %
Gas marketing services (mmBtu in millions)
Firm:
Georgia 35 34 2.9 %
Other 18 18 -Interruptible large commercial and industrial 14 14
-
Total 67 66 1.5 %
Other Operations and Maintenance Expenses
In 2022, other operations and maintenance expenses increased$104 million , or 9.7%, compared to 2021. Excluding$66 million of expenses related to Sequent in 2021, other operations and maintenance expenses increased approximately$174 million . The increase was primarily due to increases of$64 million in compensation and benefit expenses,$43 million in expenses passed through directly to customers primarily related to bad debt at gas distribution operations,$31 million primarily related to bad debt, customer service, and sales expenses, and$18 million primarily related to pipeline compliance. II-35 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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Depreciation and Amortization
In 2022, depreciation and amortization increased$23 million , or 4.3%, compared to 2021. The 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.
Taxes Other Than Income Taxes
In 2022, taxes other than income taxes increased$57 million , or 25.3%, compared to 2021. The increase was primarily due to a$39 million increase in revenue tax expenses as a result of higher natural gas revenues and an$11 million increase in invested capital tax expense atNicor Gas . Revenue tax expenses are passed through directly to customers and have no impact on net income.
Impairment Charges
In 2022,
Gain on Dispositions, Net
In 2021,
Earnings from Equity Method Investments
In 2022, earnings from equity method investments increased$98 million compared to 2021. The increase was primarily due to pre-tax impairment charges totaling$84 million in 2021 related to the PennEast Pipeline project and higher earnings at SNG resulting from higher revenues primarily due to increased demand. See Note 7 to the financial statements under "Southern Company Gas " for additional information.
Interest Expense, Net of Amounts Capitalized
In 2022, interest expense, net of amounts capitalized increased$25 million , or 10.5%, compared to 2021. The increase reflects approximately$16 million related to higher average outstanding borrowings and$8 million related to higher interest rates. See Note 8 to the financial statements for additional information.
Other Income (Expense), Net
In 2022, other income (expense), net increased$106 million compared to 2021. The increase was largely due to charitable contributions by Sequent prior to its sale totaling$101 million in 2021 and an increase of$10 million at gas distribution operations primarily related to non-service cost-related retirement benefits income. See Note 11 to the financial statements under "Southern Company Gas " for additional information.
Income Taxes
In 2022, income taxes decreased$95 million , or 34.5%, compared to 2021. The decrease was primarily due to additional tax benefit of$110 million resulting from the sale of Sequent in 2021 and$32 million as a result of the impairment related to the agreement to sell two natural gas storage facilities in 2022. The decrease was partially offset by$17 million of tax benefits in 2021 resulting from the impairment charge related to the PennEast Pipeline project and higher pre-tax earnings in 2022. See Notes 7 and 15 to the financial statements under "Southern Company Gas " and Note 10 to the financial statements for additional information. II-36 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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Segment Information
2022 2021
Operating Operating Net Income Operating Operating Net Income
Revenues Expenses (Loss) Revenues Expenses (Loss)
(in millions) (in millions)
Gas distribution operations $ 5,267 $ 4,464 412
Gas pipeline investments 32 11 107 32 11
19
Wholesale gas services(*) - - - 188 (53) 107 Gas marketing services 638 505 94 475 350 88 All other 55 190 (99) 38 78 (87) Intercompany eliminations (30) (22) - (32) (32) - Consolidated$ 5,962 $ 5,148 $ 572 $ 4,380 $ 3,325 $ 539
(*)As a result of the sale of Sequent, wholesale gas services was no longer a
reportable segment in 2022. See Note 15 to the financial statements under
"
Gas Distribution Operations
Gas distribution operations is the largest component ofSouthern 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 provideSouthern 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 ofAtlanta 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. See Note 2 to the financial statements under "Southern Company Gas " for additional information. In 2022, net income increased$58 million , or 14.1%, compared to 2021. Operating revenues increased$1.6 billion primarily due to higher gas cost recovery, rate increases, and continued investment in infrastructure replacement. Gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas. Operating expenses increased$1.5 billion primarily due to a$1.2 billion increase in cost of gas as a result of higher natural gas prices compared to 2021, a$52 million increase in compensation and benefit expenses, and a$34 million increase in depreciation resulting from additional assets placed in service. The increase in operating expenses also includes increases of$83 million in costs passed through directly to customers primarily related to bad debt expenses and revenue taxes. Other income and expense increased$10 million primarily due to an increase in non-service cost-related retirement benefits income. Interest expense, net of amounts capitalized increased$22 million primarily due to additional debt issued to finance continued investments. Income taxes increased$25 million primarily due to higher pre-tax earnings. See Note 2 to the financial statements under "Southern Company Gas " and Note 11 to the financial statements for additional information.
Gas Pipeline Investments
Gas pipeline investments consists primarily of joint ventures in natural gas pipeline investments including SNG, Dalton Pipeline, and PennEast Pipeline. In 2022, net income increased$88 million compared to 2021. The increase was primarily due to impairment charges in 2021 totaling$84 million ($67 million after tax) related to the PennEast Pipeline project and higher earnings at SNG resulting from higher revenues primarily due to increased demand. See Note 7 to the financial statements under "Southern Company Gas " for additional information.
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
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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. In 2022, net income increased$6 million , or 6.8%, compared to 2021. The increase was primarily due to a$163 million increase in operating revenues as a result of higher commodity prices, colder weather, and higher sales to commercial customers, partially offset by a$155 million increase in operating expenses primarily due to$149 million in higher cost of natural gas and an increase of$3 million in income taxes as a result of higher pre-tax earnings.
All Other
All other includes natural gas storage businesses, a renewable natural gas business,AGL Services Company , andSouthern 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. See Note 15 to the financial statements under "Southern Company Gas " for information regarding agreements by certain affiliates ofSouthern Company Gas to sell two natural gas storage facilities. In 2022, net income decreased$12 million compared to 2021. The decrease was primarily due to pre-tax impairment charges in 2022 totaling approximately$131 million ($99 million after tax) related to the sale of natural gas storage facilities, largely offset by$84 million of additional tax expense as a result of the sale of Sequent in 2021, an increase in operating revenues of$17 million primarily related to higher demand fees and favorable hedge gains at the natural gas storage businesses and higher sales from the renewable natural gas business, lower depreciation in 2022, and an increase in charitable contributions in 2022. See Note 10 to the financial statements and Note 15 to the financial statements under "Southern Company Gas " for additional information.
FUTURE EARNINGS POTENTIAL
General
Prices for electric service provided by the traditional electric operating companies and natural gas distribution service provided 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 through various regulatory mechanisms and/or processes and may be adjusted periodically within certain limitations. Effectively operating pursuant to these regulatory mechanisms and/or processes and appropriately balancing required costs and capital expenditures with customer prices will continue to challenge the traditional electric operating companies and natural gas distribution utilities for the foreseeable future. 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, including those related to projected long-term demand growth, stringent environmental standards, including CCR rules, safety, system reliability and resiliency, fuel, restoration following major storms, and capital expenditures, including constructing new electric generating plants and expanding and improving the transmission and distribution systems; continued customer growth; and the trends of higher inflation and reduced electricity usage per customer, especially in residential and commercial markets. ForGeorgia Power , completing construction of Plant Vogtle Units 3 and 4 and the 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 continue to be significantly affected by a series of demand and supply shocks that caused a global and national economic recession in 2020 and have been further impacted by the invasion ofUkraine and significant declines in labor force participation rates. The confluence of these disruptions has resulted in the highest levels of inflation globally in 40 years and driven a significant policy response by central banks across the global economy. TheU.S. Federal Reserve has increased policy interest rates faster than any rate increase cycle in the last 40 years and to levels high enough to slow economic activity. These actions and impacts, including increased costs for goods and services and borrowing costs, have led to a significantly increased risk of recession. Additionally, inflation remains elevated in part due to continued supply chain constraints and labor markets remaining tight. Electricity sales across all classes have recovered to pre-COVID-19 pandemic levels and II-38 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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customer growth at both the traditional electric operating companies and natural gas distribution utilities has remained strong. However, weakening economic activity increases the risk of slowing to declining energy sales. Additionally, the current economic environment has increased the uncertainty of future energy demand and operating costs. See RESULTS OF OPERATIONS herein for information on energy sales inthe Southern Company system's service territory during 2022. The level of future earnings forSouthern Power's competitive wholesale electric business depends on numerous factors including the parameters of the wholesale market and the efficient operation of its wholesale generating assets;Southern Power's ability to execute its growth strategy through the development or acquisition of renewable facilities and other energy projects while containing costs; regulatory matters; customer creditworthiness; total electric generating capacity available inSouthern Power's market areas;Southern Power's ability to successfully remarket capacity as current contracts expire; renewable portfolio standards; continued availability of federal and state ITCs and PTCs, which could be impacted by future tax legislation; transmission constraints; cost of generation from units withinthe Southern Company power pool; and operational limitations. See "Income Tax Matters" herein for information regarding recent tax legislation expanding the availability of federal ITCs and PTCs. Also see Notes 10 and 15 to the financial statements for additional information. The level of future earnings forSouthern Company Gas' primary business of distributing natural gas and its complementary businesses in the gas pipeline investments 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, including those related to projected long-term demand growth, safety, system reliability and resiliency, natural gas, and capital expenditures, including expanding and improving the natural gas distribution systems; the completion and subsequent operation of ongoing infrastructure and other construction projects; customer creditworthiness; and certain policies to limit the use of natural gas, such as the potential across certain parts of theU.S. for state or municipal bans on the use of natural gas or policies designed to promote electrification. 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 business to capture value from locational and seasonal spreads. Additionally, changes in commodity prices, primarily driven by tight gas supplies, geopolitical events, and diminished gas production, subject a portion ofSouthern Company Gas' operations to earnings variability and have resulted in higher natural gas prices. Additional economic factors may contribute to this environment. The demand for natural gas may increase, which may cause natural gas prices to rise and drive higher volatility in the natural gas markets on a longer-term basis. Alternatively, a significant drop in oil and natural gas prices could lead to a consolidation of natural gas producers or reduced levels of natural gas production. 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; customer energy conservation practices; the use of alternative energy sources by customers; government incentives to reduce overall energy usage; fuel, labor, and material prices in an environment of heightened inflation and material and labor supply chain disruptions; 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 requirements cost-based electric tariffs which are subject to regulation by theFERC . The contracts with these wholesale customers represented 12.4% ofMississippi Power's total operating revenues in 2022. 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, or the sale of interests in, 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.
Environmental Matters
The Southern Company system's operations are regulated by state and federal environmental agencies through a variety of laws and regulations governing air, water, land, avian and other wildlife and habitat protection, and other natural resources.The Southern Company system maintains comprehensive environmental compliance and GHG strategies to assess both current and II-39 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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upcoming requirements and compliance costs associated with these environmental laws and regulations. New or revised environmental laws and regulations could further affect many areas of operations for the Subsidiary Registrants. 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, the outcome of pending and/or future legal challenges, and the ability to continue recovering the related costs, through rates for the traditional electric operating companies and the natural gas distribution utilities and/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 for 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 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 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 2027 based on the current
environmental compliance strategy for
2023 2024 2025 2026 2027 Total
(in millions)
Southern Company $ 139 $ 125 $ 108 $ 91 $ 50 $ 513
Alabama Power 53 35 46 28 18 180
Georgia Power 82 86 56 53 24 301
Mississippi Power 5 3 7 11 7 33
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 pond closure and groundwater 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.
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Environmental Laws and Regulations
Air Quality
Since 1990,the Southern Company system reduced SO2 and NOX air emissions by 99% and 92%, respectively, through 2021. Since 2005,the Southern Company system reduced mercury air emissions by 97% through 2021. OnMarch 11, 2022 , theEPA released a proposed Federal Implementation Plan to require reductions in NOX emissions from sources in 26 states, includingAlabama andMississippi , to assure those states satisfy their interstate transport (good neighbor) obligations under the 2015 Ozone National Ambient Air Quality Standards (NAAQS) in downwind states.Georgia andNorth Carolina have approved interstate transport state implementation plans related to the 2015 Ozone NAAQS and are not subject to this rule. TheEPA is anticipated to issue a final rule byMarch 2023 with initial applicability for 2023. The ultimate impact of a final rule cannot be determined at this time; however, it may result in increased compliance costs.
Water Quality
In 2020, theEPA published the final steam electric ELG reconsideration rule (ELG Reconsideration Rule), a reconsideration of the 2015 ELG rule's limits on bottom ash transport water and flue gas desulfurization wastewater that extended the latest applicability date for both discharges toDecember 31, 2025 . The ELG Reconsideration Rule also updated the voluntary incentive program and provided new subcategories for low utilization electric generating units and electric generating units that will permanently cease coal combustion by 2028. As required by the ELG Reconsideration Rule, inOctober 2021 ,Alabama Power andGeorgia Power each submitted initial notices of planned participation (NOPP) for applicable units seeking to qualify for these subcategories.Alabama Power submitted its NOPP to theAlabama Department of Environmental Management (ADEM) indicating plans to retire Plant Barry Unit 5 (700 MWs) and to cease using coal and begin operating solely on natural gas at Plant Barry Unit 4 (350 MWs) and Plant Gaston Unit 5 (880 MWs).Alabama Power , as agent for SEGCO, indicated plans to retire Plant Gaston Units 1 through 4 (1,000 MWs). These plans are expected to be completed on or before the compliance date ofDecember 31, 2028 . The NOPP submittals are subject to the review of the ADEM. With the completion of theCalhoun Generating Station acquisition onSeptember 30, 2022 ,Alabama Power expects to retire Plant Barry Unit 5 in late 2023 or early 2024 subject to certain operating conditions. Plant Barry Unit 4 ceased using coal and began to operate solely on natural gas inDecember 2022 . See Notes 2 and 7 to the financial statements under "Alabama Power - Certificates of Convenience and Necessity" and "SEGCO," respectively, for additional information. The remaining assets for whichAlabama Power has indicated retirement, due to early closure or repowering of the unit to natural gas, have net book values totaling approximately$1.4 billion (excluding capitalized asset retirement costs which are recovered through Rate CNP Compliance) atDecember 31, 2022 . The net book value of$42 million for retired coal equipment at Plant Barry Unit 4 was reclassified to a regulatory asset atDecember 31, 2022 . Based on anAlabama PSC order,Alabama Power is authorized to establish a regulatory asset to record the unrecovered investment costs, including the plant asset balance and the site removal and closure costs, associated with unit retirements caused by environmental regulations (Environmental Accounting Order). Under the Environmental Accounting Order, the regulatory asset would be amortized and recovered over an affected unit's remaining useful life, as established prior to the decision regarding early retirement, through Rate CNP Compliance. See Note 2 to the financial statements under "Alabama Power - Rate CNP Compliance" and " - Environmental Accounting Order" for additional information.Georgia Power submitted its NOPP to the Georgia Environmental Protection Division (EPD) indicating plans to retire Plant Wansley Units 1 and 2 (926 MWs based on 53.5% ownership), Plant Bowen Units 1 and 2 (1,400 MWs), and Plant Scherer Unit 3 (614 MWs based on 75% ownership) on or before the compliance date ofDecember 31, 2028 .Georgia Power also submitted a NOPP indicating plans to pursue compliance with the ELG Reconsideration Rule for Plant Scherer Units 1 and 2 (137 MWs based on 8.4% ownership) through the voluntary incentive program by no later thanDecember 31, 2028 .Georgia Power intends to comply with the ELG Rules for Plant Bowen Units 3 and 4 through the generally applicable requirements byDecember 31, 2025 ; therefore, no NOPP submission was required for these units. The NOPP submittals and generally applicable requirements are subject to the review of the Georgia EPD. The Georgia PSC approved the retirements of Plant Wansley Units 1 and 2 (which occurred onAugust 31, 2022 ) and Plant Scherer Unit 3 in its 2022 IRP order, but deferred a decision on the requested decertification and retirement of Plant Bowen Units 1 and 2 to the 2025 IRP. See Note 2 to the financial statements under "Georgia Power - Integrated Resource Plans" for additional information. II-41 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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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 . The case is being held in abeyance while theEPA undertakes a new rulemaking to revise the ELG Reconsideration Rule. A proposed rule, referred to as the ELG Supplemental Rule, is expected to be released by mid-2023. Any revisions could require changes in the traditional electric operating companies' compliance strategies.
The ultimate outcome of these matters cannot be determined at this time.
Coal Combustion Residuals
In 2015, theEPA finalized non-hazardous solid waste regulations for the management and 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. In addition to the federal CCR Rule, the States ofAlabama andGeorgia finalized state regulations regarding the management and disposal of CCR within their respective states. In 2019, theState of Georgia received partial approval from theEPA for its state CCR permitting program, which has broader applicability than the federal rule. TheState of Mississippi has not developed a state CCR permit program. The Holistic Approach to Closure: Part A rule, finalized in 2020, revised the deadline to stop sending CCR and non-CCR wastes to unlined surface impoundments toApril 11, 2021 and established a process for theEPA to approve extensions to the deadline. The traditional electric operating companies stopped sending CCR and non-CCR wastes to their unlined impoundments prior toApril 11, 2021 and, therefore, did not submit requests for extensions. Beginning onJanuary 11, 2022 , theEPA has issued numerous Part A determinations that state its current positions on a variety of CCR Rule compliance requirements, such as criteria for groundwater corrective action and CCR unit closure. The traditional electric operating companies are working with state regulatory agencies to determine whether theEPA 's current positions may impact closure and groundwater monitoring plans. OnApril 8, 2022 , theUtilities Solid Waste Activities Group and a group of generating facility operators filed petitions for review in theU.S. Court of Appeals for the D.C. Circuit challenging whether theEPA 'sJanuary 11, 2022 actions establish new legislative rules that should have gone through notice-and-comment rulemaking. A decision by the court is expected in late 2023. The ultimate impacts of theEPA 's current positions are subject to the outcome of the pending litigation and any potential future rulemaking and cannot be determined at this time. 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 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," Notes 2 and 3 to the financial statements under "Georgia Power - Rate Plans" and "General Litigation Matters -Alabama Power ," respectively, and Note 6 to the financial statements 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 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
In 2019, theEPA published the final Affordable Clean Energy rule (ACE Rule), which repealed and replaced the Clean Power Plan (CPP) and would have required states to develop unit-specific CO2 emission rate standards for existing coal-fired units based on heat-rate efficiency improvements. OnJune 30, 2022 , theU.S. Supreme Court issued an opinion limiting theEPA 's authority II-42 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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to regulate GHG emissions under the Clean Air Act with a focus on whether such authority allows theEPA to regulate the electric industry in a manner as broad as the CPP. TheEPA has announced its intent to propose a new rule for existing fossil fuel-fired electric generating units and to propose revised performance standards for new fossil fuel-fired electric generating units pursuant to the Clean Air Act byApril 2023 . The ultimate impact of these actions cannot be determined at this time. InFebruary 2021 ,the United States officially rejoined the Paris Agreement. 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. InApril 2021 ,President Biden announced a new target forthe United States to achieve a 50% to 52% reduction in economy-wide GHG emissions from 2005 levels by 2030. The target was accepted by theUnited Nations asthe United States' nationally determined emissions reduction contribution under theParis Agreement. Additional GHG policies, including legislation, may emerge in the future requiringthe United States to accelerate its 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 22% coal and 51% natural gas in 2022. This transition has been supported in part bythe Southern Company system retiring over 6,700 MWs of coal-fired generating capacity since 2010 and converting 3,700 MWs of generating capacity from coal to natural gas since 2015. In addition,the Southern Company system's capacity mix consists of over 11,500 MWs of renewable and storage facilities through ownership and long-term PPAs. See "Environmental Laws and Regulations - Water Quality" herein for information on plans to retire or convert to natural gas additional coal-fired generating capacity. 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.
The following table provides the Registrants' 2021 and preliminary 2022 Scope 1 GHG emissions based on equity share of facilities:
2021 Preliminary 2022
(in million metric tons of CO2 equivalent)
Southern Company(*) 82 85
Alabama Power(*) 34 35
Georgia Power 23 23
Mississippi Power 8 9
Southern Power 11 13
Southern Company Gas(*) 2 2
(*)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.
Southern Company system management has established an intermediate goal of a 50%
reduction in GHG emissions from 2007 levels by 2030 and a long-term goal of net
zero GHG emissions by 2050. Based on the preliminary 2022 emissions, the
Southern Company system has achieved an estimated GHG emission reduction of 46%
since 2007. GHG emissions increased in 2022 due to an increase in generation
when compared to 2021 resulting from increased electricity sales, as discussed
further under RESULTS OF OPERATIONS - "Southern Company - Electricity Business"
herein. Southern Company system management expects to achieve sustained GHG
emissions reductions of at least 50% as early as 2025. While none of Southern
Company's subsidiaries are currently subject to renewable portfolio standards or
similar requirements, management of the traditional electric operating companies
is working with applicable regulators through their IRP processes to continue
the generating fleet transition 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 and deployment of low- to no-GHG energy technologies and negative
carbon concepts. Southern Company system management plans to continue to pursue
a diverse portfolio including low-carbon and carbon-free resources and energy
efficiency resources; continue to transition the Southern Company system's
generating fleet and make the necessary related investments in transmission and
distribution systems; implement initiatives to reduce natural gas distribution
operational emissions; 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, customers, and other stakeholders to support outcomes
leading to a net zero future.
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Regulatory Matters
See OVERVIEW - "Recent Developments" herein and Note 2 to the financial statements for a discussion of regulatory matters related toAlabama Power ,Georgia Power ,Mississippi Power , andSouthern 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 strategy continues to include 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 inthe 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 - Certificates of Convenience and Necessity" for information regardingAlabama Power's construction of Plant Barry Unit 8.
See Note 15 to the financial statements under "
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, reduce emissions, 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 Note 2 to the financial statements under "Southern Company Gas - Infrastructure Replacement Programs and Capital Projects" for additional information onSouthern Company Gas' construction program.
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.
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 provideSouthern Power with a stable source of revenue during their respective terms. Many ofSouthern Power's PPAs have provisions that requireSouthern 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 works to maintain and expand its share of the wholesale market. During 2022,Southern Power continued to be successful in remarketing up to 1,175 MWs of annual natural gas generation capacity to load-serving entities through several PPAs extending over the next eight 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.
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 thatSouthern Power serve the customer's capacity and energy requirements from a combination of the customer's own generating units and fromSouthern 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 reimbursingSouthern 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 II-44 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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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 reduceSouthern 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 generating facilities are also primarily through long-term PPAs; however, these PPAs do not have a capacity charge and customers either purchase the energy output of a dedicated renewable facility through an energy charge or provideSouthern 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 associated renewable energy credits. Income Tax Matters Consolidated Income Taxes The impact of certain tax events atSouthern 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
Southern Power's ITCs relate to its investment in new solar facilities and battery energy storage facilities (co-located with existing solar facilities) that are 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 onSouthern Power's cash flows and net income. AtDecember 31, 2022 ,Southern Company andSouthern Power had approximately$1.1 billion and$0.8 billion , respectively, of unutilized federal ITCs and PTCs, which are currently expected to be fully utilized by 2026, but could be further delayed. Since 2018,Southern Power has been utilizing tax equity partnerships for wind, solar, and battery energy storage projects, where the tax partner takes significantly all of the respective federal tax benefits. These tax equity partnerships are consolidated inSouthern Company's andSouthern 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.
Inflation Reduction Act
OnAugust 16, 2022 , the Inflation Reduction Act (IRA) was signed into law. The IRA extends, expands, and increases ITCs and PTCs for clean energy projects, allows PTCs for solar projects, adds ITCs for stand-alone energy storage projects with an option to elect out of the tax normalization requirement, and allows for the transferability of the tax credits. The IRA extends and increases the tax credits for carbon capture and sequestration projects and adds tax credits for clean hydrogen and nuclear projects. Additional ITC and PTC amounts are available if the projects meet domestic content requirements or are located in low-income or energy communities. The IRA also enacted a 15% corporate minimum tax on book income, with material adjustments for pension costs and tax depreciation. The 15% corporate minimum tax on book income can be reduced by energy tax credits. For solar projects placed in service in 2022 through 2032, the IRA provides for a 30% ITC and an option to claim a PTC instead of an ITC. Starting in 2023 and through 2032, the IRA provides for a 30% ITC for stand-alone energy storage projects. For wind projects placed in service in 2022 through 2032, the IRA provides for a 100% PTC, adjusted for inflation annually. For projects placed in service before 2022, the 2022 PTC rate is2.6 cents per KWH. For projects placed in service in 2022, the 2022 PTC rate II-45 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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is2.75 cents per KWH. The same PTC rate applies for solar projects for which the PTC option has been elected. To realize the full value of ITCs and PTCs, the IRA requires satisfaction of prevailing wage and apprenticeship requirements. Implementation of the IRA provisions is subject to the issuance of additional guidance by theU.S. Treasury Department and theIRS , and the ultimate impacts cannot be determined at this time; however, the IRA is not expected to have a material impact on the Registrants' financial statements for the year endingDecember 31, 2023 .
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.
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 ofSouthern Company's Board of Directors.
Utility Regulation (
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 theFERC . 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 2022 for the applicable Registrants were as follows: 88%
for
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 ofPlant Vogtle Units 3 and 4 (Southern Company andGeorgia Power ) In 2016, the Georgia PSC approved the Vogtle Cost Settlement Agreement, which resolved certain prudency matters in connection withGeorgia Power's fifteenth VCM report. In 2017, the Georgia PSC approvedGeorgia Power's seventeenth VCM report, which included a recommendation to continue construction ofPlant 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 II-46 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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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 throughDecember 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) a prudence proceeding on cost recovery will occur subsequent to achieving fuel load for Unit 4. In its order, the Georgia PSC also stated if other conditions change and assumptions upon whichGeorgia Power's seventeenth VCM report are based do not materialize, the Georgia PSC reserved the right to reconsider the decision to continue construction. As ofDecember 31, 2022 ,Georgia Power revised its total project capital cost forecast to$10.6 billion (net of$1.7 billion received under the Guarantee Settlement Agreement and approximately$188 million in related customer refunds). This forecast includes construction contingency of$60 million and is based on projected in-service dates at the end of the second quarter 2023 and the first quarter 2024 for Units 3 and 4, respectively. Since 2018, established construction contingency and additional costs totaling$2.5 billion have been assigned to the base capital cost forecast. AlthoughGeorgia 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 will not seek rate recovery for the$0.7 billion increase to the base capital cost forecast included in the nineteenth VCM report and charged to income byGeorgia Power in the second quarter 2018 and has not sought rate recovery for any subsequent construction and additional contingency costs assigned to the base capital cost forecast. 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 2018;$149 million ($111 million after tax) and$176 million ($131 million after tax) in the second quarter and the fourth quarter 2020, respectively;$48 million ($36 million after tax),$460 million ($343 million after tax),$264 million ($197 million after tax), and$480 million ($358 million after tax) in the first quarter 2021, the second quarter 2021, the third quarter 2021, and the fourth quarter 2021, respectively; and$36 million ($27 million after tax),$32 million ($24 million after tax), and$148 million ($110 million after tax) in the second quarter 2022, the third quarter 2022, and the fourth quarter 2022, respectively.Georgia Power and the other Vogtle Owners do not agree on either the starting dollar amount for the determination of cost increases subject to the cost-sharing and tender provisions of the Global Amendments (as defined in Note 2 to the financial statements under "Georgia Power -Nuclear Construction - Joint Owner Contracts") or the extent to which COVID-19-related costs impact those provisions. The other Vogtle Owners notifiedGeorgia Power that they believe the project capital cost forecast approved by the Vogtle Owners onFebruary 14, 2022 triggered the tender provisions. OnJune 17, 2022 andJuly 26, 2022 , OPC and Dalton, respectively, notifiedGeorgia Power of their purported exercises of their tender options.Georgia Power did not accept these purported tender exercises. OnSeptember 29, 2022 ,Georgia Power andMEAG Power reached an agreement to resolve their dispute regarding the proper interpretation of the cost-sharing and tender provisions of the Global Amendments. Under the terms of the agreement, among other items, (i)MEAG Power will not exercise its tender option and will retain its full ownership interest in Plant Vogtle Units 3 and 4; (ii)Georgia Power will reimburse a portion ofMEAG Power's costs of construction for Plant Vogtle Units 3 and 4 as such costs are incurred and with no further adjustment for force majeure costs, which payments will total approximately$92 million based on the current project capital cost forecast; and (iii)Georgia Power will reimburse 20% ofMEAG Power's costs of construction with respect to any amounts over the current project capital cost forecast, with no further adjustment for force majeure costs.Georgia Power recorded additional pre-tax charges (credits) to income of approximately$440 million ($328 million after tax) in the fourth quarter 2021 and approximately$16 million ($12 million after tax),$(102) million ($(76) million after tax), and$53 million ($40 million after tax) in the second quarter 2022, the third quarter 2022, and the fourth quarter 2022, respectively, associated with the cost-sharing and tender provisions of the Global Amendments, including the settlement withMEAG Power . A total of$407 million associated with these provisions is included in the total project capital cost forecast and will not be recovered from retail customers. The settlement withMEAG Power does not resolve the separate pending litigation with OPC, including Dalton's associated complaint, regarding the cost-sharing and tender provisions of the Global Amendments described in Note 2 to the financial statements under "Georgia Power -Nuclear Construction - Joint Owner Contracts."Georgia Power may be required to record further pre-tax charges to income of up to approximately$345 million associated with these provisions for OPC and Dalton based on the current project capital cost forecast.Georgia Power's ownership interest in Plant Vogtle Units 3 and 4 continues to be 45.7%.Georgia Power believes the increases in the total project capital cost forecast throughDecember 31, 2022 will trigger the tender provisions, butGeorgia Power disagrees II-47 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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with OPC and Dalton on the tender provisions trigger date. Valid notices of tender from OPC and Dalton would requireGeorgia Power to pay 100% of their respective remaining shares of the costs necessary to completePlant Vogtle Units 3 and 4.Georgia Power's incremental ownership interest will be calculated and conveyed toGeorgia Power after Plant Vogtle Units 3 and 4 are placed in service. 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 start-up testing and related test results, engineering support, commodity installation, system turnovers, and workforce statistics. The projected schedule for Unit 3 primarily depends on the progression of final component and pre-operational testing and start-up, which may be impacted by further equipment, component, and/or other operational challenges. The projected schedule for Unit 4 primarily depends on potential impacts arising from Unit 4 testing activities overlapping with Unit 3 start-up and commissioning; maintaining overall construction productivity and production levels, particularly in subcontractor scopes of work; and maintaining appropriate levels of craft laborers. Any further delays could result in later in-service dates and cost increases. Various design and other licensing-based compliance matters, including the timely submittal by Southern Nuclear of the ITAAC documentation and the related reviews and approvals by the NRC necessary to support NRC authorization to load fuel for Unit 4, may arise, which may result in additional license amendment requests or require other resolution. If any license amendment requests or other licensing-based compliance issues, including inspections and ITAACs for Unit 4, 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 extension of the in-service date beyond the second quarter 2023 for Unit 3 or the first quarter 2024 for Unit 4, including the joint owner cost sharing and tender impacts described in Note 2, is estimated to result in additional base capital costs forGeorgia Power of up to$15 million per month for Unit 3 and$35 million per month for Unit 4, as well as the related AFUDC and any additional related construction, support resources, or testing costs. WhileGeorgia Power is not precluded from seeking retail recovery of any future capital cost forecast increase other than the amounts related to the cost-sharing and tender provisions of the joint ownership agreements described above, 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 andGeorgia Power consider these items to be critical accounting estimates. See Note 2 to the financial statements under "Georgia Power -Nuclear Construction " for additional information.
Accounting for Income Taxes (
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 whichthe 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, eachSouthern 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 withIRS 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 ofSouthern 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. See Note 10 to the financial statements under "Deferred Tax Assets and Liabilities - Tax Credit Carryforwards" and " - Net Operating Loss Carryforwards" for additional information. 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 II-48 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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methodologies that are expected to apply in future years. Any apportionments and/or filing methodologies 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 (
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 andGeorgia Power have retirement obligations related to the decommissioning of nuclear facilities (Alabama Power's Plant Farley andGeorgia Power's ownership interests inPlant Hatch and Plant Vogtle Units 1 and 2). Other significant AROs include various landfill sites and asbestos removal forAlabama Power ,Georgia Power , andMississippi Power and gypsum cells and mine reclamation forMississippi Power . The traditional electric operating companies andSouthern 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 withthe 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 updates to AROs related to ash ponds recorded during 2022 by certain Registrants.
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 (
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 II-49 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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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 onSouthern Company's investment strategy, as described in Note 11 to the financial statements, 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 toSouthern 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. 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 2023 2022 December 31, 2022 (in millions) Discount rate: Southern Company$33 /$(25) $395 /$(375) $35 /$(33) Alabama Power$9 /$(9) $95 /$(90) $9 /$(8) Georgia Power$9 /$(9) $116 /$(111) $12 /$(12) Mississippi Power$2 /$(1) $18 /$(17) $1 /$(1) Southern Company Gas$2 /$(2) $25 /$(24) $4 /$(4) Salaries: Southern Company$16 /$(15) $81 /$(79) $-/$- Alabama Power$5 /$(4) $23 /$(22) $-/$- Georgia Power$5 /$(4) $22 /$(22) $-/$- Mississippi Power$1 /$(1) $3 /$(3) $-/$- Southern Company Gas$1 /$(0) $2 /$(2) $-/$- Long-term return on plan assets: Southern Company$39 /$(39) 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 (
The acquisition method of accounting for business combinations 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 and on an interim basis if events and circumstances occur that indicate goodwill may be impaired. 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 goodwill 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 II-50 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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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 amount to determine if the fair value is greater than its carrying amount.Goodwill forSouthern Company andSouthern Company Gas was$5.2 billion and$5.0 billion , respectively, atDecember 31, 2022 . During the fourth quarter 2022,Southern Company recorded a$119 million impairment loss as a result of its annual goodwill impairment test for PowerSecure. 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 "
Long-Lived Assets (
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 amount 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 amount of the asset, the fair value of the asset is determined and a loss is recorded equal to the difference between the carrying amount 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 amount 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. Impairments of long-lived assets of the traditional electric utilities and natural gas distribution utilities are generally related to specific regulatory disallowances.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. ForSouthern 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, changes in tax legislation, the inability to remarket generating capacity for an extended period, the unplanned termination of a customer contract, or the inability of a customer to perform under the terms of the contract. ForSouthern Company Gas , examples of impairment indicators could include, but are not limited to, significant changes in theU.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. 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. During 2021 and 2020,Southern Company recorded impairment charges totaling$7 million ($6 million after tax) and$206 million ($105 million after tax), respectively, related to its leveraged lease investments. During 2022,Southern Company Gas recorded pre-tax impairment charges totaling$131 million ($99 million after tax) related to natural gas storage facilities. During 2021,Southern Company Gas recorded total pre-tax impairment charges of$84 million ($67 million after tax) related to its equity method investment in the PennEast Pipeline project. See Notes 7 and 9 to the financial statements under "Southern Company Gas " and "Southern Company Leveraged Lease," respectively, and Note 15 to the financial statements for additional information on recent asset impairments.
Revenue Recognition (
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.Southern Power's revenues are dependent upon significant judgments used to determine the appropriate transaction classification, II-51 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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which must be documented upon the inception of each contract. The two categories
with the most judgment required for
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 whether the lease is classified as operating, financing, or sales-type. Generally,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 inSouthern Power's operating revenues. Energy revenues and other contingent revenues are recognized in the period the energy is delivered or the service is rendered. For those contracts that are determined to be sales-type leases, capacity revenues are recognized by accounting for interest income on the net investment in the lease and are included inSouthern Power's operating revenues. 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 withinSouthern 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 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. Acquisitions that meet the definition of a business are accounted for under the acquisition method, whereby 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 andSouthern 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 bySouthern 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 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. IfSouthern 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. IfSouthern 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 II-52 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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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 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
InMarch 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 began phasing out onDecember 31, 2021 . The discontinuation date of the overnight 1-, 3-, 6-, and 12-month tenors of LIBOR isJune 30, 2023 , which is beyond the original effective date of ASU 2020-04; therefore, onDecember 21, 2022 , the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 (ASU 2022-06) to defer the sunset date of ASU 2020-04 fromDecember 31, 2022 toDecember 31, 2024 . The amendments 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 guidance (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 fromMarch 12, 2020 throughDecember 31, 2024 by accounting topic. The Registrants have elected to apply the amendments to modifications of debt and derivative arrangements that meet the scope of ASU 2020-04 and ASU 2022-06. The Registrants currently reference LIBOR for certain debt and hedging arrangements. In addition, certain provisions in PPAs atSouthern Power include references to LIBOR. 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. No material impacts are expected from modifications to the arrangements and effective hedging relationships are expected to continue. See FINANCIAL CONDITION AND LIQUIDITY - "Overview" and "Financing Activities" herein and Note 14 to the financial statements under "Interest Rate Derivatives" for additional information.
FINANCIAL CONDITION AND LIQUIDITY
Overview
The financial condition of each Registrant remained stable atDecember 31, 2022 . 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 build new generation facilities to meet projected long-term demand requirements and to replace units being retired as part of the generation fleet transition, 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 2022, Southern Power utilized tax credits, which provided $49 million in operating cash flows. For the three-year period from 2023 through 2025, projected stock dividends, capital expenditures, and debt maturities are expected to exceed operating cash flows for each ofSouthern Company , the traditional electric operating companies, andSouthern Company Gas .Southern Company plans to finance future cash needs in excess of its operating cash flows through one or more of the following: accessing borrowings from financial institutions, issuing debt and hybrid securities in the capital markets, and/or through its stock plans. Each Subsidiary Registrant plans to finance its II-53 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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future cash needs in excess of its operating cash flows primarily through external securities issuances, borrowings from financial institutions, and equity contributions fromSouthern Company . In addition, 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. To facilitate an orderly transition from LIBOR to alternative benchmark rate(s), the Registrants have established an initiative to assess and mitigate risks associated with the discontinuation of LIBOR. As part of this initiative, several alternative benchmark rates have been, and continue to be, evaluated and implemented. Substantially all of the Registrants' credit facilities allow for LIBOR to be phased out and replaced with SOFR and interest rate derivatives address the LIBOR transition through the adoption of the ISDA 2020 IBOR Fallbacks Protocol and subsequent amendments. None of the Registrants expects the transition from LIBOR to have a material impact. The Registrants' investments in their qualified pension plans andAlabama Power's and Georgia Power's investments in their nuclear decommissioning trust funds decreased in value at December 31, 2022 as compared to December 31, 2021. No contributions to the qualified pension plan were made during 2022 and no mandatory contributions to the qualified pension plans are anticipated during 2023. See Notes 6 and 11 to the financial statements under "Nuclear Decommissioning" and "Pension Plans," respectively, for additional information. At the end of 2022, the market price ofSouthern Company's common stock was $71.41 per share (based on the closing price as reported on the NYSE) and the book value was $27.93 per share, representing a market-to-book value ratio of 256%, compared to $68.58, $26.30, and 261%, respectively, at the end of 2021. Cash Requirements Capital Expenditures
Total estimated capital expenditures, including LTSA and nuclear fuel commitments, for the Registrants through 2027 based on their current construction programs are as follows:
2023 2024 2025 2026 2027
(in billions)
Southern Company(a)(b)(c) $ 9.1 $ 8.1 $ 7.7 $ 7.9 $ 7.7
Alabama Power(a) 2.0 1.9 1.9 1.8 1.9
Georgia Power(b) 4.6 3.9 3.6 3.9 3.6
Mississippi Power 0.3 0.3 0.3 0.2 0.2
Southern Power(c) 0.1 0.1 0.1 0.1 0.1
Southern Company Gas 1.8 1.8 1.8 1.8 1.8
(a)Includes expenditures of approximately $0.1 billion in 2023 for the construction of Plant Barry Unit 8. See Note 2 to the financial statements under "Alabama Power" for additional information.
(b)Includes expenditures of approximately $1.0 billion and $0.2 billion in 2023 and 2024, respectively, for the construction of Plant Vogtle Units 3 and 4.
(c)Excludes approximately $0.5 billion in 2023 and $0.8 billion per year for 2024 through 2027 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, 2022, significant purchase
commitments were outstanding in connection with the Registrants' construction
programs.
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The traditional electric operating companies also anticipate continued 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. The cost estimates forAlabama Power and Mississippi Power are based on closure-in-place for all ash ponds. The cost estimates for Georgia Power are based on a combination of closure-in-place for some ash ponds and closure by removal for others. These estimated 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 2027 are provided in the table below. Material expenditures in future years for ARO settlements will also be required for ash ponds, nuclear decommissioning (forAlabama 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. 2023 2024 2025 2026 2027 (in millions) Southern Company $ 672 $ 730 $ 765 $ 816 $ 712 Alabama Power 330 346 364 299 237 Georgia Power 295 330 345 482 469 Mississippi Power 21 25 31 17 2 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 inFERC rules and regulations; state regulatory agency approvals; changes in the expected environmental compliance program; changes in legislation and/or regulation; the cost, availability, 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 impacts of the 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 and AROs 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, 2022, 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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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 onSouthern Company Gas' commitments for pipeline charges, storage capacity, and gas supply. Total estimated costs for fuel and purchased power commitments at December 31, 2022 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, 2022. As discussed under "Capital Expenditures" herein, estimated expenditures for nuclear fuel are included in the applicable Registrants' construction programs for the years 2023 through 2027. Nuclear fuel commitments at December 31, 2022 that extend beyond 2027 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. 2023 2024 2025 2026 2027 Thereafter (in millions) Southern Company(*) $ 5,985 $ 3,605 $ 2,485 $ 1,260 $ 1,136 $ 6,052 Alabama Power 1,623 1,067 820 343 313 1,363 Georgia Power(*) 2,413 1,347 946 487 452 4,255 Mississippi Power 789 496 280 160 143 418 Southern Power 1,159 695 438 269 228 16
(*)Excludes capacity payments related to Plant Vogtle Units 1 and 2, which are discussed in Note 3 to the financial statements under "Commitments."
In connection with Georgia Power's 2022 IRP, the Georgia PSC approved five affiliate PPAs with Southern Power, which are expected to be accounted for as leases, and are contingent upon approval by theFERC . The expected capacity payments associated with the PPAs total $5 million in 2024, $68 million in 2025, $75 million in 2026, $76 million in 2027, and $670 million thereafter. See Note 2 to the financial statements under "Georgia Power - Integrated Resource Plans" for additional information. 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 2023 through 2027. Total estimated payments for LTSA commitments at December 31, 2022 that extend beyond 2027 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 2027) $ 1,779 $ 303 $ 305 $ 163 $ 1,008
In addition, Southern Power has certain other operations and maintenance agreements. Total estimated costs for these commitments at December 31, 2022 are provided in the table below.
2023 2024 2025 2026 2027 Thereafter
(in millions)
Southern Power's operations and maintenance agreements $ 69 $ 58 $ 41 $
30 $ 29 $ 251
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 Capital
Southern Company intends to meet its future capital needs through operating cash flows, borrowings from financial institutions, and debt, hybrid, and/or equity issuances. Equity capital can be provided from any combination ofSouthern Company's stock plans, private placements, or public offerings. II-56 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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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, Southern Power plans to utilize tax equity partnership contributions (as discussed further herein). Georgia Power intends to continue utilizing short-term floating rate bank loans and commercial paper issuances to fund operating cash flows related to fuel cost under recovery.
The amount, type, and timing of any financings in 2023, 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 2022, Southern Power obtained tax equity funding for existing tax equity partnerships totaling $51 million. 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, 2022, the amount of subsidiary retained earnings restricted to dividend totaled $1.5 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-57 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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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, 2022. The following table shows the amount
by which current liabilities exceeded current assets at December 31, 2022 for
the applicable Registrants:
Southern Georgia Southern
At December 31, 2022 Company Power Mississippi Power Southern Power Company Gas
(in millions)
Current liabilities in excess of current
assets $ 5,308 $ 3,179 $ 50 $ 263 $ 532
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 from Southern Company .
At December 31, 2022, the Registrants' unused committed credit arrangements with
banks were as follows:
Southern Southern
Company Alabama Georgia Southern Company Southern
At December 31, 2022 parent Power Power Mississippi Power Power(a) Gas(b) SEGCO Company
(in millions)
Unused committed credit $ 1,998 $ 1,250 $ 1,726 $ 275 $ 569 $ 1,748 $ 30 $ 7,596
(a)At December 31, 2022, Southern Power also had two continuing letters of credit facilities for standby letters of credit, of which $14 million was unused. Southern Power's subsidiaries are not parties to its bank credit arrangements or letter of credit facilities.
(b)Includes $798 million and $950 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, 2022 was approximately $1.7 billion (comprised of approximately $789 million atAlabama Power , $819 million at Georgia Power, and $69 million atMississippi Power). In addition, at December 31, 2022,Alabama Power and Georgia Power had approximately $120 million and $288 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. II-58 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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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,
2022 2021 2020 2022 2021 2020
(in millions)
Southern Company $ 2,609 $ 1,440 $ 609 4.9 % 0.4 % 0.3 %
Georgia Power 1,600 - 60 5.0 - 0.3
Mississippi Power - - 25 - - 0.4
Southern Power 225 211 175 4.7 0.3 0.3
Southern Company Gas :
Southern Company Gas Capital $ 285 $ 379 $ 220 4.8 % 0.3 % 0.3 %
Nicor Gas 483 830 104 4.7 0.4 0.2
Southern Company Gas Total $ 768 $ 1,209 $ 324
4.7 % 0.4 % 0.2 %
Short-term Debt During the Period(*)
Weighted Average
Average Amount Outstanding Interest Rate Maximum Amount Outstanding
2022 2021 2020 2022 2021 2020 2022 2021 2020
(in millions) (in millions)
Southern Company $ 1,995 $ 1,141 $ 1,017 2.2 % 0.3 % 1.6 % $ 2,894 $ 1,809 $ 2,113
Alabama Power 6 27 20 2.1 0.1 1.1 200 200 155
Georgia Power 673 95 264 3.1 0.2 1.7 1,710 407 478
Mississippi Power 8 15 9 1.6 0.2 1.6 71 81 40
Southern Power 166 133 64 2.3 0.2 1.5 350 520 550
Southern Company Gas :
Southern Company Gas
Capital $ 279 $ 206 $ 316 1.8 % 0.2 % 1.4 % $ 547 $ 485 $ 641
Nicor Gas 349 420 49 2.1 0.4 1.4 830 897 278
Southern Company Gas
Total $ 628 $ 626 $ 365 2.0 % 0.4 % 1.4 %
(*) Average and maximum amounts are based upon daily balances during the 12-month periods ended December 31, 2022, 2021, and 2020.
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Analysis of Cash Flows
Net cash flows provided from (used for) operating, investing, and financing activities in 2022 and 2021 are presented in the following table:
Net cash provided from (used Southern Georgia Southern for): Company Alabama Power Power
Mississippi Power Southern Power Company Gas
(in millions)
2022
Operating activities $ 6,302 $ 1,639 $ 2,038 $ 383 $ 815 $ 1,519
Investing activities (8,430) (2,263) (3,954) (317) (194) (1,580)
Financing activities 2,336 251 2,363 (68) (623) 96
2021
Operating activities $ 6,169 $ 2,053 $ 2,747 $ 246 $ 951 $ 663
Investing activities (7,353) (1,961) (3,590) (257) (803) (1,379)
Financing activities 1,945 438 867 33 (195) 745
Fluctuations in cash flows from financing activities vary from year to year based on capital needs and the maturity or redemption of securities.
Net cash provided from operating activities increased $133 million in 2022 as compared to 2021 primarily due to the timing of vendor payments and increased natural gas cost recovery at the natural gas distribution utilities, largely offset by decreased fuel cost recovery at the traditional electric operating companies.
The net cash used for investing activities in 2022 and 2021 was primarily related to the Subsidiary Registrants' construction programs.
The net cash provided from financing activities in 2022 was primarily related to net issuances of long-term debt, the issuance of common stock to settle the purchase contracts entered into as part of the Equity Units (as discussed in Note 8 to the financial statements under "Equity Units"), and an increase in short-term borrowings, partially offset by common stock dividend payments. The net cash provided from financing activities in 2021 was primarily related to net issuances of long-term and short-term debt, partially offset by common stock dividend payments.Alabama Power Net cash provided from operating activities decreased $414 million in 2022 as compared to 2021 primarily due to decreased fuel cost recovery, the timing of customer receivable collections, and fossil fuel stock purchases, partially offset by the timing of vendor payments. The net cash used for investing activities in 2022 and 2021 was primarily related to gross property additions, including approximately $211 million and $240 million, respectively, related to the construction of Plant Barry Unit 8 and, for 2022, $171 million related to the acquisition of the Calhoun Generating Station. See Notes 2 and 15 to the financial statements under "Alabama Power" for additional information. The net cash provided from financing activities in 2022 and 2021 was primarily related to net long-term debt issuances and capital contributions fromSouthern Company , partially offset by common stock dividend payments and, in 2022, preferred stock redemptions.
Georgia Power
Net cash provided from operating activities decreased $709 million in 2022 as
compared to 2021 primarily due to decreased fuel cost recovery and the timing of
customer receivable collections, partially offset by lower income and property
tax payments.
The net cash used for investing activities in 2022 and 2021 was primarily
related to gross property additions, including approximately $1.0 billion and
$1.3 billion, respectively, 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.
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The net cash provided from financing activities in 2022 was primarily related to a net increase in short-term bank debt, capital contributions fromSouthern Company , and net issuances of senior notes, partially offset by common stock dividend payments. The net cash provided from financing activities in 2021 was primarily related to capital contributions fromSouthern 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 increased $137 million in 2022 as compared to 2021 primarily due to the timing of vendor payments, partially offset by the timing of customer receivable collections.
The net cash used for investing activities in 2022 and 2021 was primarily related to gross property additions.
The net cash used for financing activities in 2022 was primarily related to common stock dividend payments, partially offset by capital contributions fromSouthern Company and the issuance of revenue bonds. The net cash provided from financing activities in 2021 was primarily related to the issuance of senior notes and capital contributions fromSouthern Company , partially offset by debt redemptions, common stock dividend payments, and a decrease in commercial paper borrowings. Southern Power Net cash provided from operating activities decreased $136 million in 2022 as compared to 2021 primarily due to a decrease in the utilization of federal ITCs, partially offset by an increase in wholesale revenues driven by higher market prices of energy. The net cash used for investing activities in 2022 was primarily related to ongoing construction activities. The net cash used for investing activities in 2021 was primarily related to the acquisition of the Deuel Harvest wind facility and ongoing construction activities. See Note 15 to the financial statements under "Southern Power" for additional information. The net cash used for financing activities in 2022 was primarily related to the repayment of senior notes at maturity, common stock dividend payments, and net capital distributions to noncontrolling interests, partially offset by capital contributions fromSouthern Company . The net cash used for financing activities in 2021 was primarily related to a return of capital toSouthern Company and common stock dividend payments, partially offset by net capital contributions from noncontrolling interests and net issuances of senior notes.
Net cash provided from operating activities increased $856 million in 2022 as compared to 2021 primarily due to increased natural gas cost recovery and the timing of vendor payments, partially offset by the timing of customer receivable collections.
The net cash used for investing activities in 2022 and 2021 was primarily related to construction of transportation and distribution assets recovered through base rates and infrastructure investment recovered through replacement programs at gas distribution operations, partially offset by proceeds from dispositions. See Note 15 to the financial statements for additional information.
The net cash provided from financing activities in 2022 was primarily related to net issuances of long-term debt and capital contributions fromSouthern Company , partially offset by common stock dividend payments and a decrease in short-term borrowings. The net cash provided from financing activities in 2021 was primarily related to net issuances of long-term and short-term debt and capital contributions fromSouthern Company , partially offset by common stock dividend payments.
Significant Balance Sheet Changes
Significant balance sheet changes in 2022 for
•an increase of $3.5 billion in total property, plant, and equipment primarily related to the Subsidiary Registrants' construction programs, net of the reclassification of $0.6 billion to other regulatory assets and $0.4 billion to regulatory assets associated with AROs upon Georgia Power's retirement of Plant Wansley Units 1 and 2;
•an increase of $2.7 billion in long-term debt (including securities due within one year) related to new issuances;
•an increase of $2.5 billion in total common stockholders' equity primarily related to net income and the issuance of common stock to settle the purchase contracts entered into as part of the Equity Units (as discussed in Note 8 to the financial statements under "Equity Units"), partially offset by common stock dividend payments;
•an increase of $1.6 billion in deferred under recovered fuel clause revenues due to higher fuel and purchased power costs at Georgia Power;
•an increase of $1.4 billion in accounts payable primarily related to the timing of vendor payments;
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•an increase of $1.2 billion in accumulated deferred income taxes primarily related to the increase in under recovered fuel clause revenues, an increase in property-related timing differences, and continued flowback of excess deferred income taxes;
•an increase of $1.2 billion in notes payable due to an increase in short-term bank debt;
•a decrease of $0.8 billion in AROs primarily related to cost estimate updates for ash pond closures at Georgia Power; and
•an increase of $0.6 billion in prepaid pension costs primarily related to actuarial gains resulting from increases in the assumed discount rates, partially offset by actual losses on plan assets.
See "Financing Activities" herein and Notes 2, 5, 6, 8, 10, and 11 to the financial statements for additional information.
Significant balance sheet changes in 2022 for
•an increase of $1.2 billion in total property, plant, and equipment primarily related to the construction of Plant Barry Unit 8, the acquisition of the Calhoun Generating Station, and construction of distribution and transmission facilities; •an increase of $1.0 billion in total common stockholder's equity primarily due to net income and capital contributions fromSouthern Company , partially offset by dividends paid toSouthern Company ;
•an increase of $0.9 billion in long-term debt (including securities due within one year) primarily due to net issuances of senior notes;
•an increase of $0.6 billion in other regulatory assets primarily due to an increase in under recovered fuel clause revenues;
•an increase of $0.4 billion in accumulated deferred income taxes primarily due to an increase in under recovered fuel clause revenues; and
•a decrease of $0.4 billion in cash and cash equivalents, as discussed further
under "Analysis of Cash Flows -
See "Financing Activities -
Georgia Power
Significant balance sheet changes in 2022 for Georgia Power included:
•an increase of $1.7 billion in total property, plant, and equipment primarily related to the construction of generation, transmission, and distribution facilities, including $1.0 billion for Plant Vogtle Units 3 and 4, net of $0.6 billion reclassified to other regulatory assets and $0.4 billion reclassified to regulatory assets associated with AROs due to the retirement ofPlant Wansley Units 1 and 2 as approved inGeorgia Power's 2022 IRP;
•an increase of $1.6 billion in common stockholder's equity primarily due to net
income and capital contributions from
•an increase of $1.6 billion in deferred under recovered fuel clause revenues resulting from higher fuel and purchased power costs;
•an increase of $1.6 billion in notes payable due to an increase in short-term bank debt;
•an increase of $1.1 billion in long-term debt (including securities due within one year) primarily due to net issuances of senior notes;
•a decrease of $0.8 billion in AROs primarily due to cost estimate updates for ash pond closures; and
•an increase of $0.7 billion in accumulated deferred income taxes primarily due to the increase in under recovered fuel clause revenues and the expected reduction in federal and state credit carryforward balances in 2022.
See "Financing Activities - Georgia Power" herein and Notes 2, 5, 6, 8, and 10 to the financial statements for additional information.
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Mississippi Power
Significant balance sheet changes in 2022 for Mississippi Power included:
•an increase of $131 million in total property, plant, and equipment primarily related to the construction of transmission and distribution facilities;
•a decrease of $68 million in other regulatory assets, deferred primarily related to amortization of regulatory assets and the annual remeasurement of pension and other postretirement benefit obligations;
•an increase of $64 million in common stockholder's equity related to net income and capital contributions fromSouthern Company , partially offset by dividends paid toSouthern Company ;
•an increase of $59 million in other accounts payable due to the timing of vendor payments; and
•an increase of $53 million in affiliated receivables primarily due to power pool sales.
See Notes 2 and 5 to the financial statements for additional information.
Southern Power
Significant balance sheet changes in 2022 for Southern Power included:
•a decrease of $709 million in long-term debt (including securities due within one year) primarily due to the redemption of senior notes;
•a decrease of $351 million in total property, plant, and equipment in service primarily due to continued depreciation of assets; and
•an increase of $318 million in total stockholder's equity primarily due to capital contributions fromSouthern Company and net income, partially offset by dividends paid toSouthern Company and net distributions to noncontrolling interests.
See "Financing Activities - Southern Power" herein and Notes 5 and 8 to the financial statements for additional information.
Significant balance sheet changes in 2022 for
•an increase of $859 million in total property, plant, and equipment primarily related to the construction of transportation and distribution assets and additional infrastructure investment;
•an increase of $540 million in long-term debt (including securities due with one year) due to issuances of senior notes and first mortgage bonds, partially offset by the repayment of medium-term notes and adjustments related to fair value hedges;
•an increase of $481 million in common stockholder's equity related to net
income and capital contributions from
•a decrease of $441 million in notes payable due to repayments of short-term debt and commercial paper borrowings;
•an increase of $356 million in total accounts receivable primarily relating to increases of $154 million in customer accounts receivable and $175 million in unbilled revenues as a result of seasonality;
•an increase of $340 million in other accounts payable due to the timing of vendor payments; and
•a decrease of $192 million in other regulatory assets, deferred primarily due to a $207 million reduction in natural gas cost under recovery.
See "Financing Activities -
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Financing Activities
The following table outlines the Registrants' long-term debt financing activities for the year ended December 31, 2022:
Issuances/Reofferings Maturities, Redemptions, and Repurchases
Revenue Other Long-Term Senior Other Long-Term
Company Senior Notes Bonds Debt Notes Revenue Bonds Debt(a)
(in millions)
Southern Company parent $ 1,000 $ - $ - $ - $ - $ -
Alabama Power 1,700 - - 750 - 1
Georgia Power 1,500 200 - 400 53 228
Mississippi Power - 35 - - - -
Southern Power - - - 677 - -
Southern Company Gas 500 - 197 - - 46
Other - - - - - 11
Elimination(b) - - - - - (8)
Southern Company $ 4,700 $ 235 $ 197 $ 1,827 $ 53 $ 278
(a)Includes reductions in finance lease obligations resulting from cash payments
under finance leases and, for Georgia Power, principal amortization payments
totaling $88 million for FFB borrowings. See Note 8 to the financial statements
under "Long-term Debt - DOE Loan Guarantee Borrowings" for additional
information.
(b)Represents reductions in affiliate finance lease obligations at Georgia
Power, which are eliminated in
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.
During 2022,
In May 2022,Southern Company remarketed its Series 2019A and Series 2019B Remarketable Junior Subordinated Notes pursuant to the terms of its 2019 Series A Equity Units (Equity Units).Southern Company did not receive any proceeds from the remarketing, which were used to purchase a portfolio of treasury securities maturing on July 28, 2022. On August 1, 2022, the proceeds from this portfolio were used to settle the purchase contracts entered into as part of the Equity Units andSouthern Company issued approximately 25.2 million shares of common stock and received proceeds of $1.725 billion. See Note 8 to the financial statements under "Equity Units" for additional information.
In March 2022,
In May 2022,
In October 2022,Southern Company issued $500 million aggregate principal amount of Series 2022A 5.15% Senior Notes due October 6, 2025 and $500 million aggregate principal amount of Series 2022B 5.70% Senior Notes due October 15, 2032.
Subsequent to December 31, 2022,
Alabama Power
In February 2022,
In March 2022,
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In June 2022,Alabama Power redeemed the following series of preferred stock: 4.20% Preferred Stock, Par Value $100 Per Share, 4.60% Preferred Stock, Par Value $100 Per Share, 4.92% Preferred Stock, Par Value $100 Per Share, 4.52% Preferred Stock, Par Value $100 Per Share, 4.64% Preferred Stock, Par Value $100 Per Share, and 4.72% Preferred Stock, Par Value $100 Per Share. The redemption price per share for each series of preferred stock equaled the redemption price per share provided in Note 8 to the financial statements under "Outstanding Classes of Capital Stock -Alabama Power ", plus accrued and unpaid dividends to the redemption date. In August 2022,Alabama Power issued $550 million aggregate principal amount of Series 2022B 3.75% Senior Notes due September 1, 2027 and $450 million aggregate principal amount of Series 2022C 3.94% Senior Notes due September 1, 2032. An amount equal to the net proceeds of the Series 2022C Senior Notes is being allocated to finance or refinance, in whole or in part, one or more renewable energy projects and/or expenditures and programs related to enabling opportunities for diverse and small businesses/suppliers. In October 2022,Alabama Power redeemed all of its 5.00% Class A Preferred Stock, Par Value $1 Per Share (Stated Capital $25 Per Share) at a redemption price of $25.00 per share plus accrued and unpaid dividends to the redemption date.
In December 2022,
Georgia Power
In January 2022, Georgia Power redeemed all $400 million aggregate principal amount of its Series 2012B 2.85% Senior Notes due May 15, 2022.
In February 2022, Georgia Power borrowed $250 million pursuant to a short-term uncommitted bank credit arrangement, which it repaid in May 2022.
In each of March and April 2022, Georgia Power entered into a $200 million short-term floating rate bank loan bearing interest based on term SOFR.
In May 2022, Georgia Power issued $700 million aggregate principal amount of Series 2022A 4.70% Senior Notes due May 15, 2032 and $800 million aggregate principal amount of Series 2022B 5.125% Senior Notes due May 15, 2052. An amount equal to the net proceeds of the Series 2022B Senior Notes is being allocated to finance or refinance, in whole or in part, one or more renewable energy projects and/or expenditures and programs related to enabling opportunities for diverse and small businesses/suppliers.
In May 2022, Georgia Power repaid its $125 million long-term bank loan that was scheduled to mature in June 2022.
In July 2022, Georgia Power repaid at maturity $53 million aggregate principal
amount of Development Authority of
In October 2022, Georgia Power borrowed $250 million pursuant to a short-term uncommitted bank credit arrangement, which it repaid in November 2022.
In November 2022, the Development Authority ofBartow County (Georgia ) issued for the benefit of Georgia Power approximately $200 million aggregate principal amount of Solid Waste Disposal Facility Revenue Bonds (Georgia Power Company Plant Bowen Project), First Series 2022 ($100 million aggregate principal amount) and Second Series 2022 ($100 million aggregate principal amount) due November 1, 2062. The proceeds from the revenue bonds were used to finance certain solid waste disposal facilities at Plant Bowen.
Also in November 2022, Georgia Power entered into a $1.2 billion short-term floating rate bank loan bearing interest based on term SOFR.
Mississippi Power
In June 2022, Mississippi Power repaid $20 million, which was borrowed in March 2022 under its $125 million revolving credit arrangement.
In November 2022, the Mississippi Business Finance Corporation issued for the
benefit of Mississippi Power $35 million aggregate principal amount of Solid
Waste Disposal Facility and Wastewater Facility Revenue Bonds (Mississippi Power
Company Project), First Series 2022 due November 1, 2052. The proceeds from the
revenue bonds were used to finance certain solid waste disposal and wastewater
facilities at Plant Daniel.
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Southern Power
In June 2022, Southern Power repaid at maturity €600 million (approximately $677 million) aggregate principal amount of its Series 2016A 1.00% Senior Notes.
In October 2022, Southern Power borrowed $100 million pursuant to a short-term uncommitted bank credit arrangement, which it repaid in December 2022.
Subsequent to December 31, 2022, Southern Power borrowed $100 million pursuant to the short-term uncommitted bank credit arrangement bearing interest at a mutually agreed upon rate and payable on demand.
During the first quarter 2022, Nicor Gas repaid one of its three $100 million short-term floating rate bank loans entered into in March 2021. Nicor Gas also repaid $50 million of one of the other loans and increased the borrowing amount under the other loan to $150 million. In addition, both loans were renewed and amended to extend the maturity dates and change the interest rate provisions so the loans bear interest based on term SOFR. During the second quarter 2022,Atlanta Gas Light repaid at maturity $46 million aggregate principal amount of medium-term notes with a weighted average interest rate of 8.63%.
In August 2022, Nicor Gas issued in a private placement $100 million aggregate principal amount of 2.21% Series First Mortgage Bonds due August 31, 2032.
In September 2022, Southern Company Gas Capital issued $500 million aggregate
principal amount of Series 2022A 5.15% Senior Notes due September 15, 2032,
guaranteed by
In October 2022, Nicor Gas issued in a private placement $75 million aggregate principal amount of 3.18% Series First Mortgage Bonds due October 27, 2062.
During 2022,
Credit Rating Risk
At December 31, 2022, 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, 2022 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 $ 33 $ 1 $ - $ - $ 32 $ -
At BBB- and/or Baa3 395 2 61 1 334 -
At BB+ and/or Ba1 or
below 2,036 434 948 330 1,225 21
(*)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 $106 million of cash collateral posted related to
PPA requirements at December 31, 2022.
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 Products Company
(
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agreements grantChevron 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 February 22, 2022, Fitch downgraded the senior unsecured long-term debt rating of Georgia Power to BBB+ from A- with a stable outlook.
Also on February 22, 2022, Fitch revised the ratings outlook of
On December 15, 2022, Moody's revised its rating outlook for Mississippi Power from stable to positive.
Market Price Risk The Registrants had no material change in market risk exposure for the year ended December 31, 2022 when compared to the year ended December 31, 2021. 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. 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 ofSouthern 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 business also actively manages 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 earnings. 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, 2022 for the applicable Registrants:
Southern Alabama Georgia Mississippi Southern Company
At December 31, 2022 Company(*) Power Power Power Gas
(in millions, except percentages)
Long-term variable interest rate
exposure $ 5,071 $ 834 $ 819 $ 269 $ 500
Weighted average interest rate on
long-term variable interest rate
exposure 5.14 % 3.89 % 3.91 % 3.88 % 4.70 %
Impact on annualized interest expense
of 100 basis point change in interest
rates $ 51 $ 8 $ 8 $ 3 $ 5
(*)Includes $2.550 billion of long-term variable interest rate exposure at the
Southern Company parent entity, $550 million of which was redeemed subsequent to
December 31, 2022. See "Financing Activities" herein for additional information.
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.
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Southern Company and Southern Power had foreign currency denominated debt at December 31, 2022 and have each mitigated exposure to foreign currency exchange rate risk through the use of foreign currency swaps. See Note 14 to the financial statements under "Foreign Currency Derivatives" for additional information. Changes in fair value of energy-related derivative contracts forSouthern Company andSouthern Company Gas for the years ended December 31, 2022 and 2021 are provided in the table below. At December 31, 2022 and 2021, 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, 2020, assets (liabilities), net $ 107 $ 101 Contracts realized or settled (252) (85) Current period changes(b) 243 (84) Sale of Sequent(c) 76 76 Contracts outstanding at December 31, 2021, assets (liabilities), net $ 174 $ 8 Contracts realized or settled (327) 10 Current period changes(b) 142 (55)
Contracts outstanding at December 31, 2022, assets (liabilities), net
$ (11) $ (37)
(a)Excludes cash collateral held on deposit in broker margin accounts of $41
million, $3 million, and $28 million at December 31, 2022, 2021, and 2020,
respectively, and immaterial premium and intrinsic value associated with weather
derivatives for all periods presented.
(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.
(c)As a result of the sale of Sequent on July 1, 2021,Southern Company Gas' market risk exposure decreased significantly. See Note 15 to the financial statements under "Southern Company Gas" for information regarding the sale of Sequent. The net hedge volumes of energy-related derivative contracts for natural gas purchased (sold) at December 31, 2022 and 2021 forSouthern Company andSouthern Company Gas were as follows: Southern Company Southern Company Gas mmBtu Volume (in millions) At December 31, 2022: Commodity - Natural gas swaps 217 - Commodity - Natural gas options 214 93 Total hedge volume 431 93 At December 31, 2021: Commodity - Natural gas swaps 57 - Commodity - Natural gas options 253 68 Total hedge volume 310 68Southern 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 forSouthern Company Gas represent the net of long natural gas positions of 98 million mmBtu and short natural gas positions of 5 million mmBtu at December 31, 2022 and the net of long natural gas positions of 74 million mmBtu and short natural gas positions of 6 million mmBtu at December 31, 2021. Forthe Southern Company system, the weighted average swap contract cost per mmBtu was approximately $0.08 per mmBtu above market prices at December 31, 2022 and was approximately $0.74 per mmBtu below market prices at December 31, 2021. 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. II-68 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
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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. See Note 13 to the financial statements for further discussion of fair value measurements. The maturities of the energy-related derivative contracts forSouthern Company andSouthern Company Gas at December 31, 2022 were as follows: Fair Value
Measurements of Contracts at
December 31, 2022
Total Maturity
Fair Value 2023 2024 - 2025 2026 - 2027 Thereafter
(in millions)
Southern Company
Level 1(a) $ (14) $ (11) $ (3) $ - $ -
Level 2(b) 3 (11) 7 2 5
Southern Company total(c) $ (11) $ (22) $ 4 $ 2 $ 5
Southern Company Gas
Level 1(a) $ (14) $ (11) $ (3) $ - $ -
Level 2(b) (23) (23) - - -
Southern Company Gas
total(c) $ (37) $ (34) $ (3) $ - $ -
(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 $41 million as well as immaterial premium and associated intrinsic value associated with weather derivatives.
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 by Moody'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.
Credit Risk
Southern 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 14 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 2022, the four largest Marketers based on customer count, which includes SouthStar, accounted for 13% ofSouthern Company Gas' operating revenues and 15% of operating revenues 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. II-69 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS
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 .
Gas Marketing Services
Southern 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-70 -------------------------------------------------------------------------------- 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- 72Consolidated Statements of Income for the Years Ended December 31, 2022, 2021, and 2020
II- 76
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021, and 2020
II- 77
Consolidated Statements of Cash Flows for the Years Ended December 31,
2022,
2021, and 2020 II- 78
Consolidated Balance Sheets at December 31, 2022 and 2021 II- 79
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
2022, 2021, and 2020 II- 81
Alabama Power:
Report of Independent Registered Public Accounting Firm II- 82Statements of Income for the Years Ended December 31, 2022, 2021, and 2020
II- 84
Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021, and 2020
II- 84
Statements of Cash Flows for the Years Ended December 31, 2022, 2021, and 2020
II- 85
Balance Sheets at December 31, 2022 and 2021 II- 86
Statements of Common Stockholder's Equity for the Years Ended December 31,
2022, 2021, and 2020 II- 88
Georgia Power:
Report of Independent Registered Public Accounting Firm II- 89Statements of Income for the Years Ended December 31, 2022, 2021, and 2020
II- 92
Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021, and 2020
II- 92
Statements of Cash Flows for the Years Ended December 31, 2022, 2021, and 2020
II- 93
Balance Sheets at December 31, 2022 and 2021 II- 94
Statements of Common Stockholder's Equity for the Years Ended December 31,
2022, 2021, and 2020 II- 96
Mississippi Power:
Report of Independent Registered Public Accounting Firm II- 97Statements of Income for the Years Ended December 31, 2022, 2021, and 2020
II- 99
Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021, and 2020
II- 99
Statements of Cash Flows for the Years Ended December 31, 2022, 2021, and 2020
II- 100
Balance Sheets at December 31, 2022 and 2021 II- 101
Statements of Common Stockholder's Equity for the Years Ended December 31,
2022, 2021, and 2020 II- 103
Southern Power and Subsidiary Companies:
Report of Independent Registered Public Accounting Firm II- 104Consolidated Statements of Income for the Years Ended December 31, 2022, 2021, and 2020
II- 106
Consolidated Statements of Comprehensive Income for the Years Ended December 31,
2022, 2021, and 2020 II- 107
Consolidated Statements of Cash Flows for the Years Ended December 31,
2022,
2021, and 2020 II- 108 Consolidated Balance Sheets at December 31, 2022 and 2021 II- 109
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
2022, 2021, and 2020 II- 111
Southern Company Gas and Subsidiary Companies:
Report of Independent Registered Public Accounting Firm II- 112Consolidated Statements of Income for the Years Ended December 31, 2022, 2021, and 2020
II- 116
Consolidated Statements of Comprehensive Income for the Years Ended December 31,
2022, 2021, and 2020 II- 116
Consolidated Statements of Cash Flows for the Years Ended December 31,
2022,
2021, and 2020 II- 117 Consolidated Balance Sheets at December 31, 2022 and 2021 II- 118
Consolidated Statements of Common Stockholder's Equity for the Years Ended December 31, 2022, 2021, and 2020
II- 120
Combined Notes to Financial Statements II- 121
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets ofThe Southern Company and Subsidiary Companies (Southern Company ) as of December 31, 2022 and 2021, 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, 2022, the related notes, and the financial statement schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). We also have auditedSouthern Company's internal control over financial reporting as of December 31, 2022, 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 ofSouthern Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted inthe 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, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. Basis for OpinionsSouthern 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 onSouthern Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) (PCAOB) and are required to be independent with respect toSouthern Company in accordance with theU.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 ofSouthern Company's Board of Directors and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved 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 88% ofSouthern Company's consolidated operating revenues for the year ended December 31, 2022 and 87% of its consolidated total assets at December 31, 2022, are subject to rate regulation by their respective state Public Service Commissions or other applicable state regulatory agencies and wholesale regulation by theFederal Energy Regulatory Commission (collectively, the "Commissions"). Management has determined that the regulated utility subsidiaries meet the requirements under accounting principles generally accepted inthe 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 through 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. WhileSouthern 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 those investments. 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 remaining net book values 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/or deferred as regulatory assets, and (2) refunds or
future reductions 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 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
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 ofGeorgia 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 theGeorgia Public Service Commission ) and potential actions by the co-owners of the Vogtle project. In addition, Georgia Power's ability to meet its cost and schedule forecasts could impact its ability 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. The projected schedule for Unit 3 primarily depends on the progression of final component and pre-operational testing and start-up, which may be impacted by further equipment, component, and/or other operational challenges. The projected schedule for Unit 4 primarily depends on potential impacts arising from Unit 4 testing activities overlapping with Unit 3 start-up and commissioning; maintaining overall construction productivity and production levels, particularly in subcontractor scopes of work; and maintaining appropriate levels of craft laborers. As Unit 4 completes construction and transitions further into testing, ongoing and potential future challenges include the timeframe and duration of hot functional and other testing; the pace and quality of remaining commodities installation; completion of documentation to support Inspections, Tests, Analyses, and Acceptance Criteria (ITAAC) submittals; the pace of remaining work package closures and system turnovers; and the availability of craft, supervisory, and technical support resources. Ongoing or future challenges for both units also include management of contractors and vendors; subcontractor performance; and/or related cost escalation. New challenges also may continue to arise, as Unit 3 completes start-up and commissioning and Unit 4 moves further into testing and start-up, which may result in required engineering changes or remediation related to 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). These challenges may result in further schedule delays and/or cost increases. 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 asGeorgia Public Service Commission decisions in future regulatory proceedings. 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 pre-tax charges to income of $183 million in 2022. In addition, management has disclosed the status, risks, and uncertainties associated with Plant Vogtle Units 3 and 4, including (1) the status of construction and testing; (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 ofGeorgia 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 the
reasonableness of the methodology and assumptions used to determine the
forecasted costs and the projected in-service dates for Plant Vogtle Units 3 and
4 and Georgia Power's processes for on-going evaluation and monitoring of the
construction schedule.
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•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 and cost recovery 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 and inspections by the Nuclear Regulatory
Commission to identify potential impediments to the licensing and commercial
operation of the project that could impact the ultimate cost recovery of Plant
Vogtle Units 3 and 4.
•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 15, 2023
We have served as
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CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2022, 2021, and 2020
2022 2021 2020
(in millions)
Operating Revenues:
Retail electric revenues $ 18,197 $ 14,852 $ 13,643
Wholesale electric revenues 3,641 2,455 1,945
Other electric revenues 747 718 672
Natural gas revenues 5,962 4,380 3,434
Other revenues 732 708 681
Total operating revenues 29,279 23,113 20,375
Operating Expenses:
Fuel 6,835 4,010 2,967
Purchased power 1,593 978 799
Cost of natural gas 3,004 1,619 972
Cost of other sales 396 357 327
Other operations and maintenance 6,630 6,088 5,413
Depreciation and amortization 3,663 3,565 3,518
Taxes other than income taxes 1,411 1,290 1,234
Estimated loss on Plant Vogtle Units 3 and 4 183 1,692 325
Impairment charges 251 2 -
Gain on dispositions, net (57) (186) (65)
Total operating expenses 23,909 19,415 15,490
Operating Income 5,370 3,698 4,885
Other Income and (Expense):
Allowance for equity funds used during construction 224 190 149
Earnings from equity method investments 151 76 153
Interest expense, net of amounts capitalized (2,022) (1,837) (1,821)
Impairment of leveraged leases - (7) (206)
Other income (expense), net 500 456 336
Total other income and (expense) (1,147) (1,122) (1,389)
Earnings Before Income Taxes 4,223 2,576 3,496
Income taxes 795 267 393
Consolidated Net Income 3,428 2,309 3,103
Dividends on preferred stock of subsidiaries 11 15 15
Net loss attributable to noncontrolling interests (107) (99) (31)
Consolidated Net Income Attributable to Southern
Company $ 3,524 $ 2,393 $ 3,119
Common Stock Data:
Earnings per share -
Basic $ 3.28 $ 2.26 $ 2.95
Diluted 3.26 2.24 2.93
Average number of shares of common stock outstanding -
(in millions)
Basic 1,075 1,061 1,058
Diluted 1,081 1,068 1,065
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, 2022, 2021, and 2020
2022 2021 2020
(in millions)
Consolidated Net Income $ 3,428 $ 2,309 $ 3,103
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of
$(19), $(16), and $3, respectively (60) (49) 10
Reclassification adjustment for amounts included in net income,
net of tax of $23, $31, and $(13), respectively 73 96 (40) Pension and other postretirement benefit plans: Benefit plan net gain (loss), net of tax of $18, $37, and $(17), respectively 48 98 (55)
Reclassification adjustment for amounts included in net income,
net of tax of $3, $5, and $3, respectively 10 13 10 Total other comprehensive income (loss) 71 158 (75) Dividends on preferred stock of subsidiaries 11 15 15 Comprehensive loss attributable to noncontrolling interests (107) (99) (31)
Consolidated Comprehensive Income Attributable to
$ 3,595 $ 2,551 $ 3,044
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, 2022, 2021, and 2020
2022 2021 2020
(in millions)
Operating Activities:
Consolidated net income $ 3,428 $ 2,309 $ 3,103
Adjustments to reconcile consolidated net income
to net cash provided from operating activities - Depreciation and amortization, total
4,064 3,973 3,905
Deferred income taxes 670 (49) (241)
Utilization of federal investment tax credits 88 288 341
Allowance for equity funds used during construction (224) (190) (149)
Pension, postretirement, and other employee benefits (436) (305) (261)
Settlement of asset retirement obligations (455) (456) (442)
Storm damage and reliability reserve accruals 430 288 325
Stock based compensation expense 127 144 113
Estimated loss on Plant Vogtle Units 3 and 4 183 1,692 325
Impairment charges 251 91 206
Gain on dispositions, net (42) (176) (66)
Retail fuel cost under recovery - long-term (2,166) (536) -
Natural gas cost under recovery - long-term 207 (207) -
Other, net 17 87 (75)
Changes in certain current assets and liabilities -
-Receivables (769) (81) (222)
-Fossil fuel for generation (125) 99 (29)
-Materials and supplies (160) (130) (157)
-Natural gas cost under recovery 158 (266) -
-Other current assets (288) (270) (132)
-Accounts payable 1,021 (8) (27)
-Accrued taxes 51 (54) 242
-Customer refunds 119 130 (236)
-Other current liabilities 153 (204) 173
Net cash provided from operating activities 6,302 6,169 6,696
Investing Activities:
Property additions (7,923) (7,586) (7,522)
Nuclear decommissioning trust fund purchases (1,125) (1,598) (877)
Nuclear decommissioning trust fund sales 1,112 1,593 871
Proceeds from dispositions 275 917 1,049
Cost of removal, net of salvage (649) (442) (361)
Payments pursuant to LTSAs (190) (188) (211)
Other investing activities 70 (49) 21
Net cash used for investing activities (8,430) (7,353) (7,030)
Financing Activities:
Increase (decrease) in notes payable, net (337) 530 (1,096)
Proceeds -
Long-term debt 5,132 8,262 8,047
Short-term borrowings 2,650 325 615
Common stock 1,808 73 74
Redemptions and repurchases -
Long-term debt (2,158) (4,327) (4,458)
Preferred stock (298) - -
Short-term borrowings (1,150) (25) (840)
Capital contributions from noncontrolling interests 73 501 363
Distributions to noncontrolling interests (259) (351) (271)
Payment of common stock dividends (2,907) (2,777) (2,685)
Other financing activities (218) (266) (325)
Net cash provided from (used for) financing activities 2,336 1,945 (576)
Net Change in Cash, Cash Equivalents, and Restricted Cash 208 761 (910)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year
1,829 1,068 1,978
Cash, Cash Equivalents, and Restricted Cash at End of Year $ 2,037
$ 1,829 $ 1,068
Supplemental Cash Flow Information:
Cash paid during the period for -
Interest (net of $103, $92, and $81 capitalized,
respectively) $ 1,758 $ 1,718 $ 1,683
Income taxes, net 146 93 64
Noncash transactions -
Accrued property additions at year-end 1,024 866 989
Contributions from noncontrolling interests 15 89 12
Contributions of wind turbine equipment - 82 17
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
At December 31, 2022 and 2021
Southern Company and Subsidiary Companies
Assets 2022 2021
(in millions)
Current Assets:
Cash and cash equivalents $ 1,917 $ 1,798
Receivables -
Customer accounts 2,138 1,806
Unbilled revenues 1,012 711
Other accounts and notes 637 523
Accumulated provision for uncollectible accounts (71) (78)
Materials and supplies 1,664 1,543
Fossil fuel for generation 575 450
Natural gas for sale 438 362
Prepaid expenses 347 330
Assets from risk management activities, net of collateral 115 151
Regulatory assets - asset retirement obligations 332 219
Natural gas cost under recovery 108 266
Other regulatory assets 860 653
Other current assets 344 231
Total current assets 10,416 8,965
Property, Plant, and Equipment:
In service 117,529 115,592
Less: Accumulated depreciation 35,297 34,079
Plant in service, net of depreciation 82,232 81,513
Other utility plant, net 599 -
Nuclear fuel, at amortized cost 843 824
Construction work in progress 10,896 8,771
Total property, plant, and equipment 94,570 91,108
Other Property and Investments:
Goodwill 5,161 5,280
Nuclear decommissioning trusts, at fair value 2,145 2,542
Equity investments in unconsolidated subsidiaries 1,443 1,282
Other intangible assets, net of amortization of $340 and $307, respectively
406 445
Miscellaneous property and investments 602 653
Total other property and investments 9,757 10,202
Deferred Charges and Other Assets:
Operating lease right-of-use assets, net of amortization 1,531 1,701
Deferred charges related to income taxes 866 824
Prepaid pension costs 2,290 1,657
Unamortized loss on reacquired debt 238 258
Deferred under recovered fuel clause revenues 2,056 410
Regulatory assets - asset retirement obligations, deferred 5,764 5,466
Other regulatory assets, deferred 5,918 5,577
Other deferred charges and assets 1,485 1,366
Total deferred charges and other assets 20,148 17,259
Total Assets $ 134,891 $ 127,534
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
At December 31, 2022 and 2021
Southern Company and Subsidiary Companies
Liabilities and Stockholders' Equity 2022 2021
(in millions)
Current Liabilities:
Securities due within one year $ 4,285 $ 2,157
Notes payable 2,609 1,440
Accounts payable 3,525 2,169
Customer deposits 502 479
Accrued taxes -
Accrued income taxes 60 50
Other accrued taxes 764 641
Accrued interest 614 533
Accrued compensation 1,127 1,070
Asset retirement obligations 694 697
Operating lease obligations 197 250
Other regulatory liabilities 382 563
Other current liabilities 965 872
Total current liabilities 15,724 10,921
Long-Term Debt 50,656 50,120
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 10,036 8,862
Deferred credits related to income taxes 5,235 5,401
Accumulated deferred ITCs 2,133 2,216
Employee benefit obligations 1,238 1,550
Operating lease obligations, deferred 1,388 1,503
Asset retirement obligations, deferred 10,146 10,990
Other cost of removal obligations 1,903 2,103
Other regulatory liabilities, deferred 733 485
Other deferred credits and liabilities 1,167 816
Total deferred credits and other liabilities 33,979 33,926
Total Liabilities 100,359 94,967
Redeemable Preferred Stock of Subsidiaries:
Cumulative preferred stock
$100 par or stated value - 4.20% to 4.92% - 48
Authorized - 10 million shares
Outstanding - 2022: no shares; 2021: 0.5 million shares
$1 par value - 5.00% - 243
Authorized - 28 million shares
Outstanding - 2022: no shares; 2021: 10 million shares Total redeemable preferred stock of subsidiaries (annual dividend requirement - $15 million)
- 291
Common Stockholders' Equity: Common stock, par value $5 per share (Authorized - 1.5 billion shares)
5,417 5,279
(Issued - 1.1 billion shares;
Paid-in capital 13,673 11,950 Treasury, at cost (53) (47) Retained earnings 11,538 10,929 Accumulated other comprehensive loss (167) (237) Total common stockholders' equity 30,408 27,874 Noncontrolling interests 4,124 4,402 Total Stockholders' Equity (See accompanying statements) 34,532 32,276 Total Liabilities and Stockholders' Equity $ 134,891 $ 127,534 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, 2022, 2021, and 2020
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, 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 Consolidated net income (loss) - - - - - 2,393 - (99) 2,294 Other comprehensive income - - - - - - 158 - 158 Stock issued 3 - 11 62 - - - - 73 Stock-based compensation - - - 62 - - - - 62 Cash dividends of $2.6200 per share - - - - - (2,777) - - (2,777) Contributions from noncontrolling interests - - - - - - - 590 590 Distributions to noncontrolling interests - - - - - - - (351) (351) Other - - - (8) (1) 2 - - (7) Balance at December 31, 2021 1,061 (1) 5,279 11,950 (47) 10,929 (237) 4,402 32,276 Consolidated net income (loss) - - - - - 3,524 - (107) 3,417 Other comprehensive income - - - - - - 71 - 71 Stock issued 29 - 138 1,670 - - - - 1,808 Stock-based compensation - - - 44 - - - - 44 Cash dividends of $2.7000 per share - - - - - (2,907) - - (2,907) Contributions from noncontrolling interests - - - - - - - 88 88 Distributions to noncontrolling interests - - - - - - - (259) (259) Other - - - 9 (6) (8) (1) - (6) Balance at December 31, 2022 1,090 (1) $ 5,417 $ 13,673 $ (53) $ 11,538 $ (167) $ 4,124 $ 34,532
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
Opinion on the Financial Statements
We have audited the accompanying balance sheets ofAlabama Power Company (Alabama Power ) (a wholly-owned subsidiary ofThe Southern Company ) as of December 31, 2022 and 2021, 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, 2022, the related notes, and the financial statement schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position ofAlabama Power as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted inthe United States of America .
Basis for Opinion
These financial statements are the responsibility ofAlabama Power's management. Our responsibility is to express an opinion onAlabama Power's financial statements based on our audits. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) (PCAOB) and are required to be independent with respect toAlabama Power in accordance with theU.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 ofAlabama 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 ofSouthern Company's Board of Directors and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved 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 theAlabama Public Service Commission and wholesale regulation by theFederal Energy Regulatory Commission (collectively, the "Commissions"). Management has determined that it meets the requirements under accounting principles generally accepted inthe 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 ratesAlabama Power is permitted to charge customers. Rates are determined and approved in regulatory proceedings based on an analysis ofAlabama 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 through 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. WhileAlabama Power expects to recover costs from customers through regulated rates, there is a risk that the Commissions will not II-82 -------------------------------------------------------------------------------- Table of Contents Index to Financial Statements 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 those investments. 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 remaining net book values 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/or deferred as regulatory assets, and (2) refunds or future reductions 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 forAlabama 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
•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 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
/s/Deloitte & Touche LLP Birmingham, Alabama February 15, 2023
We have served as Alabama Power's auditor since 2002.
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STATEMENTS OF INCOME
For the Years Ended December 31, 2022, 2021, and 2020
Alabama Power Company
2022 2021 2020
(in millions)
Operating Revenues:
Retail revenues $ 6,470 $ 5,499 $ 5,213
Wholesale revenues, non-affiliates 726 377 269
Wholesale revenues, affiliates 202 171 46 Other revenues 419 366 302 Total operating revenues 7,817 6,413 5,830 Operating Expenses: Fuel 1,840 1,235 970 Purchased power, non-affiliates 441 221
191
Purchased power, affiliates 360 147
128
Other operations and maintenance 1,935 1,735 1,619 Depreciation and amortization 875 859 812 Taxes other than income taxes 424 410 416 Total operating expenses 5,875 4,607 4,136 Operating Income 1,942 1,806 1,694 Other Income and (Expense): Allowance for equity funds used during construction 70 52
46
Interest expense, net of amounts capitalized (382) (340)
(338)
Other income (expense), net 144 107
100
Total other income and (expense) (168) (181)
(192)
Earnings Before Income Taxes 1,774 1,625 1,502 Income taxes 423 372 337 Net Income 1,351 1,253 1,165 Dividends on Preferred Stock 11 15
15
Net Income After Dividends on Preferred Stock $ 1,340 $ 1,238
$ 1,150
STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2022, 2021, and 2020
Alabama Power Company
2022 2021 2020
(in millions)
Net Income $ 1,351 $ 1,253 $ 1,165
Other comprehensive income:
Qualifying hedges:
Changes in fair value, net of tax of $-, $1, and $-,
respectively (1) 2 -
Reclassification adjustment for amounts included in net income,
net of tax of $2, $2, and $2, respectively 5 4 4 Total other comprehensive income 4 6 4 Comprehensive Income $ 1,355 $ 1,259 $ 1,169
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, 2022, 2021, and 2020
Alabama Power Company
2022 2021 2020
(in millions)
Operating Activities:
Net income $ 1,351 $ 1,253 $ 1,165
Adjustments to reconcile net income
to net cash provided from operating activities - Depreciation and amortization, total
1,014 1,005 963
Deferred income taxes 355 245 78
Allowance for equity funds used during construction (70) (52) (46)
Pension, postretirement, and other employee benefits (118) (106) (90)
Settlement of asset retirement obligations (205) (202) (219)
Natural disaster reserve and reliability reserve accruals 185 75 112
Retail fuel cost under recovery - long-term (520) (126) -
Other, net (50) (52) 50
Changes in certain current assets and liabilities -
-Receivables (321) 42 (49)
-Materials and supplies (7) (6) (47)
-Retail fuel cost under recovery (102) - -
-Other current assets (93) 44 (66)
-Accounts payable 249 (109) (90)
-Accrued taxes (65) (56) 84
-Customer refunds 5 128 (12)
-Other current liabilities 31 (30) (91)
Net cash provided from operating activities 1,639 2,053 1,742
Investing Activities:
Property additions (2,016) (1,753) (1,970)
Nuclear decommissioning trust fund purchases (355) (638) (268)
Nuclear decommissioning trust fund sales 354 637 267
Cost of removal net of salvage (234) (165) (98)
Change in construction payables 50 (16) (34)
Other investing activities (62) (26) (19)
Net cash used for investing activities (2,263) (1,961) (2,122)
Financing Activities:
Proceeds -
Senior notes 1,700 1,300 600
Revenue bonds - - 87
Redemptions and repurchases -
Senior notes (750) (200) (250)
Preferred stock (298) - -
Revenue bonds - (65) (87)
Other long-term debt - (206) -
Capital contributions from parent company 649 636 653
Payment of common stock dividends (1,016) (984) (957)
Other financing activities (34) (43) (30)
Net cash provided from financing activities 251 438 16
Net Change in Cash, Cash Equivalents, and Restricted Cash (373)
530 (364)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year
1,060 530 894
Cash, Cash Equivalents, and Restricted Cash at End of Year $ 687
$ 1,060 $ 530
Supplemental Cash Flow Information:
Cash paid during the period for -
Interest (net of $20, $15, and $15 capitalized, respectively) $ 342 $ 308 $ 321
Income taxes, net 121 185 187
Noncash transactions - Accrued property additions at year-end 182
150 166
The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS
At December 31, 2022 and 2021
Alabama Power Company
Assets 2022 2021
(in millions)
Current Assets:
Cash and cash equivalents $ 687 $ 1,060
Receivables -
Customer accounts 431 410
Unbilled revenues 174 138
Affiliated 101 37
Other accounts and notes 153 55
Accumulated provision for uncollectible accounts (14) (14)
Fossil fuel stock 229 159
Materials and supplies 557 548
Prepaid expenses 65 41
Other regulatory assets 474 208
Other current assets 67 67
Total current assets 2,924 2,709
Property, Plant, and Equipment:
In service 33,472 33,135
Less: Accumulated provision for depreciation 10,470
10,313
Plant in service, net of depreciation 23,002
22,822
Other utility plant, net 599
-
Nuclear fuel, at amortized cost 239
247
Construction work in progress 1,526
1,147
Total property, plant, and equipment 25,366
24,216
Other Property and Investments: Nuclear decommissioning trusts, at fair value 1,127
1,325
Equity investments in unconsolidated subsidiaries 57
57
Miscellaneous property and investments 124
126
Total other property and investments 1,308
1,508
Deferred Charges and Other Assets: Operating lease right-of-use assets, net of amortization 71
108
Deferred charges related to income taxes 250
240
Prepaid pension and other postretirement benefit costs 657
513
Regulatory assets - asset retirement obligations 1,845
1,547
Other regulatory assets, deferred 2,107
1,807
Other deferred charges and assets 442
334
Total deferred charges and other assets 5,372 4,549 Total Assets $ 34,970 $ 32,982
The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS
At December 31, 2022 and 2021
Alabama Power Company
Liabilities and Stockholder's Equity 2022 2021
(in millions)
Current Liabilities:
Securities due within one year $ 301 $ 751
Accounts payable -
Affiliated 443 309
Other 641 459
Customer deposits 106 106
Accrued taxes 57 98
Accrued interest 120 100
Accrued compensation 229 219
Asset retirement obligations 330 320
Other regulatory liabilities 96 215
Other current liabilities 91 125
Total current liabilities 2,414 2,702
Long-Term Debt 10,329 8,936
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 3,981 3,573
Deferred credits related to income taxes 1,925 1,968
Accumulated deferred ITCs 81 88
Employee benefit obligations 145 171
Operating lease obligations 67 66
Asset retirement obligations, deferred 3,957 4,014
Other cost of removal obligations - 192
Other regulatory liabilities, deferred 315 210
Other deferred credits and liabilities 69 58
Total deferred credits and other liabilities 10,540 10,340
Total Liabilities 23,283 21,978
Redeemable Preferred Stock:
Cumulative redeemable preferred stock
$100 par or stated value - 4.20% to 4.92% - 48
Authorized - 3.9 million shares
Outstanding - 2022: no shares; 2021: 0.5 million shares
$1 par value - 5.00% - 243
Authorized - 27.5 million shares
Outstanding - 2022: no shares; 2021: 10 million shares: $25 stated value Total redeemable preferred stock (annual dividend requirement - $15 million)
- 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 6,710 6,056
Retained earnings 3,764 3,448
Accumulated other comprehensive loss (9) (13)
Total common stockholder's equity (See accompanying statements) 11,687
10,713
Total Liabilities and Stockholder's Equity $ 34,970 $ 32,982
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, 2022, 2021, and 2020
Alabama Power Company
Number of Accumulated
Common Other
Shares Common Paid-In Retained Comprehensive
Issued Stock Capital Earnings Income (Loss) Total
(in millions)
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
Net income after dividends on
preferred stock - - - 1,238 - 1,238 Capital contributions from parent company - - 643 - - 643 Other comprehensive income - - - - 6 6 Cash dividends on common stock - - - (984) - (984) Balance at December 31, 2021 31 1,222 6,056 3,448 (13) 10,713
Net income after dividends on
preferred stock - - - 1,340 - 1,340 Capital contributions from parent company - - 654 - - 654 Other comprehensive income - - - - 4 4 Cash dividends on common stock - - - (1,016) - (1,016) Other - - - (8) - (8) Balance at December 31, 2022 31 $ 1,222 $ 6,710 $ 3,764 $ (9) $ 11,687
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, 2022 and 2021, 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, 2022, the related notes, and the financial statement schedule listed in the Index at Item 15 (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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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 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 through 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
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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 those investments.
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 remaining net book values 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/or deferred as regulatory assets, and (2) refunds or future reductions 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 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's 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) and potential actions by the co-owners of the
Vogtle project. In addition, Georgia Power's ability to meet its cost and
schedule forecasts could impact its ability 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. The projected schedule for Unit 3 primarily depends on the
progression of final component and pre-operational testing and start-up, which
may be impacted by further equipment, component, and/or other operational
challenges. The projected schedule for Unit 4 primarily depends on potential
impacts arising from Unit 4 testing activities overlapping with Unit 3 start-up
and commissioning; maintaining overall construction productivity and production
levels, particularly in subcontractor scopes of work; and maintaining
appropriate levels of craft laborers. As Unit 4 completes construction and
transitions further into testing, ongoing and potential future challenges
include the timeframe and duration of hot functional and other testing; the pace
and quality of remaining commodities installation; completion of documentation
to support Inspections, Tests, Analyses, and Acceptance Criteria (ITAAC)
submittals; the pace of remaining work package closures and system turnovers;
and the availability of craft, supervisory, and technical support resources.
Ongoing or future challenges for both units also include management of
contractors and vendors; subcontractor performance; and/or related cost
escalation. New challenges also may continue to arise, as Unit 3 completes
start-up and commissioning and Unit 4 moves
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further into testing and start-up, which may result in required engineering
changes or remediation related to 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). These
challenges may result in further schedule delays and/or cost increases.
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.
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
pre-tax charges to income of $183 million in 2022.
In addition, management has disclosed the status, risks, and uncertainties
associated with Plant Vogtle Units 3 and 4, including (1) the status of
construction and testing; (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 the reasonableness of the methodology and assumptions used to determine the forecasted costs and the projected in-service dates for Plant Vogtle Units 3 and 4 and Georgia Power's processes for on-going evaluation and monitoring of the construction schedule. •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 and cost recovery 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 and inspections by the Nuclear Regulatory Commission to identify potential impediments to the licensing and commercial operation of the project that could impact the ultimate cost recovery of Plant Vogtle Units 3 and 4. •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 15, 2023
We have served as Georgia Power's auditor since 2002.
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STATEMENTS OF INCOME
For the Years Ended December 31, 2022, 2021, and 2020
Georgia Power Company
2022 2021 2020
(in millions)
Operating Revenues:
Retail revenues $ 10,792 $ 8,478 $ 7,609
Wholesale revenues 235 197 115
Other revenues 557 585 585
Total operating revenues 11,584 9,260 8,309
Operating Expenses:
Fuel 2,486 1,449 1,141
Purchased power, non-affiliates 856 632 540
Purchased power, affiliates 1,401 859
509
Other operations and maintenance 2,349 2,213
1,953
Depreciation and amortization 1,430 1,371
1,425
Taxes other than income taxes 527 476
444
Estimated loss on Plant Vogtle Units 3 and 4 183 1,692 325 Total operating expenses 9,232 8,692 6,337 Operating Income 2,352 568 1,972 Other Income and (Expense): Allowance for equity funds used during construction 140 127
91
Interest expense, net of amounts capitalized (485) (421) (425) Other income (expense), net 176 142
89
Total other income and (expense) (169) (152) (245)
Earnings Before Income Taxes 2,183 416 1,727
Income taxes (benefit) 370 (168) 152
Net Income $ 1,813 $ 584 $ 1,575
STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2022, 2021, and 2020
Georgia Power Company
2022 2021 2020
(in millions)
Net Income $ 1,813 $ 584 $ 1,575
Other comprehensive income:
Qualifying hedges:
Changes in fair value, net of tax of $8, $-, and $(1),
respectively 23 - (2)
Reclassification adjustment for amounts included in net income,
net of tax of $2, $2, and $2, respectively 5 6 6 Total other comprehensive income 28 6 4 Comprehensive Income $ 1,841 $ 590 $ 1,579
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, 2022, 2021, and 2020
Georgia Power Company
2022 2021 2020
(in millions)
Operating Activities:
Net income $ 1,813 $ 584 $ 1,575
Adjustments to reconcile net income
to net cash provided from operating activities - Depreciation and amortization, total
1,622 1,557 1,607
Deferred income taxes 313 (550) (273)
Allowance for equity funds used during construction (140) (127) (91)
Pension, postretirement, and other employee benefits (240) (148) (137)
Settlement of asset retirement obligations (212) (210) (185)
Storm damage accruals 213 213 213
Retail fuel cost recovery - long-term (1,646) (410) (73)
Estimated loss on Plant Vogtle Units 3 and 4 183 1,692 325
Other, net 81 53 14
Changes in certain current assets and liabilities -
-Receivables (286) 81 (114)
-Fossil fuel stock (43) 30 (6)
-Materials and supplies (73) (82) (91)
-Other current assets (83) (30) (48)
-Accounts payable 264 186 59
-Accrued taxes 173 21 55
-Retail fuel cost over recovery - (113) 113
-Customer refunds 113 1 (223)
-Other current liabilities (14) (1) 64
Net cash provided from operating activities 2,038 2,747 2,784
Investing Activities:
Property additions (3,901) (3,376) (3,445)
Nuclear decommissioning trust fund purchases (770) (960) (609)
Nuclear decommissioning trust fund sales 758 956 604
Cost of removal, net of salvage (274) (149) (143)
Change in construction payables, net of joint owner portion 186
(65) 16
Payments pursuant to LTSAs (44) (42) (86)
Contributions in aid of construction 92 65 20
Proceeds from dispositions 56 8 153
Other investing activities (57) (27) (13)
Net cash used for investing activities (3,954) (3,590) (3,503)
Financing Activities:
Decrease in notes payable, net - (60) (55)
Proceeds -
Senior notes 1,500 750 1,500
FFB loan - 440 848
Revenue bonds 200 122 53
Short-term borrowings 2,100 - 250
Redemptions and repurchases -
Senior notes (400) (325) (950)
FFB loan (88) (96) (73)
Revenue bonds (53) (69) (336)
Short-term borrowings (500) - (375)
Other long-term debt (125) - -
Capital contributions from parent company 1,471 1,782 1,392
Payment of common stock dividends (1,691) (1,649) (1,542)
Other financing activities (51) (28) (36)
Net cash provided from financing activities 2,363 867 676
Net Change in Cash, Cash Equivalents, and Restricted Cash 447 24 (43)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year
33 9 52
Cash, Cash Equivalents, and Restricted Cash at End of Year $ 480
$ 33 $ 9
Supplemental Cash Flow Information:
Cash paid during the period for -
Interest (net of $73, $63, and $47 capitalized, respectively) $ 432 $ 382 $ 380
Income taxes, net 30 305 373
Noncash transactions - Accrued property additions at year-end 626
479 553
The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS
At December 31, 2022 and 2021
Georgia Power Company
Assets 2022 2021
(in millions)
Current Assets:
Cash and cash equivalents $ 364 $ 33
Receivables -
Customer accounts, net 735 547
Unbilled revenues 309 231
Joint owner accounts 128 116
Affiliated 53 25
Other accounts and notes 62 44
Fossil fuel stock 291 248
Materials and supplies 729 670
Regulatory assets - asset retirement obligations 158 178
Other regulatory assets 324 289
Other current assets 246 178
Total current assets 3,399 2,559
Property, Plant, and Equipment:
In service 41,879 41,332
Less: Accumulated provision for depreciation 13,115
12,854
Plant in service, net of depreciation 28,764
28,478
Nuclear fuel, at amortized cost 604
577
Construction work in progress 8,103
6,688
Total property, plant, and equipment 37,471
35,743
Other Property and Investments: Nuclear decommissioning trusts, at fair value 1,018
1,217
Equity investments in unconsolidated subsidiaries 51
50
Miscellaneous property and investments 107
69
Total other property and investments 1,176
1,336
Deferred Charges and Other Assets: Operating lease right-of-use assets, net of amortization 1,007
1,157
Deferred charges related to income taxes 583
550
Prepaid pension costs 738
563
Deferred under recovered fuel clause revenues 2,056
410
Regulatory assets - asset retirement obligations, deferred 3,671
3,688
Other regulatory assets, deferred 2,522
1,964
Other deferred charges and assets 540
491
Total deferred charges and other assets 11,117 8,823 Total Assets $ 53,163 $ 48,461
The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS
At December 31, 2022 and 2021
Georgia Power Company
Liabilities and Stockholder's Equity 2022 2021
(in millions)
Current Liabilities:
Securities due within one year $ 901 $ 675
Notes payable 1,600 -
Accounts payable -
Affiliated 928 757
Other 1,076 702
Customer deposits 252 259
Accrued taxes 508 335
Accrued interest 157 136
Accrued compensation 254 232
Operating lease obligations 151 156
Asset retirement obligations 295 317
Other regulatory liabilities 170 280
Other current liabilities 286 254
Total current liabilities 6,578 4,103
Long-Term Debt 14,009 13,109
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 3,707 3,019
Deferred credits related to income taxes 2,244 2,321
Accumulated deferred ITCs 319 328
Employee benefit obligations 318 402
Operating lease obligations, deferred 851 999
Asset retirement obligations, deferred 5,739 6,507
Other deferred credits and liabilities 540 439
Total deferred credits and other liabilities 13,718 14,015
Total Liabilities 34,305 31,227
Common Stockholder's Equity:
Common stock, without par value
(Authorized - 20 million shares; Outstanding - 9 million shares) 398 398
Paid-in capital 15,626 14,153
Retained earnings 2,846 2,724
Accumulated other comprehensive loss (12) (41)
Total common stockholder's equity (See accompanying statements) 18,858
17,234
Total Liabilities and Stockholder's Equity $ 53,163 $ 48,461
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, 2022, 2021, and 2020
Georgia Power Company
Accumulated Other
Number of Common Paid-In Retained Comprehensive
Shares Issued Common Stock Capital Earnings Income (Loss) Total
(in millions)
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 Net income - - - 584 - 584 Capital contributions from parent company - - 1,792 - - 1,792 Other comprehensive income - - - - 6 6 Cash dividends on common stock - - - (1,649) -
(1,649)
Balance at December 31, 2021 9 398 14,153 2,724 (41) 17,234 Net income - - - 1,813 - 1,813 Capital contributions from parent company - - 1,473 - - 1,473 Other comprehensive income - - - - 28 28 Cash dividends on common stock - - - (1,691) -
(1,691)
Other - - - - 1 1 Balance at December 31, 2022 9 $ 398 $ 15,626 $ 2,846 $ (12) $ 18,858
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, 2022 and 2021, 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, 2022, the related notes, and the financial statement schedule listed in the Index at Item 15 (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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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 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 through 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
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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 those investments.
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 the remaining net book values 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, 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 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 15, 2023
We have served as Mississippi Power's auditor since 2002.
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STATEMENTS OF INCOME
For the Years Ended December 31, 2022, 2021, and 2020
Mississippi Power Company
2022 2021 2020
(in millions)
Operating Revenues:
Retail revenues $ 935 $ 875 $ 821
Wholesale revenues, non-affiliates 252 230 215
Wholesale revenues, affiliates 460 188 111 Other revenues 47 29 25 Total operating revenues 1,694 1,322 1,172 Operating Expenses: Fuel and purchased power 789 496 372 Other operations and maintenance 376 313 284 Depreciation and amortization 181 180 183 Taxes other than income taxes 124 128 124 Total operating expenses 1,470 1,117 963 Operating Income 224 205 209 Other Income and (Expense):
Interest expense, net of amounts capitalized (56) (60) (60) Other income (expense), net
33 35 17
Total other income and (expense) (23) (25) (43)
Earnings Before Income Taxes 201 180 166
Income taxes 37 21 14
Net Income $ 164 $ 159 $ 152
STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2022, 2021, and 2020
Mississippi Power Company
2022 2021 2020
(in millions)
Net Income $ 164 $ 159 $ 152
Other comprehensive income:
Qualifying hedges:
Reclassification adjustment for amounts included in net income,
net of tax of $-, $-, and $-, respectively - 1 1 Total other comprehensive income - 1 1 Comprehensive Income $ 164 $ 160 $ 153
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, 2022, 2021, and 2020
Mississippi Power Company
2022 2021 2020
(in millions)
Operating Activities:
Net income $ 164 $ 159 $ 152
Adjustments to reconcile net income
to net cash provided from operating activities - Depreciation and amortization, total
223 213 191
Settlement of asset retirement obligations (20)
(24) (22)
System restoration rider and reliability reserve accruals 32 (2) 1 Other, net (2) (35) (6) Changes in certain current assets and liabilities - -Receivables (82) 9 (7) -Other current assets (25) (6) (31) -Accounts payable 97 (35) 20 -Over recovered regulatory clause revenues -
(34) 5
-Other current liabilities (4) 1 (5) Net cash provided from operating activities 383 246 298 Investing Activities: Property additions (276) (213) (274) Payments pursuant to LTSAs (29) (29) (28) Contributions in aid of construction 19 15 - Other investing activities (31) (30) (21) Net cash used for investing activities (317) (257) (323) Financing Activities: Increase (decrease) in notes payable, net - (25) 25 Proceeds - Senior notes - 525 - Short-term borrowings - - 40 Revenue bonds 35 - 34 Other long-term debt - - 100 Redemptions - Senior notes - - (275) Short-term borrowings - - (40) Revenue bonds - (320) (41) Other long-term debt - (100) - Capital contributions from parent company 68 120 85 Return of capital to parent company -
- (74)
Payment of common stock dividends (170) (157) (74) Other financing activities (1) (10) (2) Net cash provided from (used for) financing activities (68) 33 (222) Net Change in Cash, Cash Equivalents, and Restricted Cash (2) 22 (247) Cash, Cash Equivalents, and Restricted Cash at Beginning of Year 61 39 286 Cash, Cash Equivalents, and Restricted Cash at End of Year $ 59 $ 61 $ 39 Supplemental Cash Flow Information: Cash paid during the period for - Interest $ 55 $ 58 $ 63 Income taxes, net 33 16 28
Noncash transactions - Accrued property additions at year-end 22
25 34
The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS
At December 31, 2022 and 2021
Mississippi Power Company
Assets 2022 2021
(in millions)
Current Assets:
Cash and cash equivalents $ 59 $ 61
Receivables -
Customer accounts, net 47 37
Unbilled revenues 47 34
Affiliated 82 29
Other accounts and notes 35 28
Fossil fuel stock 44 28
Materials and supplies 80 70
Other regulatory assets 72 54
Other current assets 38 41
Total current assets 504 382
Property, Plant, and Equipment:
In service 5,254 5,106
Less: Accumulated provision for depreciation 1,689 1,591
Plant in service, net of depreciation 3,565 3,515
Construction work in progress 208 127
Total property, plant, and equipment 3,773 3,642
Other Property and Investments 167 179
Deferred Charges and Other Assets:
Deferred charges related to income taxes 30 31
Prepaid pension costs 109 79
Regulatory assets - asset retirement obligations 239 232
Other regulatory assets, deferred 249 317
Accumulated deferred income taxes 107 118
Other deferred charges and assets 94 100
Total deferred charges and other assets 828 877
Total Assets $ 5,272 $ 5,080
The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS
At December 31, 2022 and 2021
Mississippi Power Company
Liabilities and Stockholder's Equity 2022 2021
(in millions)
Current Liabilities:
Securities due within one year $ 1 $ 1
Accounts payable -
Affiliated 121 81
Other 106 47
Accrued taxes 124 120
Accrued compensation 37 36
Asset retirement obligations 37 30
Other regulatory liabilities 43 59
Other current liabilities 85 65
Total current liabilities 554 439
Long-Term Debt 1,544 1,510
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 466 464
Deferred credits related to income taxes 253
269
Employee benefit obligations 69
88
Asset retirement obligations, deferred 142
160
Other cost of removal obligations 196
195
Other regulatory liabilities, deferred 96
64
Other deferred credits and liabilities 21
24
Total deferred credits and other liabilities 1,243
1,264
Total Liabilities 3,341
3,213
Common Stockholder's Equity: Common stock, without par value (Authorized and outstanding - 1 million shares) 38 38 Paid-in capital 4,652 4,582 Accumulated deficit (2,759) (2,753)
Total common stockholder's equity (See accompanying statements) 1,931
1,867
Total Liabilities and Stockholder's Equity $ 5,272 $ 5,080 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, 2022, 2021, and 2020 Mississippi Power Company
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, 2019 1 $ 38 $ 4,449 $ (2,832) $ (3) $ 1,652
Net income - - - 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
Net income - - - 159 - 159
Capital contributions from
parent company - - 122 - - 122
Other comprehensive income - - - - 1 1
Cash dividends on common stock - - - (157) - (157)
Other - - - (1) 1 -
Balance at December 31, 2021 1 38 4,582 (2,753) - 1,867
Net income - - - 164 - 164
Capital contributions from
parent company - - 70 - - 70
Cash dividends on common stock - - - (170) - (170)
Balance at December 31, 2022 1 $ 38 $ 4,652 $ (2,759) $ - $ 1,931
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, 2022 and 2021, 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, 2022, the related notes, and the financial statement schedule listed in the Index at Item 15 (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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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 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.
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.
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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.
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. •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 15, 2023
We have served as Southern Power's auditor since 2002.
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CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2022, 2021, and 2020 Southern Power Company and Subsidiary Companies
2022 2021 2020
(in millions)
Operating Revenues:
Wholesale revenues, non-affiliates $ 2,458 $ 1,671 $ 1,355
Wholesale revenues, affiliates 875 515 364
Other revenues 36 30 14
Total operating revenues 3,369 2,216 1,733
Operating Expenses:
Fuel 1,614 802 470
Purchased power 311 139 74
Other operations and maintenance 482 423 353
Depreciation and amortization 516 517 494
Taxes other than income taxes 49 45 39
Loss on sales-type leases 1 40 -
Gain on dispositions, net (2) (41) (39)
Total operating expenses 2,971 1,925 1,391
Operating Income 398 291 342
Other Income and (Expense):
Interest expense, net of amounts capitalized (138) (147) (151)
Other income (expense), net 7 10
19
Total other income and (expense) (131) (137) (132) Earnings Before Income Taxes 267 154 210 Income taxes (benefit) 20 (13) 3 Net Income 247 167 207
Net loss attributable to noncontrolling interests (107) (99)
(31)
Net Income Attributable to Southern Power $ 354 $ 266
$ 238
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, 2022, 2021, and 2020 Southern Power Company and Subsidiary Companies
2022 2021 2020
(in millions)
Net Income $ 247 $ 167 $ 207
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $(30), $(22), and
$12, respectively (91) (67) 33
Reclassification adjustment for amounts included in net income,
net of tax of $26, $30, and $(22), respectively 81 89 (65) Pension and other postretirement benefit plans: Benefit plan net gain (loss), net of tax of $6, $5, and $(4), respectively 18 16 (12)
Reclassification adjustment for amounts included in net income,
net of tax of $1, $1, and $1, respectively 2 2 2 Total other comprehensive income (loss) 10 40 (42) Comprehensive loss attributable to noncontrolling interests (107) (99) (31)
Comprehensive Income Attributable to Southern Power $ 364 $ 306 $ 196
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, 2022, 2021, and 2020 Southern Power Company and Subsidiary Companies
2022 2021 2020
(in millions)
Operating Activities:
Net income $ 247 $ 167 $ 207
Adjustments to reconcile net income
to net cash provided from operating activities - Depreciation and amortization, total
543 542 519
Deferred income taxes 9 55 (25)
Utilization of federal investment tax credits 49 288 340
Amortization of investment tax credits (58) (58) (59)
Income taxes receivable, non-current 1 5 (20)
Gain on dispositions, net (2) (41) (39)
Loss on sales-type leases 1 40 -
Other, net 17 (6) (5)
Changes in certain current assets and liabilities -
-Receivables (82) (44) (4)
-Prepaid income taxes 22 (16) 20
-Other current assets (11) (14) (30)
-Other current liabilities 79 33 (3)
Net cash provided from operating activities 815 951 901
Investing Activities:
Acquisitions, net of cash acquired - (345) (81)
Property additions (100) (396) (223)
Change in construction payables (69) (15) 31
Proceeds from dispositions 48 24 666
Payments pursuant to LTSAs (71) (82) (76)
Other investing activities (2) 11 57
Net cash provided from (used for) investing activities (194) (803) 374
Financing Activities:
Increase (decrease) in notes payable, net 10 36 (274)
Proceeds - Senior notes - 400 -
Redemptions -
Senior notes (677) (300) (825)
Short-term borrowings - - (100)
Capital contributions from parent company 430 8 6
Return of capital to parent company - (271) -
Capital contributions from noncontrolling interests 73 501 363
Distributions to noncontrolling interests (259) (351) (271)
Purchase of membership interests from noncontrolling interests
- - (60)
Payment of common stock dividends (198) (204) (201)
Other financing activities (2) (14) (10)
Net cash used for financing activities (623) (195) (1,372)
Net Change in Cash, Cash Equivalents, and Restricted Cash (2) (47) (97)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year
135 182 279
Cash, Cash Equivalents, and Restricted Cash at End of Year $ 133
$ 135 $ 182
Supplemental Cash Flow Information:
Cash paid (received) during the period for -
Interest (net of $-, $6, and $11 capitalized, respectively) $ 142 $ 140 $ 147
Income taxes, net (15) (275) (283)
Noncash transactions -
Accrued property additions at year-end 24 72 89
Contributions from noncontrolling interests 15 89 12
Contributions of wind turbine equipment - 82 17
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
At December 31, 2022 and 2021
Southern Power Company and Subsidiary Companies
Assets 2022 2021
(in millions)
Current Assets:
Cash and cash equivalents $ 131 $ 107
Receivables -
Customer accounts, net 226 139
Affiliated 51 51
Other 70 29
Materials and supplies 88 106
Prepaid income taxes 5 27
Other current assets 50 46
Total current assets 621 505
Property, Plant, and Equipment:
In service 14,658 14,585
Less: Accumulated provision for depreciation 3,661 3,241
Plant in service, net of depreciation 10,997 11,344
Construction work in progress 41 45
Total property, plant, and equipment 11,038 11,389
Other Property and Investments:
Intangible assets, net of amortization of $129 and $109, respectively
263 282
Equity investments in unconsolidated subsidiaries 49 86
Net investment in sales-type leases 154 161
Total other property and investments 466 529
Deferred Charges and Other Assets:
Operating lease right-of-use assets, net of amortization 489 479
Prepaid LTSAs 193 210
Income taxes receivable, non-current 19 20
Other deferred charges and assets 255 258
Total deferred charges and other assets 956 967
Total Assets $ 13,081 $ 13,390
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
At December 31, 2022 and 2021
Southern Power Company and Subsidiary Companies
Liabilities and Stockholders' Equity 2022 2021
(in millions)
Current Liabilities: Securities due within one year $ 290 $ 679 Notes payable 225 211 Accounts payable - Affiliated 139 92 Other 67 85 Accrued taxes 24 14 Accrued interest 28 32 Other current liabilities 111 140 Total current liabilities 884 1,253 Long-Term Debt 2,689 3,009 Deferred Credits and Other Liabilities: Accumulated deferred income taxes 279 215 Accumulated deferred ITCs 1,556 1,614 Operating lease obligations 514 497 Other deferred credits and liabilities 243
204
Total deferred credits and other liabilities 2,592
2,530
Total Liabilities 6,165
6,792
Common Stockholder's Equity: Common stock, par value $0.01 per share (Authorized - 1 million shares; Outstanding - 1,000 shares) - - Paid-in capital 1,069 638 Retained earnings 1,741 1,585 Accumulated other comprehensive loss (18)
(27)
Total common stockholder's equity 2,792
2,196
Noncontrolling Interests 4,124
4,402
Total Stockholders' Equity (See accompanying statements) 6,916
6,598
Total Liabilities and Stockholders' Equity $ 13,081 $ 13,390 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, 2022, 2021, and 2020 Southern Power Company and Subsidiary Companies
Number of
Common Accumulated Other
Shares Paid-In Retained Comprehensive Total Common Noncontrolling
Issued Common Stock Capital Earnings Income (Loss) Stockholder's Equity Interests Total
(in millions)
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 Net income (loss) - - - 266 - 266 (99) 167
Return of capital to parent
company - - (271) - - (271) - (271)
Capital contributions from parent
company - - 10 - - 10 - 10 Other comprehensive income - - - - 40 40 - 40
Cash dividends on common
stock - - - (204) - (204) - (204)
Capital contributions from
noncontrolling interests - - - - - 590 590
Distributions to noncontrolling
interests - - - - - - (351) (351) Other - - (15) 1 - (14) - (14) Balance at December 31, 2021 - - 638 1,585 (27) 2,196 4,402 6,598 Net income (loss) - - - 354 - 354 (107) 247
Capital contributions from parent
company - - 431 - - 431 - 431 Other comprehensive income - - - - 10 10 - 10
Cash dividends on common
stock - - - (198) - (198) - (198)
Capital contributions from
noncontrolling interests - - - - - - 88 88
Distributions to noncontrolling
interests - - - - - - (259) (259) Other - - - - (1) (1) - (1) Balance at December 31, 2022 - $ - $
1,069 $ 1,741 $ (18) $ 2,792 $ 4,124 $ 6,916
(*)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, 2022 and 2021, 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, 2022, the related notes, and the financial statement schedule listed in the Index at Item 15 (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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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 $1,243 million and $1,129 million as of December 31, 2022 and December 31, 2021, respectively, and its earnings from its equity method investment in SNG of $146 million, $127 million, and $129 million for the years ended December 31, 2022, 2021, and 2020, 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 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 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 - 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 88% 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
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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; 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 through 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 those
investments.
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/or deferred as regulatory assets, and (2) refunds or future reductions 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 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.
/s/ Deloitte & Touche LLP Atlanta, Georgia February 15, 2023
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, 2022 and 2021, the related consolidated statements of income, members' equity, and cash flows for each of the three years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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 Matter
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: (i)
relates to accounts or disclosures that are material to the consolidated
financial statements and (ii) 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.
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Postretirement Benefit Obligation
At December 31, 2022, the Company's postretirement benefit obligation was $14 million and the Company's plan assets were $59 million, resulting in a net asset position of $45 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 and the expected return on plan assets. These assumptions had a significant effect on the postretirement benefit obligation calculation.
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 changes in assumptions.
•Evaluating the appropriateness of management's methodology for determining the discount rate that reflects the maturity and duration of the benefit payments.
•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 6, 2023
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CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2022, 2021, and 2020 Southern Company Gas and Subsidiary Companies
2022 2021 2020
(in millions)
Operating Revenues:Natural gas revenues (includes revenue taxes of
$162, $122, and $107, respectively) $ 5,962 $
4,380 $ 3,434
Total operating revenues 5,962 4,380 3,434
Operating Expenses:
Cost of natural gas 3,004 1,619 972
Other operations and maintenance 1,176 1,072 966
Depreciation and amortization 559 536 500
Taxes other than income taxes 282 225 206
Impairment charges 131 - -
Gain on dispositions, net (4) (127) (22)
Total operating expenses 5,148 3,325 2,622
Operating Income 814 1,055 812
Other Income and (Expense):
Earnings from equity method investments 148 50 141
Interest expense, net of amounts capitalized (263) (238) (231)
Other income (expense), net 53 (53) 41
Total other income and (expense) (62) (241) (49)
Earnings Before Income Taxes 752 814 763
Income taxes 180 275 173
Net Income $ 572 $ 539 $ 590
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2022, 2021, and 2020 Southern Company Gas and Subsidiary Companies
2022 2021 2020
(in millions)
Net Income $ 572 $ 539 $ 590
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $5, $5, and $(8),
respectively 13 17 (21)
Reclassification adjustment for amounts included in net income,
net of tax of $(9), $(5), and $3, respectively (24) (11) 7 Pension and other postretirement benefit plans: Benefit plan net gain (loss), net of tax of $8, $17, and $(3), respectively 18 40 (15) Total other comprehensive income (loss) 7 46 (29) Comprehensive Income $ 579 $ 585 $ 561
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, 2022, 2021, and 2020 Southern Company Gas and Subsidiary Companies
2022 2021 2020
(in millions)
Operating Activities:
Consolidated net income $ 572 $ 539 $ 590
Adjustments to reconcile net income to net cash
provided from operating activities -
Depreciation and amortization, total 558 536 500
Deferred income taxes 17 259 56
Impairment charges 131 84 -
Gain on dispositions, net (4) (127) (22)
Mark-to-market adjustments 12 194 61
Natural gas cost under recovery - long-term 207 (207) -
Other, net (32) (30) (29)
Changes in certain current assets and liabilities - -Receivables
(345) (143) (93)
-Natural gas for sale, net of temporary LIFO liquidation (77) 8 18
-Prepaid income taxes 19 (82) 19
-Natural gas cost under recovery 158 (266) -
-Other current assets (6) (116) (10)
-Accounts payable 299 40 103
-Other current liabilities 10 (26) 14
Net cash provided from operating activities 1,519 663 1,207
Investing Activities:
Property additions (1,533) (1,421) (1,471)
Cost of removal, net of salvage (112) (106) (100)
Change in construction payables, net 65 (29) 20
Investments in unconsolidated subsidiaries (165) (5) (79)
Proceeds from dispositions 150 150 211
Other investing activities 15 32 2
Net cash used for investing activities (1,580) (1,379) (1,417)
Financing Activities:
Increase (decrease) in notes payable, net (341) 585 (326)
Proceeds -
Senior notes 500 450 500
Short-term borrowings 50 300 -
First mortgage bonds 175 200 325
Other long-term debt 22 - -
Redemptions and repurchases -
Senior notes - (300) -
Medium-term notes (46) (30) -
Short-term borrowings (150) - -
Capital contributions from parent company 406 72 216
Payment of common stock dividends (519) (530) (533)
Other financing activities (1) (2) (2)
Net cash provided from financing activities 96 745 180
Net Change in Cash, Cash Equivalents, and Restricted Cash 35 29 (30)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year
48 19 49
Cash, Cash Equivalents, and Restricted Cash at End of Year
$ 83 $ 48 $ 19
Supplemental Cash Flow Information:
Cash paid during the period for -
Interest (net of $10, $8, and $7 capitalized,
respectively) $ 258 $ 244 $ 232
Income taxes, net 208 57 25
Noncash transactions - Accrued property additions at year-end
177 113 142
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
At December 31, 2022 and 2021
Southern Company Gas and Subsidiary Companies
Assets 2022 2021
(in millions)
Current Assets:
Cash and cash equivalents $ 81 $ 45
Receivables -
Customer accounts 616 462
Unbilled revenues 453 278
Other accounts and notes 76 49
Accumulated provision for uncollectible accounts (50) (39)
Natural gas for sale 438 362
Prepaid expenses 93 114
Natural gas cost under recovery 108 266
Other regulatory assets 119 136
Other current assets 104 82
Total current assets 2,038 1,755
Property, Plant, and Equipment:
In service 19,723 18,880
Less: Accumulated depreciation 5,276 5,067
Plant in service, net of depreciation 14,447 13,813
Construction work in progress 909 684
Total property, plant, and equipment 15,356 14,497
Other Property and Investments:
Goodwill 5,015 5,015
Equity investments in unconsolidated subsidiaries 1,276 1,173
Other intangible assets, net of amortization of $156 and $145, respectively
26 37
Miscellaneous property and investments 28 19
Total other property and investments 6,345 6,244
Deferred Charges and Other Assets:
Operating lease right-of-use assets, net of amortization 57 70
Prepaid pension costs 183 175
Other regulatory assets, deferred 497 689
Other deferred charges and assets 145 130
Total deferred charges and other assets 882 1,064
Total Assets $ 24,621 $ 23,560
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
At December 31, 2022 and 2021
Southern Company Gas and Subsidiary Companies
Liabilities and Stockholder's Equity 2022 2021
(in millions)
Current Liabilities:
Securities due within one year $ 400 $ 47
Notes payable 768 1,209
Accounts payable -
Affiliated 104 58
Other 701 361
Customer deposits 125 95
Accrued taxes 77 124
Accrued compensation 105 110
Other regulatory liabilities 36 8
Other current liabilities 254 214
Total current liabilities 2,570 2,226
Long-term Debt 7,042 6,855
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 1,560 1,555
Deferred credits related to income taxes 788 816
Employee benefit obligations 120 176
Operating lease obligations 51 59
Other cost of removal obligations 1,707 1,683
Accrued environmental remediation 207 197
Other deferred credits and liabilities 179 77
Total deferred credits and other liabilities 4,612 4,563
Total Liabilities 14,224 13,644
Common Stockholder's Equity:
Common stock, par value $0.01 per share
(Authorized - 100 million shares; Outstanding - 100 shares) Paid-in capital
10,445 10,024
Accumulated deficit (79) (132)
Accumulated other comprehensive income (loss) 31 24
Total common stockholder's equity (See accompanying statements) 10,397 9,916 Total Liabilities and Stockholder's Equity
$ 24,621 $ 23,560
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, 2022, 2021, and 2020 Southern Company Gas and Subsidiary Companies
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, 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
Net income - - - 539 - 539
Capital contributions from
parent company - - 94 - - 94
Other comprehensive income - - - - 46 46
Cash dividends on common stock - - - (530) - (530)
Balance at December 31, 2021 - - 10,024 (132) 24 9,916
Net income - - - 572 - 572
Capital contributions from
parent company - - 421 - - 421
Other comprehensive income - - - - 7 7
Cash dividends on common stock - - - (519) - (519)
Balance at December 31, 2022 - $ - $ 10,445 $ (79) $ 31 $ 10,397
The accompanying notes are an integral part of these consolidated financial statements.
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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- 122
2 Regulatory Matters II- 136
3 Contingencies, Commitments, and Guarantees II- 159
4 Revenue from Contracts with Customers II- 165
5 Property, Plant, and Equipment II- 169
6 Asset Retirement Obligations II- 173
7 Consolidated Entities and Equity Method Investments II- 176
8 Financing II- 180
9 Leases II- 188
10 Income Taxes II- 195
11 Retirement Benefits II- 202
12 Stock Compensation II- 229
13 Fair Value Measurements II- 232
14 Derivatives II- 240
15 Acquisitions and Dispositions II- 249
16 Segment and Related Information II- 252
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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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. Southern Power develops, constructs, acquires, owns, and manages power generation assets, including renewable energy 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). Southern Company Gas is also involved in several other complementary businesses including gas pipeline investments and gas marketing services. Prior to the sale of Sequent on July 1, 2021, these businesses also included wholesale gas 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. 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 develops distributed energy and resilience solutions and deploys microgrids for commercial, industrial, governmental, and utility customers. See Note 15 for information regarding the sale of Sequent. 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.
Recently Adopted Accounting Standards
In March 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 began phasing out on December 31, 2021. The discontinuation date of the
overnight 1-, 3-, 6-, and 12-month tenors of LIBOR is June 30, 2023, which is
beyond the original effective date of ASU 2020-04; therefore, on December 21,
2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral
of the Sunset Date of Topic 848 (ASU 2022-06) to defer the sunset date of ASU
2020-04 from December 31, 2022 to December 31, 2024.
The amendments 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 guidance (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
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from March 12, 2020 through December 31, 2024 by accounting topic. The Registrants have elected to apply the amendments to modifications of debt and derivative arrangements that meet the scope of ASU 2020-04 and ASU 2022-06.
The Registrants currently reference LIBOR for certain debt and hedging arrangements. In addition, certain provisions in PPAs at Southern Power include references to LIBOR. 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. No material impacts are expected from modifications to the arrangements and effective hedging relationships are expected to continue. See Note 14 under "Interest Rate Derivatives" for additional information.
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 2022, 2021, and 2020 were as
follows:
Alabama Georgia Mississippi Southern
Power Power Power Power Southern Company Gas
(in millions)
2022 $ 549 $ 762 $ 115 $ 86 $ 262
2021 504 663 120 89 239
2020 478 639 149 87 237
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 2022, 2021, and 2020 amounted to $267
million, $258 million, and $262 million, respectively, for Alabama Power and
$895 million, $906 million, and $883 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)
2022 $ 4 $ 29
2021 9 15
2020 4 8
Georgia Power has entered into several PPAs with Southern Power for capacity and
energy. Georgia Power's total expenses associated with these PPAs were $151
million, $132 million, and $141 million in 2022, 2021, and 2020, 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 $154 million, $139 million, and $139 million for 2022, 2021, and
2020, respectively. Included within these revenues were affiliate PPAs accounted
for as operating leases, which totaled $116 million, $112 million, and $115
million for 2022, 2021, and 2020, respectively. See Note 9 for additional
information.
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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 2022, 2021, and 2020 were as follows:
Alabama Georgia Southern
Power Power Power Southern Company Gas
(in millions)
2022 $ 18 $ 99 $ 37 $ 27
2021 14 108 31 29
2020 15 108 29 29
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, Georgia Power, and Mississippi Power for all periods presented and immaterial, $18 million, and $26 million for Southern Power in 2022, 2021, and 2020, respectively.
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 $6 million, $10 million, and $9 million in 2022, 2021, and 2020, respectively. See Note 5 under "Joint Ownership Agreements" for additional information. Alabama Power, Georgia Power, and Mississippi Power each have agreements with PowerSecure for equipment purchases and/or services related to utility infrastructure construction, distributed energy, and energy efficiency projects. Costs under these agreements were immaterial for all periods presented. In 2022, Southern Company Gas entered into a $70 million contract with the U.S. General Services Administration to increase energy efficiency at certain federal buildings across Georgia, with completion expected to occur in 2024. Southern Company Gas engaged PowerSecure to provide the majority of the construction services under the contract. During 2022, Southern Company Gas paid $10 million to PowerSecure related to this agreement. 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 $39 million, $28 million, and $15 million for 2022, 2021, and 2020, 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. 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
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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 leases, non-derivatives, or normal sale derivatives. Capacity revenues from PPAs classified as operating leases are recognized on a straight-line basis over the term of the agreement. Energy revenues are recognized in the period the energy is delivered. Capacity revenues from PPAs classified as sales-type leases are recognized by accounting for interest income on the net investment in the lease. 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.
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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, revenues are based on actual deliveries through the end of the period. The tariffs for 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 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. Revenue related to alternative revenue programs was $(5) million, $11 million, and $3 million in 2022, 2021, and 2020, respectively. 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 and Chattanooga Gas; •Revenue normalization mechanisms - mitigate the impact of conservation and declining customer usage and are contained in the tariffs for Virginia Natural Gas and Nicor 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
Prior to the sale of Sequent on July 1, 2021, Southern Company Gas netted
revenues from energy and risk management activities with the associated costs.
Profits from sales between segments were eliminated and recognized as goods or
services sold to end-use customers. Southern Company Gas recorded wholesale gas
services' transactions that qualified 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 were presented on a net basis in revenue. See Note 15 under
"Southern Company Gas" for additional information on the sale of Sequent.
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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 Revenue
Southern Company, Alabama Power, Georgia Power, Mississippi Power (with the exception of its full requirements cost-based MRA electric tariffs described below), Southern Power, 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. Mississippi Power provides service under long-term contracts with rural electric cooperative associations and a municipality located in southeastern Mississippi under requirements cost-based MRA electric tariffs, which are subject to regulation by the FERC. The contracts with these wholesale customers represented 12.4% of Mississippi Power's total operating revenues in 2022. 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. 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 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 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.
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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 2022 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. 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 $158 million, $119 million, and $104 million in 2022, 2021, and 2020, 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 2022, 2021, and 2020
was as follows:
Alabama Georgia Mississippi Southern
Southern Company Power Power(*) Power Power Southern Company Gas
(in millions)
2022 $ 327 $ 90 $ 213 $ - $ - $ 24
2021 282 68 190 - 6 18
2020 230 61 138 1 11 18
(*)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 2022, 2021, and 2020 for the traditional
electric operating companies and the natural gas distribution utilities were as
follows:
2022 2021 2020
Alabama Power 7.9 % 7.9 % 8.1 %
Georgia Power(*) 7.3 % 7.2 % 6.9 %
Mississippi Power 5.3 % 2.5 % 5.4 %
Southern Company Gas:
Atlanta Gas Light 7.6 % 7.7 % 7.7 %
Chattanooga Gas 7.1 % 7.1 % 7.1 %
Nicor Gas 2.0 % 0.1 % 0.7 %
(*)Excludes AFUDC related to the construction of Plant Vogtle Units 3 and 4. See Note 2 under "Georgia Power - Nuclear Construction" for additional information.
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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 amount 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 amount, or an estimate of undiscounted future cash flows attributable to the asset group, as compared with the carrying amount 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 amount is greater than the fair value. For assets identified as held for sale, the carrying amount 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 Notes 7 and 9 under "Southern Company Gas" and "Southern Company Leveraged Lease," respectively, and Note 15 under "Southern Company" and "Southern Company Gas" 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. For its 2022 and 2020 annual impairment tests, Southern Company Gas management performed the qualitative assessment and determined that it was more likely than not that the fair value of all of its reporting units with goodwill exceeded their carrying amounts, and therefore no quantitative assessment was required. For its 2021 annual impairment test, Southern Company Gas management performed the quantitative assessment and confirmed that the fair values of all of its reporting units with goodwill exceeded their carrying amounts. For its 2021 and 2020 annual impairment tests, PowerSecure management performed the quantitative assessment, which resulted in the fair value of PowerSecure exceeding its carrying amount. For its 2022 annual impairment test, PowerSecure management performed the quantitative assessment, which resulted in the fair value of PowerSecure being lower than its carrying amount. The fair value was estimated using a discounted cash flow analysis. The decline in fair value primarily resulted from declining macroeconomic conditions, reducing sales growth and estimated cash flows. As a result, a goodwill impairment of $119 million was recorded in the fourth quarter 2022. The worldwide disruptions in supply chain, reduced labor availability and productivity, and reduced economic activity in the United States have had a variety of adverse impacts on Southern Company and its subsidiaries, including PowerSecure. If these factors continue to negatively affect the operating results of PowerSecure, all or a portion of its remaining goodwill of $144 million may become impaired.
At December 31, 2022 and 2021, goodwill was as follows:
At December 31, 2022 At December 31, 2021
(in millions)
Southern Company $ 5,161 $ 5,280
Southern Company Gas:
Gas distribution operations $ 4,034 $ 4,034
Gas marketing services 981 981
Southern Company Gas total $ 5,015 $ 5,015
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At December 31, 2022 and 2021, other intangible assets were as follows:
At December 31, 2022 At December 31, 2021
Other Other
Gross Carrying Accumulated Intangible Gross Carrying Accumulated Intangible
Amount Amortization Assets, Net Amount Amortization Assets, Net
(in millions) (in millions)
Southern Company
Subject to amortization:
Customer relationships $ 212 $ (162) $ 50 $ 212 $ (150) $ 62
Trade names 64 (44) 20 64 (38) 26
PPA fair value adjustments 390 (129) 261 390 (109) 281
Other 5 (5) - 11 (10) 1
Total subject to amortization $ 671 $ (340) $ 331 $ 677 $ (307) $ 370
Not subject to amortization:
FCC licenses 75 - 75 75 - 75
Total other intangible assets $ 746 $ (340) $ 406 $ 752 $ (307) $ 445
Southern Power(*)
PPA fair value adjustments $ 390 $ (129) $ 261 $ 390 $ (109) $ 281
Southern Company Gas(*)
Gas marketing services
Customer relationships $ 156 $ (139) $ 17 $ 156 $ (130) $ 26
Trade names 26 (17) 9 26 (15) 11
Total other intangible assets $ 182 $ (156) $ 26 $ 182 $ (145) $ 37
(*)All subject to amortization.
Amortization associated with other intangible assets in 2022, 2021, and 2020 was
as follows:
2022 2021 2020
(in millions)
Southern Company(a) $ 39 $ 44 $ 49
Southern Power(b) 20 20 20
Southern Company Gas:
Gas marketing services $ 11 $ 15 $ 17
Wholesale gas services(b) - - 2
Southern Company Gas total $ 11 $ 15 $ 19
(a)Includes $20 million, $20 million, and $22 million in 2022, 2021, and 2020, respectively, recorded as a reduction to operating revenues.
(b)Recorded as a reduction to operating revenues.
At December 31, 2022, the estimated amortization associated with other intangible assets for the next five years is as follows:
2023 2024 2025 2026 2027
(in millions)
Southern Company $ 36 $ 35 $ 31 $ 26 $ 23
Southern Power 20 20 20 20 20
Southern Company Gas 9 8 6 3 -
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Acquisition Accounting
At the time of an acquisition, management will assess whether acquired assets and activities meet the definition of a business. Acquisitions that meet the definition of a business are accounted for under the acquisition method, and 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, 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, Cash Equivalents, and Restricted Cash
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.
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The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the balance sheets that total to the amount shown in the statements of cash flows for the applicable Registrants:
Southern Georgia Southern Southern
Company Power Power Company Gas
December 31,
2022 2021 2022 2022 2021 2022 2021
(in millions) (in millions) (in millions)Cash and cash equivalents $ 1,917 $ 1,798 $ 364 $
131 $ 107 $ 81 $ 45 Restricted cash(a): Other current assets 62 2 60 - - 2 2 Other deferred charges and assets 58 29 56 3 29 - - Total cash, cash equivalents, and restricted cash(b) $ 2,037 $ 1,829 $ 480 $
133 $ 135 $ 83 $ 48
(a)For Georgia Power, reflects proceeds from the issuance of solid waste disposal facility revenue bonds. See Note 8 under "Long-term Debt" for additional information. Georgia Power did not have any restricted cash at December 31, 2021. For Southern Power, reflects $3 million and $10 million at December 31, 2022 and 2021, respectively, held to fund estimated construction completion costs at the Deuel Harvest wind facility and $19 million at December 31, 2021 related to tax equity contributions restricted until the Garland battery energy storage facility achieved final contracted capacity. See Note 15 under "Southern Power" for additional information. For Southern Company Gas, reflects collateral for workers' compensation, life insurance, and long-term disability insurance.
(b)Total may not add due to rounding.
Storm Damage and Reliability 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 $65 million
and $100 million in 2021 and 2020, respectively, which are included in the table
below. In accordance with their respective state PSC orders, the traditional
electric operating companies accrued the following amounts related to storm
damage recovery in 2022, 2021, and 2020:
Southern Alabama Georgia Mississippi
Company(*) Power Power Power(*)
(in millions)
2022 $ 239 $ 19 $ 213 $ 7
2021 286 75 213 (2)
2020 326 112 213 1
(*)Mississippi Power's net accrual includes carrying costs, as well as amortization of related excess deferred income tax benefits.
In 2022, costs for weather-related damages charged against storm damage reserves totaled $24 million and $82 million for Alabama Power and Georgia Power, respectively, and were immaterial for Mississippi Power. 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.
During 2022, the Alabama PSC and the Mississippi PSC authorized Alabama Power
and Mississippi Power, respectively, to make accruals to a reliability reserve
if certain conditions are met. During 2022, Alabama Power and Mississippi Power
accrued the following amounts to their reliability reserves:
Southern Alabama Mississippi
Company Power Power
(in millions)
2022 $ 191 $ 166 $ 25
See Note 2 under "Alabama Power - Reliability Reserve Accounting Order" and "Mississippi Power - Reliability Reserve Accounting Order" for additional information.
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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, liquefied natural 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, Southern Company Gas records 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, 2022, the Nicor Gas LIFO inventory balance was $170 million. Based on the average cost of gas purchased in December 2022, the estimated replacement cost of Nicor Gas' inventory at December 31, 2022 was $613 million. Southern Company Gas' gas marketing 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 were immaterial for all periods presented.
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.
Concentration of Credit Risk
Concentration of credit risk occurs at Atlanta Gas Light for amounts billed for
services and other costs to its customers, which consist of 14 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
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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. 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 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, 2022. 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. 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 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 included in earnings 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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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, 2021 $ (162) $ (76) $ (237)
Current period change 13 58 71
Balance at December 31, 2022 $ (149) $ (18) $ (167)
Southern Power
Balance at December 31, 2021 $ 1 $ (29) $ (27)
Current period change (10) 20 10
Balance at December 31, 2022 $ (9) $ (9) $ (18)
Southern Company Gas
Balance at December 31, 2021 $ (14) $ 38 $ 24
Current period change (11) 18 7
Balance at December 31, 2022 $ (25) $ 56 $ 31
(*)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.
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2. REGULATORY MATTERS
Regulatory Assets and Liabilities
Details of regulatory assets and (liabilities) reflected in the balance sheets at December 31, 2022 and 2021 are provided in the following tables:
Southern Southern
Company Alabama Power Georgia Power Mississippi Power Company Gas
(in millions)
At December 31, 2022
AROs(a)(u) $ 6,096 $ 1,971 $ 3,829 $ 242 $ -
Retiree benefit plans(b)(u) 2,517 675 848 113 114
Remaining net book value of retired assets(c) 1,543 562 962 19 -
Under recovered regulatory clause revenues(d) 953 788 - 31 134
Deferred income tax charges(e) 866 250 583 30 -
Environmental remediation(f)(u) 294 - 25 - 269
Loss on reacquired debt(g) 257 38 213 5 1
Vacation pay(h)(u) 212 82 108 10 12
Regulatory clauses(i) 142 142 - - -
Software and cloud computing costs(j) 111 46 59 - 6
Nuclear outage(k) 82 52 30 - -
Long-term debt fair value adjustment(l) 69 - - - 69
Fuel-hedging (realized and unrealized) losses(m) 60 15 45 - -
Storm damage(n) 44 - - 44 -
Plant Daniel Units 3 and 4(o) 27 - - 27 -
Kemper County energy facility assets, net(p) 20 - - 20 -
Other regulatory assets(q) 197 36 27 16 118
Deferred income tax credits(e) (5,251) (1,925) (2,244) (269) (788)
Other cost of removal obligations(a) (1,430) 11 462 (196) (1,707)
Storm/property damage reserves(r) (216) (97) (83) (36) -
Reliability reserves(r) (191) (166) - (25) -
Customer refunds(s) (183) (62) (121) - -
Fuel-hedging (realized and unrealized) gains(m) (83) (38) (21) (24) -
Over recovered regulatory clause revenues(d) (64) - (38) - (26)
Other regulatory liabilities(t) (239) (40) (21) (3) (93)
Total regulatory assets (liabilities), net $ 5,833 $ 2,340 $ 4,663 $
4 $ (1,891)
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Southern Southern
Company Alabama Power Georgia Power Mississippi Power Company Gas
(in millions)
At December 31, 2021
AROs(a)(u) $ 5,685 $ 1,576 $ 3,866 $ 236 $ -
Retiree benefit plans(b)(u) 2,998 747 962 145 95
Remaining net book value of retired assets(c) 1,050 574 455 21 -
Deferred income tax charges(e) 829 240 555 31 -
Under recovered regulatory clause revenues(d) 806 225 - 49 532
Environmental remediation(f)(u) 302 - 35 - 267
Loss on reacquired debt(g) 281 42 231 6 2
Vacation pay(h)(u) 207 81 102 10 14
Regulatory clauses(i) 142 142 - - -
Storm damage(n) 97 - 48 49 -
Long-term debt fair value adjustment(l) 79 - - - 79
Nuclear outage(k) 75 41 34 - -
Software and cloud computing costs(j) 73 35 33 - 5
Kemper County energy facility assets, net(p) 35 - - 35 -
Plant Daniel Units 3 and 4(o) 28 - - 28 -
Other regulatory assets(q) 168 38 29 7 94
Deferred income tax credits(e) (5,636) (1,968) (2,537) (288) (816)
Other cost of removal obligations(a) (1,826) (192) 278 (195) (1,683)
Customer refunds(s) (189) (181) (8) - -
Fuel-hedging (realized and unrealized) gains(m) (176) (50) (72) (54) -
Storm/property damage reserves(r) (133) (103) - (30) -
Over recovered regulatory clause revenues(d) (63) (1) (59) - (3)
Other regulatory liabilities(t) (121) (29) (24) (4) (57)
Total regulatory assets (liabilities), net $ 4,711 $ 1,217 $ 3,928 $
46 $ (1,471)
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, 57 years for Georgia Power, 55 years for Mississippi Power, and 80 years for Southern Company Gas. AROs and cost of removal obligations are settled and trued up following completion of the related activities. Alabama Power is recovering CCR ARO expenditures over a 38-year period ending in 2054 through Rate CNP Compliance. Effective January 1, 2023, Georgia Power is recovering CCR ARO expenditures over four-year periods through its ECCR tariff. Prior to 2023, expenditures were recovered over three-year periods. See "Georgia Power - Rate Plans" herein and Note 6 for additional information. (b)Recovered and amortized over the average remaining service period, which may range up to 13 years for Alabama Power, Georgia Power, and Mississippi Power and up to 14 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 ($492 million at December 31, 2022) being amortized over remaining periods not exceeding 15 years (through 2037). Balance at December 31, 2022 also includes approximately $42 million related to Plant Barry Unit 4 being amortized over the unit's remaining useful life (through 2034). See "Alabama Power - Environmental Accounting Order" herein for additional information. Georgia Power: Net book values of Plant Wansley Units 1 and 2 (totaling $562 million at December 31, 2022) are being amortized over a remaining period of eight years (through 2030) and net book values of Plant Hammond Units 1 through 4 and Plant Branch Units 3 and 4 (totaling $396 million at December 31, 2022) are being amortized over remaining periods of between one and 13 years (between 2023 and 2035). Balance at December 31, 2022 also includes unusable materials and supplies inventories, as discussed further under "Georgia Power - Integrated Resource Plans" herein. Mississippi Power: Represents net book value of certain environmental compliance assets at Plant Watson and Plant Greene County. The retail portion is being amortized over a 10-year period through 2030 and the wholesale portion is being amortized over a 14-year period through 2035. See "Mississippi Power - Environmental Compliance Overview Plan" herein for additional information. (d)Alabama Power: Balances are recorded monthly and expected to be recovered over periods of up to eight years, with the majority expected to be recovered within two years. 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.
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Mississippi Power: At December 31, 2022, $12 million is being amortized over a three-year period ending in 2023 and the remaining $18 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. (e)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, 57 years for Georgia Power, 55 years for Mississippi Power, and 80 years for Southern Company Gas. See Note 10 for additional information. 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 at December 31, 2022 include excess federal deferred income tax liabilities that are being returned to customers through bill credits of up to approximately $318 million in 2023, as discussed under "Alabama Power - Excess Accumulated Deferred Income Tax Accounting Order" herein. The Alabama PSC will determine the treatment of any remaining excess federal accumulated deferred income taxes at a future date. Remaining amounts are being recovered and amortized ratably over the related property lives.
Georgia Power: Related amounts at December 31, 2022 include $145 million of deferred income tax assets related to CWIP for Plant Vogtle Units 3 and 4, the recovery of which is expected to be determined in a future regulatory proceeding.
Mississippi Power: Related amounts at December 31, 2022 include $33 million of retail deferred income tax liabilities generally being amortized over three years through 2025.
Southern Company Gas: Related amounts at December 31, 2022 include $1 million of deferred income tax liabilities being amortized through 2024. See "Southern Company Gas - Rate Proceedings" herein for additional information.
(f)Effective January 1, 2023, Georgia Power is recovering $5 million annually for environmental remediation under the 2022 ARP. 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.
(g)Recovered over either the remaining life of the original issue or, if refinanced, over the remaining life of the new issue. At December 31, 2022, the remaining amortization periods do not exceed 25 years for Alabama Power, 30 years for Georgia Power, 19 years for Mississippi Power, and five years for Southern Company Gas.
(h)Recorded as earned by employees and recovered as paid, generally within one year. Includes both vacation and banked holiday pay, if applicable.
(i)Effective January 1, 2023, balance is being amortized through Rate RSE over a five-year period ending in 2027.
(j)Represents certain deferred operations and maintenance costs associated with software and cloud computing projects. For Alabama Power, costs are amortized ratably over the life of the related software, which ranges up to 10 years. See "Alabama Power - Software Accounting Order" herein for additional information. For Georgia Power, costs incurred through 2022 will be amortized over five years starting in 2023 and the recovery period for all future costs will be determined in its next base rate case. For Southern Company Gas, costs began being amortized ratably in July 2022 over the life of the related software, which ranges up to 10 years. (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 16 years at December 31, 2022.
(m)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 four years for Mississippi Power. (n)Mississippi Power's balance represents deferred storm costs associated with Hurricanes Ida and Zeta being recovered through PEP over an eight-year period through 2029. (o)Represents the difference between Mississippi Power's revenue requirement for Plant Daniel Units 3 and 4 under purchase accounting and operating lease accounting. At December 31, 2022, consists of the $18 million retail portion being amortized through 2039 over the remaining life of the related property and the $9 million wholesale portion being amortized through 2035. (p)Includes $26 million of regulatory assets and $6 million of regulatory liabilities at December 31, 2022. The retail portion includes $17 million of regulatory assets and $6 million of regulatory liabilities that are expected to be fully amortized by 2023 and 2025, respectively. The wholesale portion includes $10 million of regulatory assets that are expected to be fully amortized by 2035. (q)Comprised of numerous immaterial components with remaining amortization periods generally not exceeding 21 years for Alabama Power, 10 years for Georgia Power, 14 years for Mississippi Power, and 20 years for Southern Company Gas at December 31, 2022. (r)Utilized as related expenses are incurred. See "Alabama Power - Rate NDR" and " - Reliability Reserve Accounting Order," "Georgia Power - Storm Damage Recovery," and "Mississippi Power - System Restoration Rider" and " - Reliability Reserve Accounting Order" herein and Note 1 under "Storm Damage and Reliability Reserves" for additional information. (s)Primarily includes approximately $62 million and $181 million at December 31, 2022 and 2021, respectively, for Alabama Power and $119 million and $5 million at December 31, 2022 and 2021, respectively, for Georgia Power as a result of each company exceeding its allowed retail return range. Georgia Power's balances also include immaterial amounts related to refunds for transmission service customers. See "Alabama Power - Rate RSE" and "Georgia Power - Rate Plans" herein for additional information. (t)Comprised of numerous immaterial components with remaining amortization periods generally not exceeding 11 years for Alabama Power, 10 years for Georgia Power, four years for Mississippi Power, and 20 years for Southern Company Gas at December 31, 2022.
(u)Generally not earning a return as they are excluded from rate base or are offset in rate base by a corresponding asset or liability.
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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.
Certificates of Convenience and Necessity
In 2020, the Alabama PSC issued its order regarding Alabama Power's 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 in November 2023, (ii) complete the acquisition of the Central Alabama Generating Station, which occurred in August 2020, (iii) purchase approximately 240 MWs of combined cycle generation under a long-term PPA, which began in September 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, 2022, project expenditures associated with Plant Barry Unit 8 totaled approximately $518 million, of which $513 million and $5 million was included in CWIP and property, plant, and equipment in service, respectively. The ultimate outcome of this matter cannot be determined at this time. Alabama Power expects to recover costs associated with Plant Barry Unit 8 pursuant to its 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 are expected to be recovered through Rate RSE. Through May 2023, Alabama Power expects to recover substantially all costs associated with the Central Alabama Generating Station through Rate RSE, offset by revenues from a previous power sales agreement. Beginning in July 2022, fuel costs associated with Central Alabama Generating Station are being recovered through Rate ECR. On July 12, 2022, the Alabama PSC approved a CCN authorizing Alabama Power to complete the acquisition of the Calhoun Generating Station, a 743-MW winter peak, simple-cycle, combustion turbine generation facility in Calhoun County, Alabama. The acquisition was approved by the FERC on March 25, 2022. The transaction closed on September 30, 2022 and, on October 3, 2022, Alabama Power filed Rate CNP New Plant with the Alabama PSC to recover the related costs, as described further under "Rate CNP New Plant" herein. Alabama Power is recovering the remaining costs associated with the Calhoun Generating Station through its existing rate structure, primarily Rate CNP Compliance, Rate ECR, and Rate RSE.
Renewable Generation Certificate
Alabama Power is authorized by the Alabama PSC to procure up to 500 MWs of
renewable capacity and energy by September 16, 2027 and to market the related
energy and environmental attributes to customers and other third parties.
Through December 31, 2022, Alabama Power has procured solar capacity totaling
approximately 330 MWs.
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.
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, 2022 and 2021, Alabama
Power's equity ratio was approximately 52.2% and 51.6%, respectively.
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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%. Alabama Power's ability to retain a portion of the revenue that causes the actual WCER for a given year to exceed the allowed range positions Alabama Power to address the growing pressure on its credit quality, without increasing retail rates under Rate RSE in the near term. There is no provision for additional customer billings should the actual retail return fall below the WCER range. Retail rates under Rate RSE did not change for 2020 or 2022 and increased by 4.09%, or approximately $228 million annually, effective with the billing month of January 2021. At December 31, 2020, 2021, and 2022 Alabama Power's WCER exceeded 6.15%, resulting in Alabama Power establishing a current regulatory liability of $50 million, $181 million, and $62 million, respectively, for Rate RSE refunds. The 2020 refund was issued to customers through bill credits in April 2021. In accordance with an Alabama PSC order issued on February 1, 2022, Alabama Power applied $126 million of the 2021 refund to reduce the Rate ECR under recovered balance and the remaining $55 million was refunded to customers through bill credits in July 2022. See "Rate ECR" herein for additional information. On February 7, 2023, the Alabama PSC directed Alabama Power to issue the 2022 refund to customers through bill credits in August 2023. On December 1, 2022, Alabama Power made its required annual Rate RSE submission to the Alabama PSC of projected data for calendar year 2023. Projected earnings were within the specified range; therefore, retail rates under Rate RSE remain unchanged for 2023.
Excess Accumulated Deferred Income Tax Accounting Order
On December 6, 2022, the Alabama PSC directed Alabama Power to accelerate the amortization of a regulatory liability associated with excess federal accumulated deferred income taxes, which is being returned to customers through bill credits of up to approximately $318 million in 2023 to offset the impact of the rate increase discussed under "Rate CNP Depreciation" herein. The Alabama PSC will determine the treatment of any remaining excess federal accumulated deferred income taxes at a future date. The ultimate outcome of this matter cannot be determined at this time.
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 January 2020 through October 2022. On October 3, 2022, Alabama Power filed Rate CNP New Plant with the Alabama PSC to recover costs related to the acquisition of the Calhoun Generating Station. The filing reflected an increase in annual revenues of $34 million, or 0.6%, effective with November 2022 billings. See "Certificates 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 2020 through 2022 and no adjustment is expected for 2023. At December 31, 2022, Alabama Power had an under recovered Rate CNP PPA balance of $120 million, of which $18 million is included in other regulatory assets, current and $102 million is included in other regulatory assets, deferred on the balance sheet. At December 31, 2021, Alabama Power had an under recovered Rate CNP PPA balance of $84 million 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. Accordingly, changes in the billing factor will have no
significant effect on Southern Company's or Alabama Power's revenues or
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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 2020, November 2021, and December 2022, Alabama Power submitted calculations associated with its cost of complying with governmental mandates for the following calendar year, as provided under Rate CNP Compliance. Both the 2020 and 2021 filings reflected a projected under recovered retail revenue requirement of approximately $59 million. In December 2020 and 2021, the Alabama PSC issued consent orders that Alabama Power leave the 2020 Rate CNP Compliance factors in effect for 2021 and 2022, respectively, with any prior year under collected amount deemed recovered before any current year amounts are recovered, and any remaining under recovery reflected in the 2022 filing. The 2022 filing reflected a $255 million, or 3.7%, annual increase effective with January 2023 billings, primarily due to updated depreciation rates. At December 31, 2022 and 2021, Alabama Power had an under recovered Rate CNP Compliance balance of $47 million and $16 million, respectively, included in other regulatory assets, current and other regulatory assets, deferred, respectively, on the balance sheet.
Rate CNP Depreciation
On December 6, 2022, the Alabama PSC approved Rate CNP Depreciation, which allows Alabama Power to recover changes in depreciation resulting from updates to certain depreciation rates, excluding any depreciation recovered through Rate CNP New Plant, Rate CNP Compliance, or costs associated with the capitalization of asset retirement costs. Rate CNP Depreciation will result in an annual revenue increase of approximately $318 million, or 4.6%, effective with January 2023 billings. See "Excess Accumulated Deferred Income Tax Accounting Order" herein for information related to 2023 customer bill credits approved by the Alabama PSC. 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 the related operating cash flows. The Alabama PSC may approve billing rates under Rate ECR of up to 5.910 cents per KWH. In 2020, Alabama Power reduced its over-collected fuel balance by $94 million in accordance with an Alabama PSC order and returned that amount to customers in the form of bill credits. Also in 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 with January 2021 billings and remained in effect through July 2022 billings. The Alabama PSC approved adjustments to Rate ECR from 1.960 cents per KWH to 2.557 cents per KWH, or approximately $310 million annually, effective with August 2022 billings and from 2.557 cents per KWH to 3.510 cents per KWH, or approximately $500 million annually, effective with December 2022 billings. The rate will adjust to 5.910 cents per KWH in January 2025 absent a further order from the Alabama PSC. In accordance with an Alabama PSC order issued on February 1, 2022, Alabama Power applied $126 million of its 2021 Rate RSE refund to reduce the Rate ECR under recovered balance. See "Rate RSE" herein for additional information. At December 31, 2022, Alabama Power's under recovered fuel costs totaled $622 million, of which $102 million is included in other regulatory assets, current and $520 million is included in other regulatory assets, deferred on the balance sheet. At December 31, 2021, Alabama Power's under recovered fuel costs totaled $126 million and is included in other regulatory assets, 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.
Software Accounting Order
The Alabama PSC authorizes Alabama Power to establish a regulatory asset for
operations and maintenance costs associated with software implementation
projects. The regulatory asset is amortized ratably over the life of the related
software. At December 31, 2022 and 2021, the regulatory asset balance totaled
$46 million and $35 million, respectively, and is included in other regulatory
assets, deferred on the balance sheet.
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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 September 2021, the Mississippi PSC issued an order confirming the conclusion of its review of Mississippi Power's 2021 IRP with no deficiencies identified. Mississippi Power's 2021 IRP included a schedule to retire Mississippi Power's 40% ownership interest in Plant Greene County Units 1 and 2 in December 2025 and 2026, respectively, consistent with each unit's remaining useful life. The Plant Greene County unit retirements identified by Mississippi Power 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 the transmission and system reliability improvements. Currently, Alabama Power plans to retire Plant Greene County Units 1 and 2 at the dates indicated. 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 48-month period (24-month period prior to modifications approved by the Alabama PSC on July 12, 2022). 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. The maximum total Rate NDR charge was limited to $10.00 per month per non-residential customer account and $5.00 per month per residential customer account through July 12, 2022. Subsequently, modifications approved by the Alabama PSC replaced the maximum total Rate NDR charge with a maximum charge to recover a deficit of $5 per month per non-residential customer account and $2.50 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, which can be used to offset storm charges. Alabama Power made additional accruals of $65 million and $100 million in 2021 and 2020, respectively. Alabama Power collected approximately $14 million, $6 million, and $5 million in 2022, 2021, and 2020, respectively, under Rate NDR. Beginning with August 2022 billings, the reserve establishment charge was suspended and the reserve maintenance charge was activated as a result of the NDR balance exceeding $75 million. Alabama Power expects to collect approximately $12 million annually under Rate NDR unless the NDR balance falls below $50 million. At December 31, 2022 and 2021, the NDR balance was $97 million and $103 million, respectively, and is included in other regulatory liabilities, deferred on the balance sheets.
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.
Reliability Reserve Accounting Order
On July 12, 2022, the Alabama PSC approved an accounting order authorizing Alabama Power to create a reliability reserve separate from the NDR and transition the previous Rate NDR authority related to reliability expenditures to the reliability reserve. Alabama Power may make accruals to the reliability reserve if the NDR balance exceeds $35 million. At December 31, 2022, Alabama Power accrued $166 million to the reserve, which is included in other regulatory liabilities, deferred on the balance sheet.
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.
With the completion of the Calhoun Generating Station acquisition, Alabama Power
expects to retire Plant Barry Unit 5 in late 2023 or early 2024, subject to
certain operating conditions. In September 2022, Alabama Power reclassified
approximately $600 million for Plant Barry Unit 5 from plant in service, net of
depreciation to other utility plant, net and will continue to
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depreciate the asset according to the original depreciation rates. At retirement, Alabama Power will reclassify the remaining net investment costs of the unit to a regulatory asset to be recovered over the unit's remaining useful life, as established prior to the decision to retire, through Rate CNP Compliance. See "Certificates of Convenience and Necessity" herein for additional information. On December 5, 2022, in conjunction with Alabama Power's compliance plan for the EPA's final steam electric ELG reconsideration rule, Plant Barry Unit 4 ceased using coal and began operating solely on natural gas. As a result, approximately $42 million of plant in service, net of depreciation was reclassified to a regulatory asset to be recovered through Rate CNP Compliance through 2034, the unit's remaining useful life.
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 recovers its costs from the regulated retail business through traditional
base tariffs, Demand-Side Management (DSM) tariffs, the ECCR tariff, and
Municipal Franchise Fee (MFF) tariffs. These tariffs were set under the 2019 ARP
for the years 2020 through 2022 and under the 2022 ARP for the years 2023
through 2025 as described herein. 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.
See "Plant Vogtle Unit 3 and Common Facilities Rate Proceeding" herein for
information regarding the approved recovery through retail base rates of certain
costs related to Plant Vogtle Unit 3 and the common facilities shared between
Plant Vogtle Units 3 and 4 (Common Facilities) that will become effective the
month after Unit 3 is placed in service. 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
2022 ARP
On December 20, 2022, the Georgia PSC voted to approve the 2022 ARP, under which
Georgia Power increased its rates on January 1, 2023 and will increase rates
annually for 2024 and 2025 as detailed below, with the incremental revenue
requirements related to DSM tariffs and CCR AROs subject to updates through
annual compliance filings to be made at least 90 days prior to the effective
date. Georgia Power will recover estimated adjustments through its existing
tariffs as follows:
Tariff 2023 2024 2025
(in millions)
Traditional base $ 194 $ 275 $ 315
ECCR (21) 66 81
DSM 37 27 (2)
MFF 6 9 9
Total $ 216 $ 377 $ 403
In the 2022 ARP, the Georgia PSC approved recovery through the ECCR tariff of
estimated CCR ARO compliance costs for 2023, 2024, and 2025 over four-year
periods beginning January 1 of each respective year, with recovery of
construction contingency beginning in the year following actual expenditures,
resulting in an estimated $20 million reduction in the related amortization
expense for 2023. The estimated compliance costs expected to be incurred in
2023, 2024, and 2025 are $320 million, $410 million, and $510 million,
respectively. The CCR ARO costs are expected to be revised for actual
expenditures and updated estimates through future annual compliance filings. See
"Integrated Resource Plans" herein for additional information.
Further, under the 2022 ARP, Georgia Power's retail ROE is set at 10.50% and its
equity ratio is set at 56%. Earnings will be evaluated against a retail ROE
range of 9.50% to 11.90%. Any retail earnings above 11.90% 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 2022 ARP, Georgia Power projects that its
retail earnings will be below 9.50% for any calendar year, it may 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, 2026 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.
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Except as provided above, Georgia Power will not file for a general base rate increase while the 2022 ARP is in effect. Georgia Power is required to file a general base rate case by July 1, 2025, in response to which the Georgia PSC would be expected to determine whether the 2022 ARP should be continued, modified, or discontinued.
2019 ARP
The Georgia PSC approved the following tariff adjustments under the 2019 ARP effective January 1, 2021 and 2022, respectively:
Tariff 2021 2022
(in millions)
Traditional base $ 120 $ 192
ECCR 2 (12)
DSM (15) (25)
MFF 4 2
Total $ 111 $ 157
In the 2019 ARP, the Georgia PSC approved recovery through the ECCR tariff of
the estimated under recovered balance of CCR ARO compliance costs. Under the
2019 ARP, the under recovered balance at December 31, 2019 and compliance costs
for 2020 were recovered over the three-year period ended December 31, 2022.
Recovery of estimated compliance costs for 2021 and 2022 are being recovered
over four-year periods beginning January 1 of each respective year, as
authorized under the 2019 ARP and modified under the 2022 ARP, with recovery of
construction contingency beginning in the year following actual expenditure. The
CCR ARO costs recovered through the ECCR tariff are revised for actual
expenditures and updated estimates through annual compliance filings, which
resulted in an approximate $90 million decrease and $10 million increase
effective January 1, 2021 and 2022, respectively, in the related cost recovery.
See "Integrated Resource Plans" herein for additional information.
Georgia Power's retail ROE under the 2019 ARP was set at 10.50% and earnings
were evaluated against a retail ROE range of 9.50% to 12.00%. Any retail
earnings above 12.00% were shared, with 40% applied to reduce regulatory assets,
40% directly refunded to customers, and the remaining 20% retained by Georgia
Power. In 2020, Georgia Power's retail ROE was within the allowed retail ROE
range. In 2021, Georgia Power's retail ROE exceeded 12.00%, and Georgia Power
reduced regulatory assets by approximately $5 million and accrued approximately
$5 million which was refunded to customers in 2022. In 2022, Georgia Power's
retail ROE exceeded 12.00%, and Georgia Power reduced regulatory assets by
approximately $119 million and accrued approximately $119 million, which is
expected to be refunded to customers through bill credits later in the first
quarter 2023, prior to review and approval by the Georgia PSC, in accordance
with the 2022 ARP.
Plant Vogtle Unit 3 and Common Facilities Rate Proceeding
In accordance with a Georgia PSC order approved in November 2021, Georgia Power will include in rate base an allocation of $2.1 billion to Unit 3 and Common Facilities from the $3.6 billion of Plant Vogtle Units 3 and 4 previously deemed prudent by the Georgia PSC and will recover the related depreciation expense through retail base rates effective the month after Unit 3 is placed in service. Financing costs on the remaining portion of the total Unit 3 and the Common Facilities construction costs will continue to be recovered through the NCCR tariff or deferred. Georgia Power will defer as a regulatory asset the remaining depreciation expense (approximately $40 million annually) until Unit 4 costs are placed in retail base rates. In addition, the stipulated agreement clarified that following the prudency review, the remaining amount to be placed in retail base rates will be net of the proceeds from the Guarantee Settlement Agreement and will not be used to offset imprudent costs, if any. The related increase in annual retail base rates of approximately $302 million also includes recovery of all projected operations and maintenance expenses for Unit 3 and the Common Facilities and other related costs of operation, partially offset by the related production tax credits, and will become effective the month after Unit 3 is placed in service. As approved by the Georgia PSC, the increase in annual retail base rates will be adjusted based on the actual in-service date of Plant Vogtle Unit 3.
See "Nuclear Construction" herein for additional information on Plant Vogtle Units 3 and 4.
Integrated Resource Plans
In 2021, as authorized in its 2019 IRP, Georgia Power requested and received
certification from the Georgia PSC for 970 MWs of utility-scale PPAs for solar
generation resources. In response to supply chain challenges in the solar
industry, the Georgia PSC approved a request by Georgia Power to extend the
required commercial operation dates for the PPAs from 2023 to 2024.
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On July 21, 2022, the Georgia PSC approved Georgia Power's triennial IRP (2022 IRP), as modified by a stipulated agreement among Georgia Power, the staff of the Georgia PSC, and certain intervenors and as further modified by the Georgia PSC. In the 2022 IRP decision, the Georgia PSC approved the following: •Decertification and retirement of Plant Wansley Units 1 and 2 (926 MWs based on 53.5% ownership), which occurred on August 31, 2022, and reclassification to regulatory asset accounts of the remaining net book values and any remaining unusable materials and supplies inventories upon retirement. The regulatory asset accounts for the remaining net book values of the units ($292 million and $270 million for Unit 1 and Unit 2, respectively, at December 31, 2022) were amortized at a rate equal to the unit depreciation rates authorized in the 2019 ARP through December 31, 2022. Under the 2022 ARP, the Georgia PSC approved recovery of the remaining regulatory asset balances for the net book values of the units through 2030 and deferred a decision on the timing of recovery of the regulatory asset account for the unusable materials and supplies inventories ($13 million at December 31, 2022) to a future base rate case. •Decertification and retirement of Plant Scherer Unit 3 (614 MWs based on 75% ownership) by December 31, 2028 and reclassification to regulatory asset accounts of the remaining net book value (approximately $601 million at December 31, 2022). Under the 2022 ARP, $43 million annually of the related depreciation is being deferred to a regulatory asset, which will be amortized over six years beginning in 2029. Any remaining unusable materials and supplies inventory will be reclassified to regulatory asset accounts upon retirement, with the timing of recovery to be determined in a future base rate case. •Decertification and retirement of Plant Gaston Units 1 through 4 (500 MWs based on 50% ownership through SEGCO) by December 31, 2028. See Note 7 under "SEGCO" for additional information. •Georgia Power's environmental compliance strategy, including approval of Georgia Power's plans to address CCR at its ash ponds and landfills. Recovery of the related costs incurred beyond 2025 is expected to be determined in future base rate cases. The Georgia PSC's approval of the 2022 IRP included a change in the method of closure for one ash pond. See "Rate Plans" herein and Note 6 for additional information.
•Installation of environmental controls at Plants Bowen and Scherer for compliance with rules related to effluent limitations guidelines.
•Initiation of a license renewal application with the NRC for Plant Hatch.
•Investments related to the continued hydro operations of Plants Sinclair and Burton.
•Provisional authorization for development of a 265-MW battery energy storage facility with expected commercial operation in 2026.
•Issuance of requests for proposals (RFP) for 2,300 MWs of renewable resources, an additional 500 MWs of energy storage, and up to 140 MWs of biomass generation.
•Related transmission projects necessary to support the generation facilities plan.
•Certification of six PPAs (including five affiliate PPAs with Southern Power that are subject to approval by the FERC) with capacities of 1,567 MWs beginning in 2024, 380 MWs beginning in 2025, and 228 MWs beginning in 2028, procured through RFPs authorized in the 2019 IRP. See Note 9 for additional information. The Georgia PSC deferred a decision on the requested decertification and retirement of Plant Bowen Units 1 and 2 (1,400 MWs) to the 2025 IRP. Under the 2022 ARP, $40 million annually of the related depreciation is being deferred to a regulatory asset, which will be amortized over four years beginning in 2031. The Georgia PSC rejected Georgia Power's request to certify approximately 88 MWs of wholesale capacity to be placed in retail rate base between January 1, 2024 and January 1, 2025. Georgia Power may offer such capacity in the wholesale market or to the retail jurisdiction in a future regulatory proceeding. On August 26, 2022, Restore Chattooga Gorge Coalition (RCG) filed a petition in the Superior Court of Fulton County, Georgia against Georgia Power and the Georgia PSC. The petition challenges Georgia Power's plan to expend $115 million to modernize Plant Tugalo, as approved in the 2019 IRP, and seeks judicial review of the Georgia PSC's order in the 2022 IRP proceeding with respect to the denial of RCG's challenge to the modernization plan. On November 7, 2022, Georgia Power and the Georgia PSC both filed motions to dismiss the RCG petition.
The ultimate outcome of these matters cannot be determined at this time.
Deferral of Incremental COVID-19 Costs
During 2020, in response to the COVID-19 pandemic, the Georgia PSC approved
orders directing Georgia Power to defer as a regulatory asset the incremental
bad debt resulting from the approved suspension of customer disconnections
during certain periods in 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. At December 31,
2022 and 2021, the incremental
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costs deferred totaled approximately $25 million and $21 million, respectively. In the 2022 ARP, the Georgia PSC approved a three-year recovery period ending December 31, 2025. Fuel Cost Recovery Georgia Power has established fuel cost recovery rates approved by the Georgia PSC. In 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. During the second half of 2021, the price of natural gas rose significantly and resulted in an under recovered fuel balance exceeding $200 million. Therefore, in November 2021, the Georgia PSC voted to approve Georgia Power's interim fuel rider, which increased fuel rates by 15%, or approximately $252 million annually, effective January 1, 2022. During 2022, Georgia Power's under recovered fuel balance continued to increase significantly due to higher fuel and purchased power costs. Georgia Power is scheduled to file its next fuel case no later than February 28, 2023. Georgia Power's under recovered fuel balance totaled $2.1 billion and $0.4 billion at December 31, 2022 and 2021, respectively, and is included in deferred under recovered fuel clause revenues 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. During 2020 through 2022, Georgia Power recovered $213 million annually under the 2019 ARP. Effective January 1, 2023, Georgia Power is recovering $31 million annually under the 2022 ARP. At December 31, 2022, Georgia Power's storm damage reserve balance was $83 million and is included in other regulatory liabilities, deferred on Southern Company's balance sheets and other deferred credits and liabilities on Georgia Power's balance sheets. At December 31, 2021, Georgia Power's regulatory asset balance related to storm damage was $48 million and is included in other regulatory assets, current on Southern Company's and Georgia Power's balance sheets. 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. See Note 1 under "Storm Damage and Reliability Reserves" for additional information.
Nuclear Construction
In 2009, the Georgia PSC certified construction of Plant Vogtle Units 3 and 4,
in which Georgia Power currently 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, under which Bechtel is reimbursed
for actual costs plus a base fee and an at-risk fee, 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
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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, and mandatory prepayment events.
Cost and Schedule
Georgia Power's approximate proportionate share of the remaining estimated capital cost to complete Plant Vogtle Units 3 and 4, including contingency, through the end of the second quarter 2023 and the first quarter 2024, respectively, is as follows:
(in millions)
Base project capital cost forecast(a)(b) $ 10,533
Construction contingency estimate 60
Total project capital cost forecast(a)(b) 10,593
Net investment at December 31, 2022(b) (9,521)
Remaining estimate to complete $ 1,072
(a)Includes approximately $610 million of costs that are not shared with the
other Vogtle Owners, including $33 million of construction monitoring costs
approved for recovery by the Georgia PSC in its nineteenth VCM order, and
approximately $407 million of incremental costs under the cost-sharing and
tender provisions of the joint ownership agreements described below. Excludes
financing costs expected to be capitalized through AFUDC of approximately $421
million, of which $304 million had been accrued through December 31, 2022.
(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 $3.5 billion, of which $3.2 billion had been incurred through December 31, 2022.
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 start-up testing and related test
results, engineering support, commodity installation, system turnovers, and
workforce statistics. Southern Nuclear establishes aggressive target values for
monthly construction production and system turnover activities, which are
reflected in the site work plans.
Since March 2020, the number of active COVID-19 cases at the site has fluctuated
consistent with the surrounding area and impacted productivity levels and pace
of activity completion, with the site experiencing peaks in the number of active
cases in January 2021, August 2021, and January 2022. 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
plans. As of December 31, 2022, Georgia Power's proportionate share of the
estimated incremental cost associated with COVID-19 mitigation actions and
impacts on construction productivity is estimated to be between $160 million and
$200 million and is included in the total project capital cost forecast. Future
COVID-19 variants could further disrupt or delay construction and testing
activities.
On July 29, 2022, Southern Nuclear announced that all Unit 3 ITAACs had been
submitted to the NRC. On August 3, 2022, the NRC published its 103(g) finding
that the acceptance criteria in the combined license for Unit 3 had been met,
which allowed nuclear fuel to be loaded and start-up testing to begin. Fuel load
for Unit 3 was completed on October 17, 2022. In early 2023, during the start-up
and pre-operational testing for Unit 3, Southern Nuclear identified and is
remediating certain equipment and component issues. As a result, Unit 3 is
projected to be placed in service during May or June 2023. After considering the
timeframe and duration of hot functional and other testing and recent experience
with Unit 3 start-up and pre-operational testing, Unit 4 is now projected to be
placed in service during late fourth quarter 2023 or the first quarter 2024.
During 2022, established construction contingency and additional costs totaling
$307 million were assigned to the base capital cost forecast for costs primarily
associated with schedule extensions, construction productivity, the pace of
system turnovers, additional craft and support resources, procurement for Units
3 and 4, and the equipment and component issues identified during Unit 3
start-up and pre-operational testing. During 2022, Georgia Power also increased
its total project capital cost forecast by $125 million to replenish
construction contingency and $9 million for construction monitoring costs, which
were approved for recovery by the Georgia PSC in its nineteenth VCM order.
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
pre-tax charges to income in the second quarter 2022, the third quarter 2022,
and the fourth quarter 2022 of $36 million ($27 million after tax), $32 million
($24 million after tax), and $148 million ($110 million after tax),
respectively, for the increases in the total project capital cost forecast.
Georgia Power may request the Georgia PSC to evaluate those expenditures for
rate recovery during the prudence review following the Unit 4 fuel load pursuant
to the twenty-fourth VCM stipulation described below.
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The projected schedule for Unit 3 primarily depends on the progression of final component and pre-operational testing and start-up, which may be impacted by further equipment, component, and/or other operational challenges. The projected schedule for Unit 4 primarily depends on potential impacts arising from Unit 4 testing activities overlapping with Unit 3 start-up and commissioning; maintaining overall construction productivity and production levels, particularly in subcontractor scopes of work; and maintaining appropriate levels of craft laborers. As Unit 4 completes construction and transitions further into testing, ongoing and potential future challenges include the timeframe and duration of hot functional and other testing; the pace and quality of remaining commodities installation; completion of documentation to support ITAAC submittals; the pace of remaining work package closures and system turnovers; and the availability of craft, supervisory, and technical support resources. Ongoing or future challenges for both units also include management of contractors and vendors; subcontractor performance; and/or related cost escalation. New challenges also may continue to arise, as Unit 3 completes start-up and commissioning and Unit 4 moves further into testing and start-up, which may result in required engineering changes or remediation related to 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). These challenges may result in further schedule delays and/or cost increases. 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 ensure 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. With the receipt of the NRC's 103(g) finding, Unit 3 is now subject to the NRC's operating reactor oversight process and must meet applicable technical and operational requirements contained in its operating license. Various design and other licensing-based compliance matters, including the timely submittal by Southern Nuclear of the ITAAC documentation and the related reviews and approvals by the NRC necessary to support NRC authorization to load fuel for Unit 4, may arise, which may result in additional license amendment requests or require other resolution. If any license amendment requests or other licensing-based compliance issues, including inspections and ITAACs for Unit 4, 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 extension of the in-service date beyond the second quarter 2023 for Unit 3 or the first quarter 2024 for Unit 4, including the joint owner cost sharing and tender impacts described below, is estimated to result in additional base capital costs for Georgia Power of up to $15 million per month for Unit 3 and $35 million per month for Unit 4, as well as the related AFUDC and any additional related construction, support resources, or testing costs. While Georgia Power is not precluded from seeking retail recovery of any future capital cost forecast increase other than the amounts related to the cost-sharing and tender provisions of the joint ownership agreements described below, 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.
Amendments to the Vogtle Joint Ownership Agreements
In connection with a September 2018 vote by the Vogtle Owners 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).
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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, of which Georgia Power's share is $8.4
billion (VCM 19 Forecast Amount), 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 VCM 19 Forecast Amount (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 VCM 19 Forecast Amount (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. The Global Amendments provide that if the
EAC is revised and exceeds the VCM 19 Forecast Amount by more than $2.1 billion,
each of the other Vogtle Owners will have a one-time option at the time the
project budget cost 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 VCM 19 Forecast Amount plus $2.1 billion.
For purposes of the foregoing provisions, qualifying construction costs will not
include costs (i) resulting from force majeure events, including epidemics and
quarantines, governmental actions or inactions (or significant delays associated
with issuance of such actions) that affect the licensing, completion, start-up,
operations, or financing of Plant Vogtle Units 3 and 4, administrative
proceedings or litigation regarding ITAAC or other regulatory challenges to
commencement of operation of Plant Vogtle Units 3 and 4, and changes in laws or
regulations governing Plant Vogtle Units 3 and 4, (ii) legal fees and legal
expenses incurred due to litigation with contractors or subcontractors that are
not subsidiaries or affiliates of Southern Company, and (iii) additional costs
caused by requests from the Vogtle Owners other than Georgia Power, except for
the exercise of a right to vote granted under the Vogtle Joint Ownership
Agreements, that increase costs by $100,000 or more.
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 (Project 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 from the seventeenth VCM report estimated
in-service dates of November 2021 and November 2022 for Units 3 and 4,
respectively. The schedule extension announced in February 2022 triggered the
requirement for a vote to continue construction. Effective February 25, 2022,
all of the Vogtle Owners had voted to continue construction.
Georgia Power and the other Vogtle Owners do not agree on either the starting
dollar amount for the determination of cost increases subject to the
cost-sharing and tender provisions of the Global Amendments or the extent to
which COVID-19-related costs impact those provisions. The other Vogtle Owners
notified Georgia Power that they believe the project capital cost forecast
approved by the Vogtle Owners on February 14, 2022 triggered the tender
provisions. On June 17, 2022 and July 26, 2022, OPC and Dalton, respectively,
notified Georgia Power of their purported exercises of their tender options.
Georgia Power did not accept these purported tender exercises.
On June 18, 2022, OPC and MEAG Power each filed a separate lawsuit against
Georgia Power in the Superior Court of Fulton County, Georgia seeking a
declaratory judgment that the starting dollar amount is $17.1 billion and that
the cost-sharing and tender provisions have been triggered. The lawsuits also
assert other claims, including breach of contract allegations, and seek, among
other remedies, damages and injunctive relief requiring Georgia Power to track
and allocate construction costs consistent with MEAG Power's and OPC's
interpretations of the Global Amendments. On July 25, 2022 and July 28, 2022,
Georgia Power filed its answers in the lawsuits filed by MEAG Power and OPC,
respectively, and included counterclaims seeking a declaratory judgment that the
starting dollar amount is $18.38 billion and that costs related to force majeure
events are excluded prior to calculating the cost-sharing and tender provisions
and when calculating Georgia Power's related financial obligations. On September
26, 2022, Dalton filed complaints in each of these lawsuits. On September 29,
2022, Georgia Power and MEAG Power reached an agreement to resolve their dispute
regarding the proper interpretation of the cost-sharing and tender provisions of
the Global Amendments. Under the terms of the agreement, among other items, (i)
MEAG Power will not exercise its tender option and will retain its full
ownership interest in Plant Vogtle Units 3 and 4; (ii) Georgia Power will
reimburse a portion of MEAG Power's costs of construction for Plant Vogtle Units
3 and 4 as such costs are incurred and with no further adjustment for force
majeure costs, which payments will total approximately $92 million based on the
current project capital cost forecast; and (iii) Georgia Power will reimburse
20% of MEAG Power's costs of construction with respect to any amounts over the
current project capital cost forecast, with no further adjustment for force
majeure costs. In addition, MEAG Power agreed to vote to continue
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construction upon occurrence of a Project Adverse Event unless the commercial operation date of either of Plant Vogtle Unit 3 or Unit 4 is not projected to occur by December 31, 2025. On October 4, 2022, MEAG Power and Georgia Power filed a notice of settlement and voluntary dismissal of their pending litigation, including Georgia Power's counterclaim, and, on October 6, 2022, Dalton dismissed its related complaint. Georgia Power recorded pre-tax charges (credits) to income in the fourth quarter 2021, the second quarter 2022, the third quarter 2022, and the fourth quarter 2022 of approximately $440 million ($328 million after tax), $16 million ($12 million after tax), $(102) million ($(76) million after tax), and $53 million ($40 million after tax), respectively, associated with the cost-sharing and tender provisions of the Global Amendments, including the settlement with MEAG Power. A total of $407 million associated with these provisions is included in the total project capital cost forecast and will not be recovered from retail customers. The settlement with MEAG Power does not resolve the separate pending litigation with OPC, including Dalton's associated complaint, described above. Georgia Power may be required to record further pre-tax charges to income of up to approximately $345 million associated with the cost-sharing and tender provisions of the Global Amendments for OPC and Dalton based on the current project capital cost forecast. Georgia Power's ownership interest in Plant Vogtle Units 3 and 4 continues to be 45.7%. Georgia Power believes the increases in the total project capital cost forecast through December 31, 2022 will trigger the tender provisions, but Georgia Power disagrees with OPC and Dalton on the tender provisions trigger date. Valid notices of tender from OPC and Dalton would require Georgia Power to pay 100% of their respective remaining shares of the costs necessary to complete Plant Vogtle Units 3 and 4. Georgia Power's incremental ownership interest will be calculated and conveyed to Georgia Power after Plant Vogtle Units 3 and 4 are placed in service.
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, 2022, Georgia Power
had recovered approximately $2.9 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 is not recording 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 December 20,
2022, the Georgia PSC approved Georgia Power's filing to increase the NCCR
tariff by $36 million annually, effective January 1, 2023.
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 a prudence proceeding on cost recovery will occur
following Unit 4 fuel load, 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 at that time) to 10.00% effective
January 1, 2016, (b) from 10.00% to
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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 effective the first month after Unit 3 reaches 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 (see "Plant Vogtle Unit 3 and Common Facilities Rate Proceeding" herein for additional information). 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 $300 million, $270 million, and $150 million in 2022, 2021, and 2020, respectively, and are estimated to have negative earnings impacts of approximately $270 million in 2023 and $60 million in 2024. 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 the August 2021 order approving the twenty-fourth VCM report, the Georgia PSC approved a stipulation addressing the following matters: (i) beginning with its twenty-fifth VCM report, Georgia Power will continue to report to the Georgia PSC all costs incurred during the period for review and will request for approval costs up to the $7.3 billion determined to be reasonable in the Georgia PSC's seventeenth VCM order and (ii) Georgia Power will not seek rate recovery of the $0.7 billion increase to the base capital cost forecast included in the nineteenth VCM report and charged to income by Georgia Power in the second quarter 2018. In addition, the stipulation confirms Georgia Power may request verification and approval of costs above $7.3 billion for inclusion in rate base at a later time, but no earlier than the prudence review contemplated by the seventeenth VCM order described previously. The Georgia PSC has approved 25 VCM reports covering periods through June 30, 2021. These reports reflect total construction capital costs incurred of $7.9 billion (net of $1.7 billion of payments received under the Guarantee Settlement Agreement and approximately $188 million in related customer refunds), of which the Georgia PSC has verified and approved $7.3 billion as described above. The Georgia PSC also has reviewed two additional VCM reports, which reflected $1.1 billion of additional construction capital costs incurred through June 30, 2022. Georgia Power expects to file its twenty-eighth VCM report with the Georgia PSC on February 16, 2023, which will reflect the revised capital cost forecast described above and $461 million of construction capital costs incurred from July 1, 2022 through December 31, 2022.
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
In 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 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.
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
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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 in March of the current year and the PEP lookback filing in March of the subsequent year. The annual PEP projected filings utilize a historic test year adjusted for "known and measurable" changes and discounted cash flow and regression formulas to determine base ROE. The PEP lookback filing reflects the actual revenue requirement. Pursuant to a Mississippi PSC-approved settlement agreement between Mississippi Power and the MPUS, Mississippi Power was not required to make any PEP filings for the regulatory year 2020.
In June 2021 and June 2022, the Mississippi PSC approved Mississippi Power's annual retail PEP filings, resulting in annual increases in revenues of approximately $16 million, or 1.8%, and $18 million, or 1.9%, respectively, effective with the first billing cycle of April 2021 and April 2022, respectively.
Integrated Resource Plan
In 2020, the Mississippi PSC issued an order 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. In September 2021, the Mississippi PSC concluded its review of Mississippi Power's 2021 IRP. The 2021 IRP included a schedule to retire Plant Watson Unit 4 (268 MWs) and Mississippi Power's 40% ownership interest in Plant Greene County Units 1 and 2 (103 MWs each) in December 2023, 2025, and 2026, respectively, consistent with each unit's remaining useful life in the most recent approved depreciation studies. In addition, the schedule reflects the early retirement of Mississippi Power's 50% undivided ownership interest in Plant Daniel Units 1 and 2 (502 MWs) by the end of 2027. The Plant Greene County unit retirements require the completion by Alabama Power of transmission and system reliability improvements, as well as agreement by Alabama Power. Mississippi Power is scheduled to file its next IRP in April 2024. The remaining net book value of Plant Daniel Units 1 and 2 was approximately $499 million at December 31, 2022 and Mississippi Power is continuing to depreciate these units using the current approved rates through the end of 2027. Mississippi Power expects to reclassify the net book value remaining at retirement, which is expected to total approximately $397 million, to a regulatory asset to be amortized over a period to be determined by the Mississippi PSC in future proceedings, consistent with the 2020 order. The Plant Watson and Greene County units are expected to be fully depreciated upon retirement. 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 June 2021, the Mississippi PSC approved Mississippi Power's ECO Plan filing for 2021, resulting in a decrease in revenues of approximately $9 million annually effective with the first billing cycle of July 2021.
On April 5, 2022, the Mississippi PSC approved Mississippi Power's ECO Plan filing for 2022, resulting in an increase in revenues of approximately $1 million annually. The rate increase became effective with the first billing cycle of May 2022.
On February 14, 2023, Mississippi Power submitted its ECO Plan filing for 2023
indicating no change in retail rates. 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 a decrease of $24 million
effective in February 2020 and increases of $2 million and $43 million effective
in February 2021 and 2022, respectively. On November 15, 2022, Mississippi Power
filed a request with the Mississippi PSC to increase retail fuel revenues by
$25 million annually effective with the first billing cycle of February 2023 and
an additional $25 million annually effective with the first billing cycle of
June 2023. On January 10, 2023, the Mississippi PSC voted to defer approval of
the filing. Mississippi Power is allowed to maintain current
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billing rates and continue accruing its weighted-average cost of capital on any under or over fuel recovery balance. The ultimate outcome of this matter cannot be determined at this time.
At December 31, 2022 and 2021, under recovered retail fuel costs totaled approximately $1 million and $4 million, respectively, and were included in other customer accounts receivable on Southern Company's and 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 2021, 2022, and 2023, annual revenues under the wholesale MRA fuel rate decreased $5 million, increased $11 million, and increased $22 million, respectively. The wholesale MB fuel rate did not change materially in any period presented. At December 31, 2022 and 2021, under recovered wholesale fuel costs were $6 million and $1 million, respectively. 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 annually establishes an ad valorem tax adjustment factor that is approved by the Mississippi PSC. Effective with the first billing cycle of April 2020, May 2021, and July 2022, the Mississippi PSC approved increases in annual revenues collected through the ad valorem tax adjustment factor of $10 million, $28 million, and $5 million, respectively. The 2021 increase included approximately $19 million of ad valorem taxes previously recovered through PEP in accordance with the Mississippi Power Rate Case Settlement Agreement.
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 year, the Mississippi PSC, the MPUS, and Mississippi Power agree on SRR revenue level(s). Mississippi Power's net retail SRR accrual, which includes carrying costs and amortization of related excess deferred income tax benefits, was $6.9 million in 2022, $(1.8) million in 2021, and $0.8 million in 2020. At December 31, 2022 and 2021, the retail property damage reserve balance was $37 million and $31 million, respectively. In December 2021, the Mississippi PSC approved Mississippi Power's annual SRR filing, which requested an increase in retail revenues of approximately $9 million annually effective with the first billing cycle of March 2022. The Mississippi PSC also established $8 million as the minimum annual accrual amount until a target property damage reserve balance of $75 million is met. In the event the expected annual charges exceed the annual accrual or the target balance has been met, Mississippi Power and the Mississippi PSC will determine the appropriate change to the annual accrual. Additionally, if PEP earnings are above a certain threshold, Mississippi Power has the ability to apply any required PEP refund as an additional accrual to the property damage reserve in lieu of customer refunds. On February 14, 2023, Mississippi Power submitted its annual SRR filing to the Mississippi PSC, which indicated no change in retail rates. The filing includes a request to increase the minimum annual accrual from $8 million to $12 million. The ultimate outcome of this matter cannot be determined at this time.
Reliability Reserve Accounting Order
On December 6, 2022, the Mississippi PSC approved an accounting order authorizing Mississippi Power to create a reliability reserve for the purpose of deferring generation, transmission, and distribution reliability-related expenditures for use in a future year. Mississippi Power may make accruals to the reliability reserve each year after meeting with the MPUS and Mississippi PSC staff. Mississippi Power will provide annually, through its capital plan, energy delivery plan, or PEP filing, any amounts to be charged against the reliability reserve during the current year. At December 31, 2022, Mississippi Power accrued $25 million to the reliability reserve.
Software Accounting Order
On December 6, 2022, the Mississippi PSC approved an accounting order
authorizing Mississippi Power to establish a regulatory asset for certain
operations and maintenance expenditures related to major technology projects.
The recovery period for this regulatory asset will be determined in Mississippi
Power's annual PEP filing process. Mississippi Power will begin deferring these
costs in 2023.
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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 share in providing electricity to the Cooperative Energy delivery points under the tariff. On August 26, 2022, the FERC accepted an amended SSA between Mississippi Power and Cooperative Energy, effective July 1, 2022, under which Cooperative Energy will continue to decrease its use of Mississippi Power's generation services under the MRA tariff up to 2.5% annually through 2035. At December 31, 2022, Mississippi Power is serving approximately 400 MWs of Cooperative Energy's annual demand. Beginning in 2036, Cooperative Energy will provide 100% of its electricity requirements at the MRA delivery points under the tariff. Neither party has the option to cancel the amended SSA. On July 15, 2022, Mississippi Power filed a request with the FERC for a $23 million increase in annual wholesale base revenues under the MRA tariff. Cooperative Energy filed a complaint with the FERC challenging the new rates. On September 13, 2022, the FERC issued an order that accepted Mississippi Power's request effective September 14, 2022, subject to refund, and established hearing and settlement judge procedures. The ultimate outcome of this matter cannot be determined at this time. 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.
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. With the exception of Chattanooga Gas, the natural
gas distribution utilities 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" herein for additional information. Also see "Infrastructure
Replacement Programs and Capital Projects" herein for additional information
regarding infrastructure replacement programs at certain of the natural gas
distribution utilities.
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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 at December 31, 2022 9.75% 10.25% 9.50% 9.80% Weather normalization mechanisms(a) ü ü Decoupled, including straight-fixed-variable rates(b) ü ü ü Regulatory infrastructure program rates(c) ü ü ü ü Bad debt rider(d) ü ü ü Energy efficiency plan(e) ü ü Annual base rate adjustment mechanism(f) ü ü Year of last base rate case decision 2021 2019 2021 2018 (a)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. (b)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.
(c)Programs that update or expand distribution systems and LNG facilities. Atlanta Gas Light's infrastructure program, System Reinforcement Rider, is effective for 2022 through 2024. See "Rate Proceedings - Atlanta Gas Light" herein for additional information. Chattanooga Gas' pipeline replacement program costs are recovered through its annual base rate review mechanism.
(d)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.
(e)Recovery of costs associated with plans to achieve specified energy savings goals.
(f)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 2022 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, 2022. 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 2022 Project Inception Project Inception Program Program Duration Year of Program
(in millions) (miles) (miles) (years)
Nicor Gas Investing in Illinois(*) Rider $ 437 $ 2,945 1,297 1,854 9 2023
Virginia Natural Gas Steps to Advance
Virginia's Energy (SAVE) Rider 69 411 525 695 13 2024
Atlanta Gas Light System Reinforcement
Rider Rider 76 76 10 N/A 3 2024
Chattanooga Gas Pipeline Replacement
Program Rate Base 5 7 5 73 7 2027
Total $ 587 $ 3,439 1,837 2,622
(*)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. Recovery of program costs is described under "Nicor Gas"
herein.
Nicor Gas
Illinois legislation allows Nicor Gas to provide more widespread safety and
reliability enhancements to its distribution system through 2023 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 accordance with orders from the Illinois Commission, Nicor Gas
recovers program costs incurred through a separate rider and base rates. The
Illinois
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Commission's approval of Nicor Gas' rate case in November 2021 included recovery of program costs through December 31, 2021. See "Rate Proceedings - Nicor Gas" herein for additional information. Nicor Gas' capital expenditures related to qualifying projects under the Investing in Illinois program totaled $408 million and $389 million in 2021 and 2020, respectively.
Virginia Natural Gas
The Steps to Advance Virginia's Energy (SAVE) program, an accelerated infrastructure replacement program, allows Virginia Natural Gas to continue replacing aging pipeline infrastructure through 2024. The program includes authorized annual investments of $50 million in 2020, $60 million in 2021, and $70 million in each year from 2022 through 2024, with 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. Virginia Natural Gas' capital expenditures under the SAVE program totaled $51 million and $49 million in 2021 and 2020, respectively. The SAVE program is subject to annual review by the Virginia Commission. In accordance with the base rate case approved by the Virginia Commission in 2021, 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. Atlanta Gas Light In 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. These allowed costs are primarily the equity return on the capital investment under the infrastructure programs in place prior to GRAM and 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, 2022 was $68 million, including $35 million of unrecognized equity return. The Georgia PSC reviews Atlanta Gas Light's performance annually under GRAM. See "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.
See "Rate Proceedings - Atlanta Gas Light" herein for additional information regarding the Georgia PSC's November 2021 approval of Atlanta Gas Light's GRAM filing and Integrated Capacity and Delivery Plan. The Georgia PSC also approved a new System Reinforcement Rider for authorized large pressure improvement and system reliability projects, which is expected to recover related capital investments totaling $286 million for the years 2022 through 2024, of which $76 million was incurred in 2022.
Chattanooga Gas
In June 2021, the Tennessee Public Utilities Commission approved Chattanooga
Gas' pipeline replacement program to replace approximately 73 miles of
distribution main over a seven-year period. The estimated total cost of the
program is $118 million, which will be recovered through Chattanooga Gas' annual
base rate review mechanism.
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
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' 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, 2022, the under
recovered balance was $108 million, which was included in natural gas cost
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under recovery on Southern Company's and Southern Company Gas' balance sheets. At December 31, 2021, the under recovered balance was $473 million, $266 million of which was included in natural gas cost under recovery and $207 million of which was included in other regulatory assets, deferred on Southern Company's and Southern Company Gas' balance sheets.
Rate Proceedings
Nicor Gas
In November 2021, the Illinois Commission approved a $240 million annual base rate increase effective November 24, 2021. The base rate increase included $94 million related to the recovery of program costs under the Investing in Illinois program and was based on a ROE of 9.75% and an equity ratio of 54.5%.
On January 3, 2023, Nicor Gas filed a general base rate case with the Illinois Commission requesting a $321 million increase in annual base rate revenues, including $59 million related to the recovery of investments under the Investing in Illinois program through December 31, 2023. The requested increase is based on a projected test year for the 12-month period ending December 31, 2024, a return on equity of 10.35%, and an equity ratio of 54.5%. Further, Nicor Gas is seeking to recover an additional $32 million under three proposed riders related to recovery of vehicle fuel costs, company use gas, and customer payment fees. The Illinois Commission is expected to rule on the requested increase within the 11-month statutory time limit, after which rate adjustments will be effective. The ultimate outcome of this matter cannot be determined at this time.
Atlanta Gas Light
The Georgia PSC evaluates Atlanta Gas Light's earnings 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 allows inclusion in base rates of the recovery of and return on the infrastructure program investments, including, but not limited to, GRAM adjustments. GRAM filing rate adjustments are based on an authorized ROE of 10.25%. GRAM adjustments for 2021 could not exceed 5% of 2020 base rates. The 5% limitation does not set a precedent in any future rate proceedings by Atlanta Gas Light. In 2020, Atlanta Gas Light filed its annual 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 February 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 was required to 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. In April 2021, Atlanta Gas Light filed its first i-CDP with the Georgia PSC, which included a series of ongoing and proposed pipeline safety, reliability, and growth programs for the next 10 years (2022 through 2031), as well as the required capital investments and related costs to implement the programs. The i-CDP reflected capital investments totaling approximately $0.5 billion to $0.6 billion annually. In November 2021, the Georgia PSC approved a joint stipulation agreement between Atlanta Gas Light and the staff of the Georgia PSC, under which, for the years 2022 through 2024, Atlanta Gas Light will incrementally reduce its combined GRAM and System Reinforcement Rider request by 10% through Atlanta Gas Light's GRAM mechanism, which resulted in a reduction of $5 million for 2022 and $7 million for 2023. The stipulation agreement also provided for $1.7 billion of total capital investment for the years 2022 through 2024.
Also in November 2021, the Georgia PSC approved Atlanta Gas Light's amended annual GRAM filing, which resulted in an annual rate increase of $43 million effective January 1, 2022.
On December 20, 2022, the Georgia PSC approved Atlanta Gas Light's annual GRAM filing, which resulted in an annual rate increase of $53 million effective January 1, 2023.
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Virginia Natural Gas
In September 2021, the Virginia Commission approved a stipulation agreement related to Virginia Natural Gas' 2020 general rate case filing, which allowed for a $43 million increase in annual base rate revenues, including $14 million related to the recovery of investments under the SAVE program, based on a ROE of 9.5% and an equity ratio of 51.9%. Interim rate adjustments became effective as of November 1, 2020, subject to refund, based on Virginia Natural Gas' original request for an increase of approximately $50 million. Refunds to customers related to the difference between the approved rates and the interim rates were completed during the fourth quarter 2021. On August 1, 2022, Virginia Natural Gas filed a general base rate case with the Virginia Commission seeking an increase in annual base rate revenues of $69 million, including $15 million related to the recovery of investments under the SAVE program, primarily to recover investments and increased costs associated with infrastructure, technology, and workforce development. The requested increase is based on a projected 12-month period beginning January 1, 2023, a ROE of 10.35%, and an equity ratio of 53.2%. Rate adjustments became effective January 1, 2023, subject to refund. The Virginia Commission is expected to rule on the requested increase in the third quarter 2023. 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, 2022 December 31, 2021
(in millions)
Atlanta Gas Light $ 35 $ 47
Virginia Natural Gas 10 10
Chattanooga Gas 2 4
Nicor Gas 3 -
Total $ 50 $ 61
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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. Alabama Power On September 26, 2022, Mobile Baykeeper, through its counsel Southern Environmental Law Center, filed a citizen suit in the U.S. District Court for the Southern District of Alabama alleging that Alabama Power's plan to close the Plant Barry ash pond utilizing a closure-in-place methodology violates the Resource Conservation and Recovery Act (RCRA) and regulations governing CCR. Among other relief requested, Mobile Baykeeper seeks a declaratory judgment that the RCRA and regulations governing CCR are being violated, preliminary and injunctive relief to prevent implementation of Alabama Power's closure plan and the development of a closure plan that satisfies regulations governing CCR requirements. On January 31, 2023, the EPA issued a Notice of Potential Violations associated with Alabama Power's plan to close the Plant Barry ash pond. Alabama Power expects to respond by March 2, 2023, subject to any extension agreed upon by the parties. The ultimate outcome of these matters cannot be determined at this time but could have an impact on Alabama Power's ARO estimates. See Note 6 for a discussion of Alabama Power's ARO liabilities.
Georgia Power
Municipal Franchise Fees
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 2019, the Georgia PSC issued an order that found Georgia Power has appropriately implemented the municipal franchise fee schedule. In March 2021, the Superior Court of Fulton County granted class certification and Georgia Power's motion for summary judgment and the plaintiffs filed a notice of appeal. In April 2021, Georgia Power filed a notice of cross appeal on the issue of class certification. In December 2021, the Georgia Court of Appeals affirmed the Superior Court's ruling that granted summary judgment to Georgia Power and dismissed Georgia Power's cross appeal on the issue of class certification as moot. Also in December 2021, the plaintiffs filed a petition for writ of certiorari to the Georgia Supreme Court, which was denied on January 27, 2023. On February 6, 2023, the plaintiffs filed a motion for reconsideration with the Georgia Supreme Court. The amount of any possible losses cannot be estimated at this time because, among other factors, it is unknown whether any losses would be subject to recovery from any municipalities.
Plant Scherer
In July 2020, a group of individual plaintiffs filed a complaint, which was
amended on December 9, 2022, in the Superior Court of Fulton County, Georgia
against Georgia Power alleging that the construction and operation of Plant
Scherer has impacted groundwater 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. Georgia Power has filed multiple motions to dismiss the complaint. On
December 29, 2022, the Superior Court of Fulton County, Georgia granted Georgia
Power's motion to transfer the case to the Superior Court of Monroe County,
Georgia.
In October 2021 and on February 7, 2022, a total of seven additional complaints
were filed in the Superior Court of Monroe County, Georgia against Georgia Power
alleging that releases from Plant Scherer have impacted groundwater and air,
resulting in alleged personal injuries and property damage. The plaintiffs seek
an unspecified amount of monetary damages including punitive damages. In
November 2021 and March 2022, Georgia Power removed these cases to the U.S.
District Court for the Middle District of Georgia. On November 16, 2022, the
plaintiffs voluntarily dismissed their complaints without prejudice. Georgia
Power anticipates that these plaintiffs will refile their complaints.
On January 9, 2023, an additional complaint was filed in the Superior Court of
Monroe County, Georgia against Georgia Power alleging that the construction and
operation of Plant Scherer have impacted groundwater and air, resulting in
alleged personal injuries. The plaintiff seeks an unspecified amount of monetary
damages, including punitive damages. On January 19, 2023, Georgia Power filed a
notice to remove the case to the U.S. District Court for the Middle District of
Georgia.
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The amount of any possible losses from these matters 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, which was amended in March 2019 to include four
additional plaintiffs. 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 and make claims for
gross negligence, reckless conduct, and intentional wrongdoing. 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. The district court dismissed the amended complaint; however, in March
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. In July 2020, the
plaintiffs filed a motion for leave to file a third amended complaint, which
included the same federal claims as the 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. In November 2020, the district court denied each of the
plaintiffs' pending motions and entered final judgment in favor of Mississippi
Power. In January 2021, the district court denied further motions by the
plaintiffs to vacate the judgment and to file a revised second amended
complaint. In February 2021, the plaintiffs filed a notice of appeal with the
U.S. Court of Appeals for the Fifth Circuit. On March 21, 2022, the U.S. Court
of Appeals for the Fifth Circuit issued an opinion affirming the dismissal of
the claims against the Mississippi PSC defendants but reversing the dismissal of
the claims against Mississippi Power. On May 31, 2022, the U.S. Court of Appeals
for the Fifth Circuit denied a petition by Mississippi Power for a rehearing en
banc and remanded the case to the U.S. District Court for the Southern District
of Mississippi for further proceedings. On June 17, 2022, Mississippi Power
filed with the trial court a motion to dismiss the complaint. An adverse outcome
in this proceeding could have a material impact on Mississippi Power's financial
statements.
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.
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 all years
presented, Georgia Power recovered approximately $12 million annually through
the ECCR tariff for environmental remediation under the 2019 ARP. Effective
January 1, 2023, Georgia Power is recovering $5 million annually through the
ECCR tariff under the 2022 ARP.
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, 2022 and 2021
was based on the estimated cost of environmental investigation and remediation
associated with these sites.
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At December 31, 2022 and 2021, the environmental remediation liability and the
balance of under recovered environmental remediation costs were reflected in the
balance sheets of Southern Company, Georgia Power, and Southern Company Gas as
shown in the table below. Alabama Power did not have environmental remediation
liabilities at December 31, 2022 or 2021. Mississippi Power did not have
environmental remediation liabilities at December 31, 2022 and had an immaterial
balance at December 31, 2021.
Georgia Southern Company
Southern Company Power Gas
(in millions)
December 31, 2022:
Environmental remediation liability:
Other current liabilities $ 65 $ 15 $ 49
Accrued environmental remediation 207 - 207
Under recovered environmental remediation costs:
Other regulatory assets, current $ 59 $ 5 $ 54
Other regulatory assets, deferred 235 20 215
December 31, 2021:
Environmental remediation liability:
Other current liabilities $ 69 $ 17 $ 52
Accrued environmental remediation 197 - 197
Under recovered environmental remediation costs:
Other regulatory assets, current $ 71 $ 12 $ 59
Other regulatory assets, deferred 231 23 208
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. In 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 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. In 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, 2022 for any potential recoveries
from the pending lawsuits.
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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. 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 $13.7 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 $330 million, respectively, per incident, but not more than an aggregate of $41 million and $49 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, 2022 under the NEIL policies would be $51 million and $85 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
Traditional Electric Operating Companies
In April 2019, Bellsouth Telecommunications d/b/a AT&T Alabama (AT&T) filed a complaint against Alabama Power with the FCC alleging that the pole rental rate AT&T is required to pay pursuant to the parties' joint use agreement is unjust and unreasonable under federal law. The complaint sought a new rate and approximately $87 million in refunds of alleged overpayments for the preceding six years. In August 2019, the FCC stayed the case in favor of arbitration, which AT&T has not pursued. The ultimate outcome of this matter cannot be determined at this time, but an adverse outcome could have a material impact on the financial statements of Southern Company and Alabama Power. Georgia Power and Mississippi Power have joint use agreements with other AT&T affiliates.
Mississippi Power
Kemper County Energy Facility
In 2020, 2021, and 2022, 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 $4 million pre-tax ($3 million after tax) in 2020, $11 million pre-tax ($8 million after tax) in 2021, and $15 million pre-tax ($12 million after tax) in 2022. 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 approximately $15 million annually through 2025. Mississippi Power owns the lignite mine located around the Kemper County energy facility site. 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 2028. As the mining permit holder, Liberty Fuels Company, LLC, a wholly-owned subsidiary of The North American Coal Corporation, has a legal obligation to perform mine reclamation and Mississippi Power has a contractual obligation to fund all reclamation activities. See Note 6 for additional information. 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. In 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. In connection with the DOE closeout discussions, in 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.
Plant Daniel
In conjunction with Southern Company's 2019 sale of Gulf Power, NextEra Energy held back $75 million of the purchase price pending Mississippi Power and NextEra Energy negotiating a mutually acceptable revised operating agreement for Plant Daniel. On July 12, 2022, the co-owners executed a revised operating agreement and Southern Company subsequently received the remaining $75 million of the purchase price. The dispatch procedures in the revised operating agreement for the two jointly-owned coal units at Plant Daniel resulted in Mississippi Power designating one of the two units as primary and the other as secondary in lieu of each company separately owning 100% of a single generating unit. Mississippi Power has the option to purchase its co-owner'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. The revised operating agreement did not have a material impact on Mississippi Power's financial statements. See Note 2 under "Mississippi Power - Integrated Resource Plan" for additional information on Plant Daniel.
Department of Revenue Audit
On August 31, 2022, the Mississippi Department of Revenue (Mississippi DOR) completed an audit of sales and use taxes paid by Mississippi Power from 2016 to 2019 and entered a final assessment, indicating a total amount due of $28 million, including
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associated penalties and interest. Mississippi Power does not agree with the audit findings and, on October 27, 2022, filed an administrative appeal with the Mississippi DOR. On December 6, 2022, the Mississippi PSC approved an accounting order authorizing Mississippi Power to defer the additional taxes and related interest related to the audit to a regulatory asset, excluding amounts associated with the gasifier and other abandoned Kemper IGCC assets. The authority to defer these costs is not a guarantee of recovery. The review and final disposition of the costs recorded to the regulatory asset will be addressed in a future rate proceeding following completion of the tax audit proceedings.
The ultimate outcome of this matter cannot be determined at this time.
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. 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 $4 million, $6 million, and $5 million in 2022, 2021, and 2020, respectively. At December 31, 2022, Georgia Power's estimated long-term obligations related to this commitment totaled $41 million, consisting of $3 million for 2023, $4 million annually for 2024 and 2025, $2 million annually for 2026 and 2027, and $26 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.
Gas supply commitments include amounts for gas commodity purchases associated
with Nicor Gas and SouthStar of 34 million mmBtu at floating gas prices
calculated using forward natural gas prices at December 31, 2022 and valued at
$157 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, 2022 were as follows:
Pipeline Charges, Storage Capacity, and Gas Supply
(in millions)
2023 $ 637
2024 455
2025 390
2026 212
2027 134
Thereafter 871
Total $ 2,699
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.
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Alabama Power has guaranteed a $100 million principal amount long-term bank loan SEGCO entered into in 2018 and subsequently extended and amended. 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, 2022, the capitalization of SEGCO consisted of $80 million of equity and $100 million of long-term debt that matures in November 2024, on which the annual interest requirement is derived from a variable rate index. In addition, SEGCO had short-term debt outstanding of $17 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.
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)
2022
Operating revenues
Retail electric revenues
Residential $ 6,604 $ 2,638 $ 3,664 $ 302 $ - $ -
Commercial 5,369 1,685 3,385 299 - -
Industrial 3,764 1,507 1,921 336 - -
Other 102 14 79 9 - -
Total retail electric revenues 15,839 5,844 9,049 946 - -
Natural gas distribution revenues
Residential 2,843 - - - - 2,843
Commercial 763 - - - - 763
Transportation 1,186 - - - - 1,186
Industrial 84 - - - - 84
Other 342 - - - - 342
Total natural gas distribution revenues 5,218 - - - - 5,218
Wholesale electric revenues
PPA energy revenues 2,274 489 130 16 1,673 -
PPA capacity revenues 596 194 47 4 356 -
Non-PPA revenues 250 200 30 690 740 -
Total wholesale electric revenues 3,120 883 207 710 2,769 -
Other natural gas revenues
Gas marketing services 636 - - - - 636
Other natural gas revenues 51 - - - - 51
Total natural gas revenues 687 - - - - 687
Other revenues 1,077 194 446 47 36 -
Total revenue from contracts with
customers 25,941 6,921 9,702 1,703 2,805 5,905
Other revenue sources(a) 3,338 896 1,882 (9) 564 57
Total operating revenues $ 29,279 $ 7,817 $ 11,584 $ 1,694 $ 3,369 $ 5,962
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Southern Southern
Company Alabama Power Georgia Power Mississippi Power Southern Power Company Gas
(in millions)
2021
Operating revenues
Retail electric revenues
Residential $ 6,207 $ 2,467 $ 3,471 $ 269 $ - $ -
Commercial 4,877 1,600 3,010 267 - -
Industrial 3,067 1,386 1,391 290 - -
Other 93 17 68 8 - -
Total retail electric revenues 14,244 5,470 7,940 834 - -
Natural gas distribution revenues
Residential 1,799 - - - - 1,799
Commercial 470 - - - - 470
Transportation 1,038 - - - - 1,038
Industrial 49 - - - - 49
Other 269 - - - - 269
Total natural gas distribution revenues 3,625 - - - - 3,625
Wholesale electric revenues
PPA energy revenues 1,122 184 95 11 854 -
PPA capacity revenues 493 115 55 5 323 -
Non-PPA revenues 236 170 21 401 398 -
Total wholesale electric revenues 1,851 469 171 417 1,575 -
Other natural gas revenues
Wholesale gas services 2,168 - - - - 2,168
Gas marketing services 464 - - - - 464
Other natural gas revenues 36 - - - - 36
Total other natural gas revenues 2,668 - - - - 2,668
Other revenues 1,075 202 452 31 30 -
Total revenue from contracts with
customers 23,463 6,141 8,563 1,282 1,605 6,293
Other revenue sources(a) 3,349 272 697 40 611 1,786
Other adjustments(b) (3,699) - - - - (3,699)
Total operating revenues $ 23,113 $ 6,413 $ 9,260 $ 1,322 $ 2,216 $ 4,380
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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 other 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
(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 Notes 15 and
16 under "Southern Company Gas" for information on the sale of Sequent and
components of wholesale gas services' operating revenues, respectively.
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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, 2022 and 2021:
Southern Southern
Company Alabama Power Georgia Power Mississippi Power Southern Power Company Gas
(in millions)
Accounts Receivable
At December 31, 2022 $ 3,123 $ 696 $ 922 $ 92 $ 237 $ 1,107
At December 31, 2021 2,504 589 736 73 149 753
Contract Assets
At December 31, 2022 $ 156 $ 2 $ 89 $ - $ - $ -
At December 31, 2021 117 2 63 - 1 -
Contract Liabilities
At December 31, 2022 $ 45 $ 4 $ 9 $ - $ 1 $ -
At December 31, 2021 57 4 14 - 1 -
At December 31, 2022 and 2021, Georgia Power had contract assets primarily
related to retail customer fixed 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, and unregulated
service agreements, where payment is contingent on project completion. Contract
liabilities for Georgia Power relate to cash collections recognized in advance
of revenue for unregulated service agreements. Southern Company's unregulated
distributed generation business had contract assets of $65 million and $50
million at December 31, 2022 and 2021, respectively, and contract liabilities of
$32 million and $39 million at December 31, 2022 and 2021, respectively, for
outstanding performance obligations.
Revenues recognized in 2022 and 2021, which were included in contract
liabilities at December 31, 2021 and December 31, 2020, respectively, were $36
million and $29 million, respectively, for Southern Company and immaterial for
the other Registrants.
Remaining Performance Obligations
The Subsidiary Registrants have long-term contracts with customers in which
revenues are recognized as performance obligations are satisfied over the
contract term. For the traditional electric operating companies and Southern
Power, these contracts primarily relate to PPAs whereby electricity and
generation capacity are provided 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. For
Southern Company Gas, these contracts involve energy infrastructure enhancement
and upgrade projects for certain governmental customers. 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, 2022 are expected to be recognized as follows:
2023 2024 2025 2026 2027 Thereafter
(in millions)
Southern Company $ 640 $ 483 $ 332 $ 311 $ 315 $ 2,076
Alabama Power 24 7 6 - - -
Georgia Power 74 39 22 11 10 10
Southern Power 355 345 302 303 310 2,077
Southern Company Gas 34 29 - - - -
Revenue expected to be recognized for performance obligations remaining at December 31, 2022 was immaterial for Mississippi Power.
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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, 2022 and 2021:
Southern Southern Southern
At December 31, 2022: Company Alabama Power Georgia Power Mississippi Power Power Company Gas
(in millions)
Electric utilities:
Generation $ 51,756 $ 15,920 $ 17,755 $ 2,826 $ 14,619 $ -
Transmission 14,201 5,658 7,576 927 - -
Distribution 24,200 9,154 13,819 1,228 - -
General/other 5,806 2,740 2,729 273 39 -
Electric utilities' plant in service 95,963 33,472 41,879 5,254 14,658 -
Southern Company Gas:
Natural gas distribution utilities
transportation and distribution 16,810 - - - - 16,810
Storage facilities 1,553 - - - - 1,553
Other 1,360 - - - - 1,360
Southern Company Gas plant in service 19,723 - - - - 19,723
Other plant in service 1,843 - - - - -
Total plant in service $ 117,529 $ 33,472 $ 41,879 $ 5,254 $ 14,658 $ 19,723
Southern Southern Southern
At December 31, 2021: Company Alabama Power Georgia Power Mississippi Power Power Company Gas
(in millions)
Electric utilities:
Generation $ 53,803 $ 16,631 $ 19,184 $ 2,791 $ 14,551 $ -
Transmission 13,406 5,334 7,132 900 - -
Distribution 22,236 8,643 12,437 1,156 - -
General/other 5,423 2,527 2,579 259 34 -
Electric utilities' plant in service 94,868 33,135 41,332 5,106 14,585 -
Southern Company Gas:
Natural gas distribution utilities
transportation and distribution 15,714 - - - - 15,714
Storage facilities 1,315 - - - - 1,315
Other 1,851 - - - - 1,851
Southern Company Gas plant in service 18,880 - - - - 18,880
Other plant in service 1,844 - - - - -
Total plant in service $ 115,592 $ 33,135 $ 41,332 $ 5,106 $ 14,585 $ 18,880
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
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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. At December 31, 2022 and 2021, deferred cloud implementation costs, net of amortization, 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)
Deferred cloud implementation costs,
net:
At December 31, 2022 $ 345 $ 81 $ 108 $ 14 $ 18 $ 54
At December 31, 2021 240 54 81 11 14 35
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. In 2022, amortization of deferred cloud
implementation costs recognized was $29 million for Southern Company, $8 million
for Alabama Power, $12 million for Georgia Power, and immaterial for the other
Registrants. In 2021, amortization from deferred cloud implementation costs was
immaterial for all Registrants.
See Note 2 under "Regulatory Assets and Liabilities," "Alabama Power - Software Accounting Order," and "Mississippi Power - Software Accounting Order" for information on deferrals of certain other operations and maintenance costs associated with software and cloud computing projects by the traditional electric operating companies and natural gas distribution utilities, as authorized by their respective state PSCs or applicable state regulatory agencies.
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 2022, 2021, and 2020 are as follows:
2022 2021 2020
Alabama Power 2.7 % 2.7 % 2.6 %
Georgia Power 3.3 % 3.3 % 3.0 %
Mississippi Power 3.4 % 3.6 % 3.7 %
Southern Company Gas 2.7 % 2.8 % 2.8 %
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. Effective April 1, 2020,
Mississippi Power's depreciation rates were revised. Effective January 1, 2023,
Alabama Power's and Georgia Power's depreciation rates were revised. 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.
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At December 31, 2022 and 2021, accumulated depreciation for Southern Company and Southern Company Gas consisted of utility plant in service totaling $34.3 billion and $33.1 billion, respectively, for Southern Company and $5.1 billion and $4.8 billion, respectively, for Southern Company Gas, as well as other plant in service totaling $963 million and $930 million, respectively, for Southern Company and $184 million and $219 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 30 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 35 years(*)
(*)Effective January 1, 2022, Southern Power revised the depreciable lives of its wind generating facilities from up to 30 years to up to 35 years. This revision resulted in an immaterial decrease in depreciation for 2022.
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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Joint Ownership Agreements
At December 31, 2022, 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) $ 193 $ 85 $ -
Plant Miller (coal) Units 1 and 2 91.8 (b) 2,148 712 13
Georgia Power
Plant Hatch (nuclear) 50.1 % (c) $ 1,401 $ 671 $ 62
Plant Vogtle (nuclear) Units 1 and
2 45.7 (c) 3,628 2,298 94
Plant Scherer (coal) Units 1 and 2 8.4 (c) 276 106 1
Plant Scherer (coal) Unit 3 75.0 (c) 1,317 567 6
Rocky Mountain (pumped storage) 25.4 (d) 184 153 1
Mississippi Power
Greene County (natural gas) Units
1 and 2 40.0 % (a) $ 125 $ 70 $ -
Plant Daniel (coal) Units 1 and 2 50.0 (e) 765 257 30
Southern Company Gas
Dalton Pipeline (natural gas
pipeline) 50.0 % (f) $ 271 $ 23 $ -
(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, and Scherer in varying amounts jointly with one or more of the following entities: OPC, MEAG Power, Dalton, FP&L, and JEA. 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 FP&L and Mississippi Power. In accordance with the operating agreement, Mississippi Power acts as FP&L's agent with respect to the operation and maintenance of these units. See Note 3 under "Other Matters - Mississippi Power - Plant Daniel" for additional information. (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 currently holds a 45.7% ownership interest in Plant Vogtle Units 3 and 4, which are under construction and had a CWIP balance of $9.7 billion at December 31, 2022, excluding charges recorded in 2018, 2020, 2021, and 2022 for the estimated probable loss associated with construction. 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
Mississippi Power provides retail service to its largest retail customer, Chevron Products Company (Chevron), at its refinery in Pascagoula, Mississippi through at least 2038 in accordance with agreements approved by the Mississippi PSC. The agreements grant Chevron a security interest in the co-generation assets located at the refinery and owned by Mississippi Power, with a lease receivable balance of $157 million at December 31, 2022, 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. See Note 9 under "Lessor" for additional information.
See Note 8 under "Long-term Debt" for information regarding debt secured by certain assets of Georgia Power and Southern Company Gas.
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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 Southern
Company Alabama Power Georgia Power Mississippi Power Power(*)
(in millions)
Balance at December 31, 2020 $ 10,684 $ 3,974 $ 6,265 $ 176 $ 95
Liabilities incurred 26 - 3 - 23
Liabilities settled (456) (202) (210) (24) -
Accretion 407 156 236 7 5
Cash flow revisions 1,026 406 530 31 8
Balance at December 31, 2021 $ 11,687 $ 4,334 $ 6,824 $ 190 $ 131
Liabilities incurred 36 - 35 - -
Liabilities settled (455) (205) (212) (20) -
Accretion 406 158 231 6 6
Cash flow revisions (834) - (844) 3 7
Balance at December 31, 2022 $ 10,840 $ 4,287 $ 6,034 $ 179 $ 144
(*)Included in other deferred credits and liabilities on Southern Power's consolidated balance sheets.
During 2021, Alabama Power recorded increases totaling approximately $406
million to its AROs primarily related to the CCR Rule and the related state rule
based on updated estimates for post-closure costs at its ash ponds and inflation
rates.
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During 2021, Georgia Power refined the cost estimates related to its plans to
close the ash ponds at all of its generating plants in compliance with the CCR
Rule and the related state rule, including updates to estimates for inflation
rates and the timing of closure activities, and recorded an increase of
approximately $435 million to its AROs related to the CCR Rule and the related
state rule. In December 2022, Georgia Power recorded a net decrease of
approximately $780 million to its AROs related to the CCR Rule and the related
state rule resulting from changes in estimates, including lower future inflation
rates, higher discount rates, and timing of closure activities, as well as a
change in closure methodology for one ash pond as approved in Georgia Power's
2022 IRP. See Note 2 under "Georgia Power - Integrated Resource Plans" for
additional information.
During 2021, Mississippi Power recorded an increase of approximately $31 million
to its AROs related to the CCR Rule based on updated estimates for the timing of
closure activities, post-closure costs at one of its ash ponds, and inflation
rates.
The cost estimates for AROs related to the disposal of CCR are based on
information at December 31, 2022 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. The cost estimates for Alabama Power and
Mississippi Power are based on closure-in-place for all ash ponds. The cost
estimates for Georgia Power are based on a combination of closure-in-place for
some ash ponds and closure by removal for others. 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. 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, 2022 and 2021, approximately $35 million and $42 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 $36 million
and $43 million at December 31, 2022 and 2021, 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, 2022 and 2021 were as
follows:
Alabama Georgia
Southern Company Power Power
(in millions)
At December 31, 2022:
Equity securities $ 1,095 $ 690 $ 405
Debt securities 838 267 571
Other securities 210 168 42
Total investment securities in the Funds $ 2,143 $ 1,125 $ 1,018
At December 31, 2021:
Equity securities $ 1,358 $ 849 $ 509
Debt securities 986 316 670
Other securities 197 159 38
Total investment securities in the Funds $ 2,541 $ 1,324 $ 1,217
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 2022, 2021, and 2020 are shown in the table below.
Alabama Georgia
Southern Company Power Power
(in millions)Fair value increases (decreases)
2022 $ (360) $ (171) $ (189)
2021 274 200 74
2020 280 142 138
Unrealized gains (losses)
At December 31, 2022 $ (391) $ (204) $ (187)
At December 31, 2021 (27) (30) 3
At December 31, 2020 220 121 99
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 $14 million and $15 million at December 31,
2022 and 2021, 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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At December 31, 2022 and 2021, the accumulated provisions for the external decommissioning trust funds were as follows:
2022 2021
(in millions)
Alabama Power
Plant Farley $ 1,125 $ 1,324
Georgia Power
Plant Hatch $ 628 $ 757
Plant Vogtle Units 1 and 2 382 460
Plant Vogtle Unit 3 8 -
Total $ 1,018 $ 1,217
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, 2022 based on the most current studies, which were performed in
2018 for Alabama Power and in 2021 for Georgia Power, 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 $ 771 $ 628
Spent fuel management 387 186 170
Non-radiated structures 99 61 85
Total site study costs $ 1,720 $ 1,018 $ 883
(*)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 2021. Significant assumptions used to determine these costs for ratemaking were an estimated inflation rate of 4.5% and 2.5% for Alabama Power and Georgia Power, respectively, and an estimated trust earnings rate of 7.0% and 4.5% for Alabama Power and Georgia Power, respectively. The next site study for Alabama Power is expected to be completed later in 2023. Alabama Power's site-specific estimates of decommissioning costs for Plant Farley are updated every five years. Projections of funds are reviewed with the Alabama PSC to ensure that, over time, the deposits and earnings of the Funds will provide adequate funding to cover the site-specific costs. If necessary, Alabama Power would seek the Alabama PSC's approval to address any changes in a manner consistent with NRC and other applicable requirements. Under the 2019 ARP, Georgia Power's annual decommissioning cost for ratemaking was a total of $4 million for Plant Hatch and Plant Vogtle Units 1 and 2. Effective January 1, 2023, as approved in the 2022 ARP, there is no annual decommissioning cost for ratemaking. Any funding amount required by the NRC during the period covered by the 2022 ARP will be deferred to a regulatory asset and recovery is expected to be determined in Georgia Power's next base rate case. See Note 2 under "Georgia Power - Rate Plans - 2022 ARP" for additional information.
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.
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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 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.
Southern Company
At December 31, 2022 and 2021, Southern Holdings had equity method investments totaling $112 million and $101 million, respectively, primarily related to investments in venture capital funds focused on energy and utility investments. Earnings from these investments were immaterial for all periods presented.
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. Retirement of SEGCO's generating units is expected to occur by December 31, 2028. 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 $124 million in 2022, $75 million in 2021, and $67 million in 2020 for Alabama Power and $127 million in 2022, $77 million in 2021, and $69 million in 2020 for Georgia Power.
SEGCO paid dividends of $14 million in 2022, $14 million in 2021, and $12 million in 2020, 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
SP Solar is owned by Southern Power and Global Atlantic Financial Group Limited
(Global Atlantic). A wholly-owned subsidiary of Southern Power is the general
partner and holds a 1% ownership interest, and another wholly-owned subsidiary
of Southern Power owns a 66% ownership interest. Global Atlantic is the limited
partner and holds the remaining 33% noncontrolling interest. 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, 2022 and 2021, SP Solar had total assets of $5.9 billion and
$6.1 billion, respectively, total liabilities of $0.4 billion, 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.
SP Wind is owned by Southern Power and three financial investors. A wholly-owned
subsidiary of 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
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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, 2022 and 2021, SP Wind had total assets of $2.2 billion and $2.3 billion, respectively, total liabilities of $169 million and $130 million, respectively, and noncontrolling interests of $39 million and $41 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 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, 2022 and 2021, the other VIEs had total assets of $1.8 billion and $1.9 billion, respectively, total liabilities of $0.2 billion and $0.3 billion, respectively, and noncontrolling interests of $0.8 billion and $0.9 billion, 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, 2022 and 2021, Southern Power had equity method investments in
wind and battery energy storage projects totaling $49 million and $86 million,
respectively. Earnings (loss) from these investments were immaterial for all
periods presented. During 2022, Southern Power sold equity method investments in
wind projects and received proceeds totaling $38 million. The gains associated
with the sales were immaterial. Subsequent to December 31, 2022, Southern Power
sold its remaining equity method investments in wind and battery energy storage
projects and received proceeds of $50 million. The gains associated with the
transactions were immaterial.
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Southern Company Gas
Equity Method Investments
The carrying amounts of Southern Company Gas' equity method investments at December 31, 2022 and 2021 and related earnings (loss) from those investments for the years ended December 31, 2022, 2021, and 2020 were as follows:
Investment Balance December 31, 2022 December 31, 2021
(in millions)
SNG $ 1,243 $ 1,129
Other(*) 33 44
Total $ 1,276 $ 1,173
(*)Balance at December 31, 2022 reflects an $11 million distribution received in 2022 from PennEast Pipeline.
Earnings (Loss) from Equity Method Investments 2022 2021 2020
(in millions)
SNG $ 146 $ 127 $ 129
PennEast Pipeline(*) - (81) 7
Other 2 4 5
Total $ 148 $ 50 $ 141
(*)For 2021, includes pre-tax impairment charges totaling $84 million. See
"PennEast Pipeline Project" herein for additional information, including the
September 2021 cancellation of the project. For 2020, earnings primarily result
from AFUDC equity recorded by the project entity.
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. In 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. In June 2021, the U.S. Supreme
Court ruled in favor of PennEast Pipeline following a review of the appellate
court decision. Southern Company Gas assesses its equity method investments for
impairment whenever events or changes in circumstances indicate that the
investment may be impaired. Following the U.S. Supreme Court ruling, during the
second quarter 2021, Southern Company Gas management reassessed the project
construction timing, including the anticipated timing for receipt of a FERC
certificate and all remaining state and local permits, as well as potential
challenges thereto, and performed an impairment analysis. The outcome of the
analysis resulted in a pre-tax impairment charge of $82 million ($58 million
after tax). In September 2021, PennEast Pipeline announced that further
development of the project was no longer supported, and, as a result, all
further development of the project ceased. During the third quarter 2021,
Southern Company Gas recorded an additional pre-tax charge of $2 million
($2 million after tax) related to its share of the project level impairment, as
well as $7 million of additional tax expense, resulting in total pre-tax charges
of $84 million ($67 million after tax) during 2021 related to the project.
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8. FINANCING
Long-term Debt
Details of long-term debt at December 31, 2022 and 2021 are provided in the
following table:
Balance Outstanding at
At December 31, 2022 December 31,
Weighted Average
Maturity Interest Rate 2022 2021
(in millions)
Southern Company
Senior notes(a) 2023-2052 3.87% $ 35,683 $ 33,120
Junior subordinated notes 2024-2081 4.58% 8,836 8,918
FFB loans(b) 2023-2044 2.88% 4,874 4,962
Revenue bonds(c) 2024-2062 3.25% 2,844 2,662
First mortgage bonds(d) 2023-2062 3.46% 2,275 2,100
Medium-term notes 2026-2027 7.03% 84 130
Other long-term debt 2024-2045 4.96% 167 270
Finance lease obligations(e) 314 215
Unamortized fair value adjustment 330 359
Unamortized debt premium (discount), net (193) (216)
Unamortized debt issuance expenses (273) (243)
Total long-term debt 54,941 52,277
Less: Amount due within one year 4,285 2,157
Total long-term debt excluding amount due
within one year $ 50,656 $ 50,120
Alabama Power
Senior notes 2023-2052 3.86% $ 9,675 $ 8,725
Revenue bonds(c) 2024-2038 3.44% 995 995
Other long-term debt 2026 5.62% 45 45
Finance lease obligations(e) 5 4
Unamortized debt premium (discount), net (18) (18)
Unamortized debt issuance expenses (72) (64)
Total long-term debt 10,630 9,687
Less: Amount due within one year 301 751
Total long-term debt excluding amount due
within one year $ 10,329 $ 8,936
Georgia Power
Senior notes 2023-2052 3.90% $ 7,925 $ 6,825
Junior subordinated notes 2077 5.00% 270 270
FFB loans(b) 2023-2044 2.88% 4,874 4,962
Revenue bonds(c) 2025-2062 3.13% 1,738 1,591
Other long-term debt - 125
Finance lease obligations(e) 238 136
Unamortized debt premium (discount), net (18) (11)
Unamortized debt issuance expenses (117) (114)
Total long-term debt 14,910 13,784
Less: Amount due within one year 901 675
Total long-term debt excluding amount due
within one year $ 14,009 $ 13,109
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Balance Outstanding at
At December 31, 2022 December 31,
Weighted Average
Maturity Interest Rate 2022 2021
(in millions)
Mississippi Power
Senior notes 2024-2051 3.93% $ 1,425 $ 1,425
Revenue bonds(c) 2025-2052 3.55% 111 76
Finance lease obligations(e) 17 18
Unamortized debt premium (discount), net 2 2
Unamortized debt issuance expenses (10) (10)
Total long-term debt 1,545 1,511
Less: Amount due within one year 1 1
Total long-term debt excluding amount due
within one year $ 1,544 $ 1,510
Southern Power
Senior notes(a) 2023-2046 3.92% $ 2,998 $ 3,711
Unamortized debt premium (discount), net (5) (6)
Unamortized debt issuance expenses (14) (17)
Total long-term debt 2,979 3,688
Less: Amount due within one year 290 679
Total long-term debt excluding amount due
within one year $ 2,689 $ 3,009
Southern Company Gas
Senior notes 2023-2051 4.08% $ 4,769 $ 4,348
First mortgage bonds(d) 2023-2062 3.46% 2,275 2,100
Medium-term notes 2026-2027 7.03% 84 130
Other long-term debt 2024-2045 3.81% 22 -
Unamortized fair value adjustment 330 359
Unamortized debt premium (discount), net (8) (35)
Unamortized debt issuance expenses (30) -
Total long-term debt 7,442 6,902
Less: Amount due within one year 400 47
Total long-term debt excluding amount due
within one year $ 7,042 $ 6,855
(a)Includes a fair value gain (loss) of $(31) million and $5 million at December 31, 2022 and 2021, respectively, related to Southern Power's foreign currency hedge on its euro-denominated senior notes.
(b)Secured by a first priority lien on (i) Georgia Power's 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" herein for additional information. (c)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 and wastewater facilities. In some cases, the 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)Secured by the underlying lease ROU asset. See Note 9 for additional information.
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Maturities of long-term debt for the next five years are as follows:
Southern Georgia Southern Company
Company(a) Alabama Power Power(b) Mississippi Power Southern Power(c) Gas
(in millions)
2023 $ 4,293 $ 301 $ 901 $ 1 $ 290 $ 400
2024 2,280 23 499 201 - -
2025 1,699 251 145 12 500 300
2026 3,726 46 445 1 964 530
2027 2,074 550 510 11 - 154
(a)See notes (b) and (c) 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)Southern Power's 2026 maturities include $564 million of 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 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 was authorized to 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 could 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 2021, Georgia Power made the final borrowings under the FFB Credit Facilities and no further borrowings are permitted. During 2022, Georgia Power made principal amortization payments of $88 million under the FFB Credit Facilities. At December 31, 2022 and 2021, Georgia Power had $4.9 billion and $5.0 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 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. The final maturity date for each advance under the FFB Credit Facilities is February 20, 2044. Interest is payable quarterly and principal payments began in February 2020. Each borrowing under the FFB Credit Facilities bears interest at a fixed rate equal to the applicable U.S. Treasury rate at the time of the borrowing 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.
In the event certain mandatory prepayment events occur, 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.
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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.
See Note 2 under "Georgia Power - Nuclear Construction" for additional information.
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, 2022 and 2021. Each Registrant's senior notes, junior subordinated notes, 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 May 2022, Southern Company remarketed $862.5 million aggregate principal
amount of its Series 2019A Remarketable Junior Subordinated Notes due August 1,
2024 (2019A RSNs) and $862.5 million aggregate principal amount of its Series
2019B Remarketable Junior Subordinated Notes due August 1, 2027 (2019B RSNs),
pursuant to the terms of its 2019 Series A Equity Units (Equity Units). In
connection with the remarketing, the interest rates on the 2019A RSNs and the
2019B RSNs were reset to 4.475% and 5.113%, respectively, payable on a
semi-annual basis. On August 1, 2022, the proceeds were ultimately used to
settle the purchase contracts entered into as part of the Equity Units and
Southern Company issued approximately 25.2 million shares of common stock and
received proceeds of $1.725 billion. At December 30, 2022 and 2021, the 2019A
RSNs and the 2019B RSNs are included in long-term debt on Southern Company's
consolidated balance sheets.
Bank Credit Arrangements
At December 31, 2022, committed credit arrangements with banks were as follows:
Expires
Due within
Company 2023 2024 2025 2026 Total Unused One Year
(in millions)
Southern Company parent $ - $ - $ - $ 2,000 $ 2,000 $ 1,998 $ -
Alabama Power - 550 - 700 1,250 1,250 -
Georgia Power - - - 1,750 1,750 1,726 -
Mississippi Power - 150 125 - 275 275 -
Southern Power(a) - - - 600 600 569 -
Southern Company Gas(b) 250 - - 1,500 1,750 1,748 250
SEGCO 30 - - - 30 30 30
Southern Company $ 280 $ 700 $ 125 $ 6,550 $ 7,655 $ 7,596 $ 280
(a)Does not include Southern Power Company's two $75 million continuing letter
of credit facilities for standby letters of credit, of which $9 million and $5
million, respectively, was unused at December 31, 2022. In December 2022,
Southern Power amended one of the $75 million letter of credit facilities, which
extended the expiration date from 2023 to 2025. The second $75 million letter of
credit facility also expires in 2025. 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 $800 million of the
credit arrangement expiring in 2026. Southern Company Gas' committed credit
arrangement expiring in 2026 also includes $700 million for which Nicor Gas is
the borrower and which is restricted for working capital needs of Nicor Gas.
Pursuant to the multi-year credit arrangement expiring in 2026, the allocations
between Southern Company Gas Capital and Nicor Gas may be adjusted. Nicor Gas is
also the borrower under a $250 million credit arrangement expiring in 2023. 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.
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These bank credit arrangements, as well as the term loan arrangements of the Registrants, Nicor Gas, 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 junior subordinated notes 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 subsidiaries. At December 31, 2022, 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, Nicor Gas, and SEGCO. The amount of variable rate revenue bonds of the traditional electric operating companies outstanding requiring liquidity support at December 31, 2022 was approximately $1.7 billion (comprised of approximately $789 million at Alabama Power, $819 million at Georgia Power, and $69 million at Mississippi Power). In addition, at December 31, 2022, Alabama Power and Georgia Power had approximately $120 million and $288 million, respectively, of fixed rate revenue bonds outstanding that are required to be remarketed within the next 12 months.
At both December 31, 2022 and 2021, Southern Power had $106 million 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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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, 2022 Notes Payable at December 31, 2021
Amount Weighted Average Amount Weighted Average
Outstanding Interest Rate Outstanding Interest Rate
(in millions) (in millions)
Southern Company
Commercial paper $ 809 4.7 % $ 1,140 0.3 %
Short-term bank debt 1,800 5.0 % 300 0.7 %
Total $ 2,609 4.9 % $ 1,440 0.4 %
Georgia Power
Short-term bank debt $ 1,600 5.0 % $ - - %
Southern Power
Commercial paper $ 225 4.7 % $ 211 0.3 %
Southern Company Gas
Commercial paper:
Southern Company Gas Capital $ 285 4.8 % $ 379 0.3 %
Nicor Gas 283 4.6 % 530 0.3 %
Short-term bank debt:
Nicor Gas 200 4.9 % 300 0.7 %
Total $ 768 4.7 % $ 1,209 0.4 %
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 2022, Southern Company issued approximately 3.6 million shares of common stock primarily through equity compensation plans and received proceeds of approximately $83 million.
See "Equity Units" herein for additional information regarding Southern Company's issuance of approximately 25.2 million shares of common stock in August 2022.
Shares Reserved
At December 31, 2022, a total of 113 million shares were reserved for issuance
pursuant to the Southern Investment Plan, employee savings plans, the Outside
Directors Stock Plan, the Equity and Incentive Compensation Plan (which includes
stock options and performance share units as discussed in Note 12), and an
at-the-market program. Of the shares reserved, 28.9 million shares are available
for awards under the Equity and Incentive Compensation Plan at December 31,
2022.
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Diluted Earnings Per Share
For Southern Company, the only difference in computing basic and diluted
earnings per share (EPS) is attributable to awards outstanding under stock-based
compensation plans. Earnings per share dilution resulting from stock-based
compensation plans is determined using the treasury stock method. Shares used to
compute diluted EPS were as follows:
Average Common Stock Shares
2022 2021 2020
(in millions)
As reported shares 1,075 1,061 1,058
Effect of stock-based compensation 6 7 7
Diluted shares 1,081 1,068 1,065
In all years presented, an immaterial number of stock-based compensation awards was excluded from the diluted EPS calculation because the awards were anti-dilutive.
Redeemable Preferred Stock of Subsidiaries
As discussed further under "Alabama Power" herein, the preferred stock and Class A preferred stock of Alabama Power at December 31, 2021 is presented as "Redeemable Preferred Stock of Subsidiaries" on Southern Company's balance sheet in a manner consistent with temporary equity under applicable accounting standards. During 2022, Alabama Power redeemed all of its preferred stock and Class A preferred stock. Alabama Power Alabama Power has preferred stock, Class A preferred stock, preference stock, and common stock authorized, but only common stock outstanding at December 31, 2022.
During 2022, Alabama Power redeemed all of its preferred stock and Class A preferred stock at the redemption prices per share provided in the table below, plus accrued and unpaid dividends to the redemption date.
Par Value/Stated Redemption
Preferred Stock Redeemed During 2022 Capital Per Share Shares 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
Prior to being redeemed, Alabama Power's preferred stock and Class A preferred
stock, without preference between classes, ranked 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
contained a feature that allowed the holders to elect a majority of Alabama
Power's board of directors if preferred dividends were not paid for four
consecutive quarters. Because such a potential redemption-triggering event was
not solely within the control of Alabama Power, the preferred stock and Class A
preferred stock at December 31, 2021 is presented as "Redeemable Preferred
Stock" on Alabama Power's balance sheet in a manner consistent with temporary
equity under applicable accounting standards.
Georgia Power
Georgia Power has preferred stock, Class A preferred stock, preference stock, and common stock authorized, but only common stock outstanding.
Mississippi Power
Mississippi Power has preferred stock and common stock authorized, but only common stock outstanding.
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Dividend Restrictions
The income of Southern Company is derived primarily from equity in earnings of its subsidiaries. At December 31, 2022, consolidated retained earnings included $4.9 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, 2022, the amount of Southern Company Gas' subsidiary retained earnings restricted for dividend payment totaled $1.5 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.
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9. LEASES
Lessee
The Registrants 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.
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)
At December 31, 2022
Electric generating units(*) $ 760 $ 59 $ 1,163 $ - $ - $ -
Real estate/land 885 4 54 2 542 36
Communication towers 141 2 4 - - 23
Railcars 34 12 18 3 - -
Other 79 4 1 21 - 1
Total $ 1,899 $ 81 $ 1,240 $ 26 $ 542 $ 60
At December 31, 2021
Electric generating units(*) $ 802 $ 104 $ 1,217 $ - $ - $ -
Real estate/land 876 3 49 2 526 45
Communication towers 156 2 4 - - 24
Railcars 32 10 20 2 - -
Other 103 5 1 24 - 1
Total $ 1,969 $ 124 $ 1,291 $ 28 $ 526 $ 70
(*)Amounts related to affiliate leases are eliminated in consolidation for Southern Company. See "Contracts that Contain a Lease" herein for additional information.
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 23 years while the land leases have remaining terms of up to 44 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 remaining terms of up to 10 years with options to renew that could extend the terms for an additional 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 Nicor 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 one and 17 years. Georgia
Power has several PPAs with Southern Power that Georgia Power accounts for as
leases with a lease obligation of $461 million and $521 million at December 31,
2022 and 2021, 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. Amounts related to the affiliate PPAs
are eliminated in consolidation for Southern Company.
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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.
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 at December 31, 2022 and 2021.
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)
At December 31, 2022
Operating Leases
Operating lease ROU assets, net $ 1,531 $ 71 $ 1,007 $ 9 $ 489 $ 57
Operating lease obligations - current $ 197 $ 9 $
151 $ 4 $ 28 $ 9 Operating lease obligations - non-current 1,388 67 851 5 514 51 Total operating lease obligations(*) $ 1,585 $ 76 $ 1,002 $ 9 $ 542 $ 60 Finance Leases Finance lease ROU assets, net $ 292 $ 5 $ 205 $ 16 $ - $ -
Finance lease obligations - current $ 18 $ 2 $
16 $ 1 $ - $ - Finance lease obligations - non-current 296 3 222 16 - - Total finance lease obligations $ 314 $ 5 $ 238 $ 17 $ - $ - At December 31, 2021 Operating Leases Operating lease ROU assets, net $ 1,701 $ 108 $ 1,157 $ 10 $ 479 $ 70
Operating lease obligations - current $ 250 $ 54 $
156 $ 4 $ 28 $ 11 Operating lease obligations - non-current 1,503 66 999 6 497 59 Total operating lease obligations(*) $ 1,754 $ 121 $ 1,155 $ 10 $ 525 $ 70 Finance Leases Finance lease ROU assets, net $ 197 $ 4 $ 104 $ 17 $ - $ -
Finance lease obligations - current $ 16 $ 1 $
10 $ 1 $ - $ -
Finance lease obligations - non-current 199 3 126 17 - -
Total finance lease obligations $ 215 $ 4 $ 136 $ 18 $ - $ -
(*)Includes operating lease obligations related to PPAs at Southern Company,
Alabama Power, and Georgia Power totaling $652 million, $59 million, and $952
million, respectively, at December 31, 2022 and $802 million, $104 million, and
$1.11 billion, respectively, at December 31, 2021.
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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Lease costs for 2022, 2021, and 2020, 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)
2022
Lease cost
Operating lease cost(*) $ 297 $ 59 $ 198 $ 5 $ 32 $ 15
Finance lease cost:
Amortization of ROU assets 23 1 15 1 - -
Interest on lease obligations 13 - 17 1 - -
Total finance lease cost 36 1 32 2 - -
Short-term lease costs 64 44 13 - - -
Variable lease cost 125 13 105 - 5 -
Sublease income (1) - - - - -
Total lease cost $ 521 $ 117 $ 348 $ 7 $ 37 $ 15
2021
Lease cost
Operating lease cost(*) $ 313 $ 58 $ 208 $ 2 $ 33 $ 19
Finance lease cost:
Amortization of ROU assets 21 1 11 1 - -
Interest on lease obligations 11 - 16 1 - -
Total finance lease cost 32 1 27 2 - -
Short-term lease costs 48 15 24 - - -
Variable lease cost 96 4 83 - 5 -
Sublease income 1 - - - - -
Total lease cost $ 490 $ 78 $ 342 $ 4 $ 38 $ 19
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
(*)Includes operating lease costs related to PPAs at Southern Company, Alabama
Power, and Georgia Power totaling $162 million, $48 million, and $180 million,
respectively, in 2022, $165 million, $47 million, and $184 million,
respectively, in 2021, and $161 million, $43 million, and $184 million,
respectively, in 2020.
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Georgia Power has variable lease payments that are based on the amount of energy produced by certain renewable generating facilities subject to PPAs, including $45 million, $41 million, and $39 million in 2022, 2021, and 2020, respectively, from finance leases which are included in purchased power on Georgia Power's statements of income, of which $21 million, $20 million, and $20 million was included in purchased power, affiliates in 2022, 2021, and 2020, respectively.
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)
2022
Other information
Cash paid for amounts included in the
measurements of lease obligations:
Operating cash flows from operating leases $ 303 $ 58 $ 206 $ 5 $ 30 $ 14
Operating cash flows from finance leases 11 - 20 1 - -
Financing cash flows from finance leases 16 1 10 1 - -
ROU assets obtained under operating leases 56 10 17 9 - 3
Reassessment of ROU assets under operating
leases 16 - - - 16 -
ROU assets obtained under finance leases 118 2 116 - - -
2021
Other information Cash paid for amounts included in the measurements of lease obligations: Operating cash flows from operating leases $ 308 $ 58 $ 211 $ 2 $ 28 $ 19 Operating cash flows from finance leases 9 - 17 1 - - Financing cash flows from finance leases 17 1 9 1 - - ROU assets obtained under operating leases 64 3 9 - 72 7 ROU assets obtained under finance leases 3 - - - - -
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 under operating leases 227 63 32 - 51 4
ROU assets obtained under finance leases 10 2 - - - -
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Southern Alabama Georgia Mississippi Southern Company
Company Power Power Power Southern Power Gas
At December 31, 2022
Weighted-average remaining lease term in
years:
Operating leases 17.3 13.0 8.1 4.7 34.0 11.0
Finance leases 17.4 6.4 11.8 12.9 N/A N/A
Weighted-average discount rate:
Operating leases 4.51 % 4.87 % 4.52 % 3.49 % 4.86 % 3.79 %
Finance leases 4.87 % 3.00 % 8.06 % 2.74 % N/A N/A
At December 31, 2021
Weighted-average remaining lease term in
years:
Operating leases 15.9 9.1 8.7 6.1 32.8 10.5
Finance leases 18.0 8.7 8.5 13.9 N/A N/A
Weighted-average discount rate:
Operating leases 4.41 % 4.37 % 4.45 % 2.74 % 5.20 % 3.61 %
Finance leases 4.82 % 3.09 % 10.81 % 2.74 % N/A N/A
Maturities of lease liabilities are as follows:
At December 31, 2022
Southern Alabama Georgia Mississippi Southern
Company Power Power Power Southern Power Company Gas
(in millions)
Maturity Analysis
Operating leases:
2023 $ 248 $ 12 $ 191 $ 4 $ 36 $ 11
2024 201 10 165 2 28 11
2025 181 9 138 2 28 11
2026 159 6 135 1 28 8
2027 143 5 135 - 29 3
Thereafter 1,497 64 440 1 1,009 31
Total 2,429 106 1,204 10 1,158 75
Less: Present value discount 844 30 202 1 616 15
Operating lease obligations $ 1,585 $ 76 $ 1,002 $ 9 $ 542 $ 60
Finance leases:
2023 $ 33 $ 2 $ 35 $ 2 $ - $ -
2024 22 1 27 2 - -
2025 26 1 35 2 - -
2026 26 1 36 2 - -
2027 26 - 36 2 - -
Thereafter 345 - 187 10 - -
Total 478 5 356 20 - -
Less: Present value discount 164 - 118 3 - -
Finance lease obligations $ 314 $ 5 $ 238 $ 17 $ - $ -
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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. 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 16 years. For Southern Power, these arrangements consist of PPAs related to electric generating units, including solar and wind facilities, accounted for as operating leases with remaining terms of up to 24 years and PPAs related to battery energy storage facilities accounted for as sales-type leases with remaining terms of up to 19 years. Southern Company Gas is the lessor in operating leases related to gas pipelines with remaining terms of up to 20 years. For Southern Company, these arrangements also include PPAs related to fuel cells accounted for as operating leases with remaining terms of up to 11 years.
Lease income for 2022, 2021, and 2020, is as follows:
Southern Mississippi Southern
Company Alabama Power Georgia Power Power Southern Power Company Gas
(in millions)2022
Lease income - interest income on sales-type
leases $ 25 $ - $ - $ 15 $ 10 $ -
Lease income - operating leases 208 77 32 2 85 36
Variable lease income 417 1 - - 448 -
Total lease income $ 650 $ 78 $ 32 $ 17 $ 543 $ 36
2021
Lease income - interest income on sales-type
leases $ 15 $ - $ - $ 14 $ 1 $ -
Lease income - operating leases 223 82 42 2 85 35
Variable lease income 429 - - - 456 -
Total lease income $ 667 $ 82 $ 42 $ 16 $ 542 $ 35
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
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.
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Mississippi Power has a tolling arrangement accounted for as a sales-type lease. During 2020 and 2021, Mississippi Power completed construction of additional leased assets under the lease and, upon completion, the book values of $26 million and $39 million, respectively, were transferred from CWIP to lease receivables. Each transfer represented a non-cash investing transaction for purposes of the statements of cash flows. During 2021, Southern Power completed construction of a portion of the Garland and Tranquillity battery energy storage facilities' assets and recorded losses totaling $40 million upon commencement of the related PPAs, which Southern Power accounts for as sales-type leases. The losses were due to ITCs retained and expected to be realized by Southern Power and its partners in these projects, and no estimated residual asset value was assumed in calculating the losses. Each lease had an initial term of 20 years. Upon commencement of the leases, the book values of the related assets totaling $210 million were derecognized from CWIP and lease receivables were recorded. The transfers represented noncash investing transactions for purposes of the statement of cash flows. See Note 15 under "Southern Power" for additional information.
The undiscounted cash flows expected to be received for in-service leased assets under the leases are as follows:
At December 31, 2022
Southern
Southern Company Mississippi Power Power
(in millions)
2023 $ 39 $ 24 $ 15
2024 38 23 15
2025 37 22 15
2026 36 21 15
2027 35 20 15
Thereafter 364 164 200
Total undiscounted cash flows $ 549 $ 274 $ 275
Net investment in sales-type lease(*) 326 157 169
Difference between undiscounted cash flows and discounted cash flows
$ 223 $ 117 $ 106
(*)For Mississippi Power, included in other current assets and other property
and investments on the balance sheets. For Southern Power, included in other
current assets ($15 million and $12 million at December 31, 2022 and 2021,
respectively) and net investment in sales-type leases ($154 million and
$161 million at December 31, 2022 and 2021, respectively) on the balance sheet.
The undiscounted cash flows to be received under operating leases and contracts accounted for as operating leases are as follows:
At December 31, 2022
Southern Alabama Southern
Company Power Power Southern Company Gas
(in millions)
2023 $ 145 $ 34 $ 88 $ 36
2024 114 6 90 34
2025 105 5 74 29
2026 104 3 73 29
2027 104 3 74 28
Thereafter 796 23 166 382
Total $ 1,368 $ 74 $ 565 $ 538
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 Georgia Power and
Mississippi Power are immaterial.
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Southern Company Leveraged Lease
At December 31, 2020, a subsidiary of Southern Holdings had four leveraged lease agreements related to energy generation, distribution, and transportation assets, including two domestic and two international projects. During 2021, one of the domestic projects was sold and the agreements for both international projects were terminated. At December 31, 2022, the one remaining leveraged lease agreement, which relates to energy generation, had an expected remaining term of nine years. Southern Company continues to receive federal income tax deductions for depreciation and amortization, as well as interest on long-term debt related to this investment. Southern Company wrote off the related investment balance in 2020, as discussed below. During the second quarter 2020, following an evaluation of the recoverability of the lease receivable and the expected residual value of the generation assets at the end of the lease, Southern Company management concluded it was no longer probable that any of the associated rental payments scheduled after 2032 would be received, because it was no longer probable the generation assets would be successfully remarketed and continue to operate after that date. Revising the estimated cash flows to be received under the leveraged lease to reflect this conclusion resulted in a full impairment of the lease investment and a pre-tax charge to earnings of $154 million ($74 million after tax).
The following table provides a summary of the components of income related to leveraged lease investments. Income was impacted in 2021 and 2020 by the impairment charges discussed below and in Note 15 under "Southern Company." Income in 2021 does not include the impacts of the sale and terminations of leveraged lease projects discussed in Note 15 under "Southern Company."
2021 2020
(in millions)
Pretax leveraged lease income (loss) $ 17 $ (180) Income tax benefit (expense)
(5) 98
Net leveraged lease income (loss) $ 12 $ (82)
On June 30, 2022, the Southern Holdings subsidiary operating the generating
plant for the lessee provided notice to the lessee to terminate the related
operating and maintenance agreement effective June 30, 2023. The parties to the
lease agreement are currently negotiating a potential restructuring, which could
result in rescission of the termination notice. The ultimate outcome of this
matter cannot be determined at this time but is not expected to have a material
impact on Southern Company's financial statements.
The lessee failed to make the semi-annual lease payment due December 15, 2022.
As a result, the Southern Holdings subsidiary was unable to make its
corresponding payment to the holders of the underlying non-recourse debt related
to the generation assets. The parties to the lease have entered into a
forbearance agreement which suspends the related contractual rights of the
parties while they continue restructuring negotiations. As the remaining amount
of Southern Company's 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.
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.
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Current and Deferred Income Taxes
Details of income tax provisions are as follows:
2022
Georgia Southern Company
Southern Company Alabama Power Power Mississippi Power Southern Power Gas
(in millions)
Federal -
Current $ 10 $ 54 $ 38 $ 42 $ (43) $ 122
Deferred 455 259 152 (16) 56 (3)
465 313 190 26 13 119
State -
Current 27 14 (21) - 2 42
Deferred 303 96 201 11 5 19
330 110 180 11 7 61
Total $ 795 $ 423 $ 370 $ 37 $ 20 $ 180
2021
Georgia Southern Company
Southern Company Alabama Power Power Mississippi Power Southern Power Gas
(in millions)
Federal -
Current $ 50 $ 104 $ 311 $ 25 $ (340) $ 85
Deferred 36 172 (449) (15) 343 35
86 276 (138) 10 3 120
State -
Current (25) 23 71 - (16) (68)
Deferred 206 73 (101) 11 - 223
181 96 (30) 11 (16) 155
Total $ 267 $ 372 $ (168) $ 21 $ (13) $ 275
2020
Southern Company Alabama Power Georgia Mississippi Southern Power Southern Company
Power 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
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 $17 million for 2022, $6 million for 2021,
and $5 million for 2020. Southern Power received $49 million, $289 million, and
$340 million of cash related to federal ITCs
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under renewable energy initiatives in 2022, 2021, and 2020, respectively. See "Deferred Tax Assets and Liabilities" herein for additional information.
In accordance with regulatory requirements, deferred federal ITCs for the
traditional electric operating companies are 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 amortized to income tax expense
over the life of the respective asset. ITCs amortized in 2022, 2021, and 2020
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)
2022 $ 83 $ 58
2021 84 58
2020 84 59
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.
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 $53 million in 2022, $66 million in 2021, and $67 million in 2020. 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 $27 million in 2022, $16 million in 2021, and $15 million in 2020.
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. In July 2021, Southern Company Gas affiliates completed the sale of Sequent. As a result of the sale, changes in state apportionment rates resulted in $85 million of additional net state tax expense. See Note 15 under "Southern Company Gas" for additional information.
A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:
2022
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 6.2 4.8 6.5 4.4 1.9 6.4
Employee stock plans' dividend deduction (0.5) - - - - -
Non-deductible book depreciation 0.6 0.5 0.6 0.3 - -
Flowback of excess deferred income taxes (6.6) (1.9) (9.6) (7.8) - (2.5)
AFUDC-Equity (1.1) (0.8) (1.5) - - -
Federal PTCs - - - - (6.6) -
ITC amortization (1.3) (0.1) (0.1) - (17.2) (0.1)
Noncontrolling interests 0.5 - - - 8.4 -
Other - 0.3 - 0.3 (0.1) (0.9)
Effective income tax (benefit) rate 18.8 % 23.8 % 16.9 % 18.2 % 7.4 % 23.9 %
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2021
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 5.5 4.6 (5.7) 4.9 (8.0) 15.1
Employee stock plans' dividend deduction (0.9) - - - - -
Non-deductible book depreciation 0.9 0.5 3.1 0.4 - -
Flowback of excess deferred income taxes (11.7) (2.6) (49.9) (15.2) - (2.8)
AFUDC-Equity (1.5) (0.7) (6.4) - - -
Federal PTCs - - - - (4.6) -
ITC amortization (2.2) (0.1) (0.4) - (29.7) (0.1)
Noncontrolling interests 0.8 - - - 13.4 -
Leveraged lease impairments and
dispositions (1.4) - - - - -
Other (0.1) 0.2 (1.9) 0.6 (0.4) 0.6
Effective income tax (benefit) rate 10.4 % 22.9 % (40.2) % 11.7 % (8.3) % 33.8 %
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) -
ITC amortization (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 %
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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, 2022
Southern Alabama Georgia Southern Southern
Company Power Power Mississippi Power Power Company Gas
(in millions)
Deferred tax liabilities -
Accelerated depreciation $ 9,443 $ 2,564 $ 3,447 $ 338 $ 1,351 $ 1,505
Property basis differences 2,350 1,303 693 179 - 150
Employee benefit obligations 888 284 412 43 11 68
AROs 876 499 324 - - -
Under recovered fuel and natural gas costs 805 185 548 40 - 32
Regulatory assets -
AROs 2,006 679 1,285 42 - -
Employee benefit obligations 677 180 226 30 - 15
Remaining book value of retired assets 400 142 253 5 - -
Premium on reacquired debt 66 9 57 - - -
Other 555 179 181 40 14 82
Total deferred income tax liabilities 18,066 6,024 7,426 717 1,376 1,852
Deferred tax assets -
AROs 2,882 1,178 1,609 42 - -
ITC and PTC carryforwards 1,685 12 673 - 794 -
Employee benefit obligations 890 198 304 47 9 89
Estimated loss on plants under construction 888 - 888 - - -
Other state deferred tax attributes 388 - 12 239 51 7
Federal effect of net state deferred tax
liabilities 365 175 88 - 28 92
Other property basis differences 207 - 79 - 109 -
State effect of federal deferred taxes 136 136 - - - -
Other partnership basis differences 111 - - - 111 -
Regulatory liability associated with the Tax
Reform Legislation (not subject to
normalization) 137 127 - 9 - -
Long-term debt fair value adjustment 85 - - - - 85
Other comprehensive losses 72 4 5 - 5 -
Other 552 213 186 62 17 28
Total deferred income tax assets 8,398 2,043 3,844 399 1,124 301
Valuation allowance (257) - (125) (41) (27) (9)
Net deferred income tax assets 8,141 2,043 3,719 358 1,097 292
Net deferred income taxes (assets)/liabilities $ 9,925 $ 3,981 $ 3,707 $
359 $ 279 $ 1,560
Recognized in the balance sheets:
Accumulated deferred income taxes - assets $ (111) $ - $ - $ (107) $ - $ -
Accumulated deferred income taxes - liabilities $ 10,036 $ 3,981 $ 3,707 $
466 $ 279 $ 1,560
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December 31, 2021
Southern Alabama Georgia Southern Southern
Company Power Power Mississippi Power Power Company Gas
(in millions)
Deferred tax liabilities -
Accelerated depreciation $ 9,300 $ 2,541 $ 3,340 $ 330 $ 1,421 $ 1,428
Property basis differences 2,301 1,182 781 169 - 148
Federal effect of net state deferred tax assets - - - 22 - -
Leveraged lease basis differences 61 - - - - -
Employee benefit obligations 820 268 382 41 11 57
AROs 868 329 494 - - -
Under recovered fuel and natural gas costs 315 47 109 15 - 144
Regulatory assets -
AROs 2,232 863 1,325 44 - -
Storm damage reserves 18 - 18 - - -
Employee benefit obligations 825 205 256 38 - 15
Remaining book value of retired assets 271 145 121 5 - -
Premium on reacquired debt 72 10 62 - - -
Other 368 147 77 34 14 82
Total deferred income tax liabilities 17,451 5,737 6,965 698 1,446 1,874
Deferred tax assets -
AROs 3,100 1,192 1,819 44 - -
ITC and PTC carryforwards 1,750 12 704 - 827 -
Employee benefit obligations 1,035 225 342 57 7 77
Estimated loss on plants under construction 825 - 825 - - -
Other state deferred tax attributes 361 - 11 246 52 5
Federal effect of net state deferred tax
liabilities 305 165 41 - 27 93
Other property basis differences 231 - 90 - 121 -
State effect of federal deferred taxes 135 135 - - - -
Other partnership basis differences 160 - - - 160 -
Regulatory liability associated with the Tax
Reform Legislation (not subject to normalization) 268 237 19 12 - -
Long-term debt fair value adjustment 91 - - - - 91
Other comprehensive losses 92 5 15 - 11 -
Other 561 193 153 34 53 62
Total deferred income tax assets 8,914 2,164 4,019 393 1,258 328
Valuation allowance (207) - (73) (41) (27) (9)
Net deferred income tax assets 8,707 2,164 3,946 352 1,231 319
Net deferred income taxes (assets)/liabilities $ 8,744 $ 3,573 $ 3,019 $
346 $ 215 $ 1,555
Recognized in the balance sheets: Accumulated deferred income taxes - assets $ (118) $ - $ - $
(118) $ - $ -
Accumulated deferred income taxes - liabilities $ 8,862 $ 3,573 $ 3,019 $
464 $ 215 $ 1,555
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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, 2022 and 2021.
Tax Credit Carryforwards
Federal ITC/PTC carryforwards at December 31, 2022 were as follows:
Alabama Georgia Southern
Southern Company Power Power Power
(in millions)
Federal ITC/PTC carryforwards $ 1,148 $ 12 $ 135 $ 794
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 2026 2025 2025 2026
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, an increase in Georgia Power's ownership interest
percentage in Plant Vogtle Units 3 and 4, changes in taxable income projections,
and potential income tax rate changes. See Note 2 under "Georgia Power - Nuclear
Construction" for additional information on Plant Vogtle Units 3 and 4.
At December 31, 2022, Georgia Power also had approximately $434 million in net
state investment and other net state tax credit carryforwards for the State of
Georgia that will expire between tax years 2022 and 2031 and are not expected to
be fully utilized. Georgia Power has a net state valuation allowance of $98
million associated with these carryforwards.
The ultimate outcome of these matters cannot be determined at this time.
Net Operating Loss Carryforwards
At December 31, 2022, 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
(in millions)
Mississippi Power
Mississippi $ 189 2031
Southern Power
Oklahoma 27 2035
Florida 10 2034
Other states 3 Various
Southern Power Total $ 40
Other(*)
Georgia 23 2042
New York 11 2036
New York City 14 2036
Other states 21 Various
Southern Company Total $ 298
(*)Represents other non-registrant Southern Company subsidiaries. Alabama Power,
Georgia Power, and Southern Company Gas did not have material state or local NOL
carryforwards at December 31, 2022.
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State NOLs for Mississippi, Oklahoma, and Florida are not expected to be fully utilized prior to expiration. At December 31, 2022, Mississippi Power had a net state valuation allowance of $32 million for the Mississippi NOL, Southern Power had net state valuation allowances of $11 million for the Oklahoma NOL and $10 million for the Florida NOL, and Southern Company had a net valuation allowance of $25 million for the New York and New York City NOLs.
The ultimate outcome of these matters cannot be determined at this time.
Unrecognized Tax Benefits
Changes in unrecognized tax benefits for the periods presented were as follows:
Southern
Southern Company Company Gas
(in millions)
Unrecognized tax benefits at December 31, 2019 $ - $ -
Tax positions changes - increase from prior periods 44
-
Unrecognized tax benefits at December 31, 2020 $ 44 $
-
Tax positions changes - increase from prior periods 3
-
Unrecognized tax benefits at December 31, 2021 $ 47 $
-
Tax positions changes - increase from prior periods 33
32
Unrecognized tax benefits at December 31, 2022 $ 80 $
32
The unrecognized tax positions increase from prior periods for 2020 primarily relates to a 2019 state tax filing position to exclude certain gains from 2019 dispositions from taxation in a certain unitary state. It is possible that this position will be resolved in the next 12 months, and if accepted by the state, this position would decrease Southern Company's annual effective tax rate. The unrecognized tax positions increase from prior periods for 2022 is primarily related to the amendment of certain 2018 state tax filing positions related to Southern Company Gas dispositions. If accepted by the states, these positions would decrease Southern Company's and Southern Company Gas' annual effective tax rates. The ultimate outcome of these unrecognized tax benefits is dependent on acceptance by each state and 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 2021. 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, 2022 and no mandatory contributions to the qualified pension plan
are anticipated for the year ending December 31, 2023. 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, 2023, no contributions to any other postretirement trusts are
expected.
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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.
2022
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
3.09 % 3.12 % 3.07 % 3.07 % 3.21 % 3.04 %
Discount rate - interest costs 2.55 2.58 2.51 2.54 2.79 2.53
Discount rate - service costs 3.34 3.36 3.37 3.35 3.36 3.21
Expected long-term return on plan
assets 8.25 8.25 8.25 8.25 8.25 8.25
Annual salary increase 4.80 4.80 4.80 4.80 4.80 4.80
Other postretirement benefit plans
Discount rate - benefit obligations 2.90 % 2.95 % 2.87 % 2.88 % 3.07 % 2.82 %
Discount rate - interest costs 2.32 2.38 2.30 2.27 2.55 2.17
Discount rate - service costs 3.26 3.30 3.27 3.26 3.25 3.22
Expected long-term return on plan
assets 7.21 7.54 6.88 7.22 - 6.08
Annual salary increase 4.80 4.80 4.80 4.80 4.80 4.80
2021
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
2.81 % 2.85 % 2.79 % 2.80 % 2.99 % 2.75 %
Discount rate - interest costs 2.13 2.17 2.09 2.12 2.46 2.10
Discount rate - service costs 3.18 3.23 3.21 3.20 3.22 2.97
Expected long-term return on plan
assets 8.25 8.25 8.25 8.25 8.25 8.25
Annual salary increase 4.80 4.80 4.80 4.80 4.80 4.80
Other postretirement benefit plans
Discount rate - benefit obligations 2.56 % 2.63 % 2.52 % 2.53 % 2.78 % 2.46 %
Discount rate - interest costs 1.84 1.91 1.82 1.78 2.12 1.64
Discount rate - service costs 3.07 3.13 3.08 3.06 3.05 3.01
Expected long-term return on plan
assets 7.09 7.18 6.84 6.98 - 6.54
Annual salary increase 4.80 4.80 4.80 4.80 4.80 4.80
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2020
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
3.41 % 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
2022
Assumptions used to determine benefit Southern Company
obligations: Southern Company Alabama Power Georgia Power Mississippi Power Southern Power Gas
Pension plans
Discount rate 5.25 % 5.26 % 5.25 % 5.25 % 5.31 % 5.24 %
Annual salary increase 4.80 4.80 4.80 4.80 4.80 4.80
Other postretirement benefit plans
Discount rate 5.18 % 5.20 % 5.17 % 5.17 % 5.24 % 5.16 %
Annual salary increase 4.80 4.80 4.80 4.80 4.80 4.80
2021
Assumptions used to determine benefit Southern Company
obligations: Southern Company Alabama Power Georgia Power Mississippi Power Southern Power Gas
Pension plans
Discount rate 3.09 % 3.12 % 3.07 % 3.07 % 3.21 % 3.04 %
Annual salary increase 4.80 4.80 4.80 4.80 4.80 4.80
Other postretirement benefit plans
Discount rate 2.90 % 2.95 % 2.87 % 2.88 % 3.07 % 2.82 %
Annual salary increase 4.80 4.80 4.80 4.80 4.80 4.80
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. 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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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, 2022 were as follows:
Initial Cost Trend Ultimate Cost Trend Year That Ultimate
Rate Rate Rate is Reached
Pre-65 6.60 % 4.50 % 2030
Post-65 medical 5.50 4.50 2030
Post-65 prescription 7.50 4.50 2031
Pension Plans
The total accumulated benefit obligation for the pension plans at December 31, 2022 and 2021 was as follows:
Southern Southern
Company Alabama Power Georgia Power Mississippi Power Southern Power Company Gas
(in millions)
December 31, 2022 $ 11,422 $ 2,601 $ 3,534 $ 520 $ 135 $ 801
December 31, 2021 14,687 3,362 4,562 672 178 1,030
Actuarial gains of $3.9 billion and $393 million were recorded for the annual
remeasurement of the Southern Company system pension plans at December 31, 2022
and 2021, respectively, primarily due to increases of 216 basis points and 28
basis points, respectively, in the overall discount rate used to calculate the
benefit obligation as a result of higher market interest rates.
Changes in the projected benefit obligations and the fair value of plan assets during the plan years ended December 31, 2022 and 2021 were as follows:
2022
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 $ 16,382 $ 3,806 $ 5,012 $ 743 $ 222 $ 1,134
Service cost 412 99 103 17 9 34
Interest cost 408 96 123 18 6 28
Benefits paid (692) (144) (226) (30) (5) (75)
Actuarial gain (3,908) (951) (1,161) (179) (69) (253)
Balance at end of year 12,602 2,906 3,851 569 163 868
Change in plan assets
Fair value of plan assets at beginning
of year 17,225 4,141 5,415 786 213 1,241
Actual loss on plan assets (2,376) (579) (753) (110) (31) (167)
Employer contributions 61 9 20 3 1 3
Benefits paid (692) (144) (226) (30) (5) (75)
Fair value of plan assets at end of
year 14,218 3,427 4,456 649 178 1,002
Accrued asset $ 1,616 $ 521 $ 605 $ 80 $ 15 $ 134
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2021
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 $ 16,646 $ 3,854 $ 5,127 $ 754 $ 217 $ 1,189
Service cost 434 102 112 18 10 37
Interest cost 346 82 104 16 5 24
Benefits paid (651) (137) (210) (28) (4) (73)
Actuarial gain (393) (95) (121) (17) (6) (43)
Balance at end of year 16,382 3,806 5,012 743 222 1,134
Change in plan assets
Fair value of plan assets at beginning
of year 15,367 3,684 4,844 701 186 1,123
Actual return on plan assets 2,449 586 781 111 30 181
Employer contributions 60 8 - 2 1 10
Benefits paid (651) (137) (210) (28) (4) (73)
Fair value of plan assets at end of
year 17,225 4,141 5,415 786 213 1,241
Accrued asset (liability) $ 843 $ 335 $ 403 $ 43 $ (9) $ 107
The projected benefit obligations for the qualified and non-qualified pension
plans at December 31, 2022 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 $ 11,928 $ 2,799 $ 3,717 $ 540 $ 140 $ 819
Non-qualified pension plan 674 107 134 28 23 49
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Amounts recognized in the balance sheets at December 31, 2022 and 2021 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, 2022:
Prepaid pension costs(a) $ 2,290 $ 629 $ 738 $ 108 $ 37 $ 183
Other regulatory assets,
deferred(b) 2,455 679 887 123 - 111
Other current liabilities (56) (10) (12) (2) (2) (3)
Employee benefit obligations(c) (618) (98) (121) (26) (20) (42)
Other regulatory liabilities,
deferred (85) - - - - -
AOCI 24 - - - 11 (75)
December 31, 2021:
Prepaid pension costs(a) $ 1,657 $ 464 $ 563 $ 78 $ 20 $ 175
Other regulatory assets,
deferred(b) 2,920 809 971 146 - 91
Other current liabilities (55) (9) (12) (2) (2) (2)
Employee benefit obligations(c) (759) (120) (148) (33) (27) (66)
Other regulatory liabilities,
deferred (119) - - - - -
AOCI 100 - - - 35 (45)
(a)Included in prepaid pension and other postretirement benefit costs on Alabama
Power's balance sheet and other deferred charges and assets on Southern Power's
consolidated balance sheet.
(b)Amounts for Southern Company exclude regulatory assets of $190 million and $210 million at December 31, 2022 and 2021, respectively, associated with unamortized amounts in Southern Company Gas' pension plans prior to its acquisition by Southern Company.
(c)Included in other deferred credits and liabilities on Southern Power's consolidated balance sheets.
Presented below are the amounts included in regulatory assets at December 31,
2022 and 2021 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, 2022
Regulatory assets:
Prior service cost $ 10 $ 4 $ 7 $ 1 $ (9)
Net loss 2,361 675 880 122 66
Regulatory amortization - - - - 54
Total regulatory assets(*) $ 2,371 $ 679 $ 887 $ 123 $ 111
Balance at December 31, 2021
Regulatory assets:
Prior service cost $ 11 $ 5 $ 8 $ 1 $ (11)
Net loss 2,790 804 963 145 38
Regulatory amortization - - - - 64
Total regulatory assets(*) $ 2,801 $ 809 $ 971 $ 146 $ 91
(*)Amounts for Southern Company exclude regulatory assets of $190 million and $210 million at December 31, 2022 and 2021, respectively, associated with unamortized amounts in Southern Company Gas' pension plans prior to its acquisition by Southern Company.
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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, 2022 and 2021 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, 2020 $ 4,621 $ 1,286 $ 1,598 $ 235 $ 205
Net gain (1,523) (394) (527) (74) (97)
Reclassification adjustments:
Amortization of prior service costs (1) (1) (1) - 2
Amortization of net loss (296) (82) (99) (15) (9)
Amortization of regulatory assets(*) - - - - (10)
Total reclassification adjustments (297) (83) (100) (15) (17)
Total change (1,820) (477) (627) (89) (114)
Balance at December 31, 2021 $ 2,801 $ 809 $ 971 $ 146 $ 91
Net (gain) loss (183) (67) (9) (12) 27
Reclassification adjustments:
Amortization of prior service costs (1) (1) (1) - 2
Amortization of net gain (loss) (246) (62) (74) (11) 1
Amortization of regulatory assets(*) - - - - (10)
Total reclassification adjustments (247) (63) (75) (11) (7)
Total change (430) (130) (84) (23) 20
Balance at December 31, 2022 $ 2,371 $ 679 $ 887 $ 123 $ 111
(*)Amounts for Southern Company exclude regulatory assets of $190 million and $210 million at December 31, 2022 and 2021, 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, 2022 and 2021
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, 2022
AOCI:
Prior service cost $ (2) $ - $ (3)
Net (gain) loss 26 11 (72)
Total AOCI $ 24 $ 11 $ (75)
Balance at December 31, 2021
AOCI:
Prior service cost $ (2) $ - $ (3)
Net (gain) loss 102 35 (42)
Total AOCI $ 100 $ 35 $ (45)
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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, 2022 and 2021 are presented in the following table:
Southern Southern Company
Southern Company Power Gas
(in millions)
AOCI:
Balance at December 31, 2020 $ 245 $ 60 $ 1
Net gain (128) (22) (47)
Reclassification adjustments:
Amortization of net gain (loss) (17) (3) 1
Total change (145) (25) (46)
Balance at December 31, 2021 $ 100 $ 35 $ (45)
Net gain (82) (22) (30)
Reclassification adjustments:
Amortization of net gain (loss) 6 (2) -
Total reclassification adjustments 6 (2) -
Total change (76) (24) (30)
Balance at December 31, 2022 $ 24 $ 11 $ (75)
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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)
2022
Service cost $ 412 $ 99 $ 103 $ 17 $ 9 $ 34
Interest cost 408 96 123 18 6 28
Expected return on plan assets (1,265) (306) (399) (57) (15) (91)
Recognized net loss 240 62 75 11 2 8
Net amortization - 1 1 - - 15
Prior service cost - - - - - (3)
Net periodic pension cost (income) $ (205) $ (48) $ (97) $ (11) $ 2 $ (9)
2021
Service cost $ 434 $ 102 $ 112 $ 18 $ 10 $ 37
Interest cost 346 82 104 16 5 24
Expected return on plan assets (1,191) (287) (375) (55) (14) (86)
Recognized net loss 314 82 100 15 3 13
Net amortization 1 1 1 - - 15
Prior service cost - - - - - (3)
Net periodic pension cost (income) $ (96) $ (20) $ (58) $ (6) $ 4 $ -
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 loss 269 71 86 13 2 6
Net amortization 1 1 1 - - 15
Prior service cost - - - - - (3)
Net periodic pension cost (income) $ (22) $ (3) $ (31) $ (3) $ 3 $ 7
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.
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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, 2022, estimated benefit payments were as follows:
Georgia Southern Company
Southern Company Alabama Power Power Mississippi Power Southern Power Gas
(in millions)
Benefit Payments:
2023 $ 734 $ 155 $ 230 $ 32 $ 6 $ 83
2024 735 160 236 33 7 57
2025 760 167 243 34 7 58
2026 784 173 248 35 7 60
2027 806 178 252 36 8 61
2028 to 2032 4,262 952 1,304 192 43 323
Other Postretirement Benefits
Changes in the APBO and the fair value of the Registrants' plan assets during the plan years ended December 31, 2022 and 2021 were as follows:
2022
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 $ 1,849 $ 440 $ 656 $ 76 $ 11 $ 237
Service cost 23 6 6 1 - 1
Interest cost 42 10 15 2 - 5
Benefits paid (109) (23) (38) (4) (1) (18)
Actuarial gain (365) (89) (125) (16) (1) (46)
Retiree drug subsidy 1 - - - - -
Balance at end of year 1,441 344 514 59 9 179
Change in plan assets
Fair value of plan assets at beginning
of year 1,251 489 450 29 - 143
Actual loss on plan assets (218) (98) (71) (4) - (25)
Employer contributions 73 4 27 3 1 13
Benefits paid (108) (23) (38) (4) (1) (18)
Fair value of plan assets at end of
year 998 372 368 24 - 113
Accrued asset (liability) $ (443) $ 28 $ (146) $ (35) $ (9) $ (66)
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COMBINED NOTES TO FINANCIAL STATEMENTS
2021
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 $ 1,948 $ 463 $ 699 $ 81 $ 12 $ 248
Service cost 24 6 7 1 - 2
Interest cost 35 9 12 1 - 4
Benefits paid (105) (22) (36) (5) - (18)
Actuarial (gain) loss (54) (16) (26) (2) (1) 1
Retiree drug subsidy 1 - - - - -
Balance at end of year 1,849 440 656 76 11 237
Change in plan assets
Fair value of plan assets at beginning
of year 1,158 458 427 27 - 128
Actual return on plan assets 154 55 55 4 - 18
Employer contributions 43 (2) 4 3 - 15
Benefits paid (104) (22) (36) (5) - (18)
Fair value of plan assets at end of
year 1,251 489 450 29 - 143
Accrued asset (liability) $ (598) $ 49 $ (206) $ (47) $ (11) $ (94)
Amounts recognized in the balance sheets at December 31, 2022 and 2021 related
to the Registrants' other postretirement benefit plans consist of the following:
Georgia Southern Southern Company
Southern Company Alabama Power Power Mississippi Power Power Gas
(in millions)
December 31, 2022:
Prepaid other postretirement benefit
costs(a) $ - $ 28 $ - $ - $ - $ -
Other regulatory assets, deferred(b) 34 - 19 - - -
Other current liabilities (6) - - - (1) -
Employee benefit obligations(c) (437) - (146) (35) (8) (66)
Other regulatory liabilities,
deferred (170) (21) (58) (9) - (58)
AOCI (4) - - - - (2)
December 31, 2021:
Prepaid other postretirement benefit
costs(a) $ - $ 49 $ - $ - $ - $ -
Other regulatory assets, deferred(b) 97 - 30 2 - -
Other current liabilities (5) - - - - -
Employee benefit obligations(c) (593) - (206) (47) (11) (94)
Other regulatory liabilities,
deferred (171) (62) (40) (1) - (34)
AOCI - - - - 2 (5)
(a)Included in prepaid pension and other postretirement benefit costs on Alabama Power's balance sheet.
(b)Amounts for Southern Company exclude regulatory assets of $32 million and $40 million at December 31, 2022 and 2021, respectively, associated with unamortized amounts in Southern Company Gas' other postretirement benefit plans prior to its acquisition by Southern Company.
(c)Included in other deferred credits and liabilities on Southern Power's consolidated balance sheets.
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COMBINED NOTES TO FINANCIAL STATEMENTS
Presented below are the amounts included in net regulatory assets (liabilities)
at December 31, 2022 and 2021 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.
Southern Georgia Southern
Company Alabama Power Power Mississippi Power Company Gas
(in millions)
Balance at December 31, 2022:
Regulatory assets (liabilities):
Prior service cost $ 14 $ 4 $ 6 $ 1 $ 1
Net gain (150) (25) (45) (10) (64)
Regulatory amortization - - - - 5
Total regulatory assets
(liabilities)(*) $ (136) $ (21) $ (39) $ (9) $ (58)
Balance at December 31, 2021:
Regulatory assets (liabilities):
Prior service cost $ 13 $ 3 $ 5 $ 1 $ 1
Net gain (87) (65) (15) - (51)
Regulatory amortization - - - - 16
Total regulatory assets
(liabilities)(*) $ (74) $ (62) $ (10) $ 1 $ (34)
(*)Amounts for Southern Company exclude regulatory assets of $32 million and $40
million at December 31, 2022 and 2021, respectively, associated with unamortized
amounts in Southern Company Gas' other postretirement benefit plans prior to its
acquisition by Southern Company.
The changes in the balance of net regulatory assets (liabilities) related to the
other postretirement benefit plans for the plan years ended December 31, 2022
and 2021 are presented in the following table:
Southern Georgia Southern
Company Alabama Power Power Mississippi Power Company Gas
(in millions)
Net regulatory assets (liabilities):(*)
Balance at December 31, 2020 $ 51 $ (21) $ 47 $ 5 $ (23)
Net gain (120) (41) (55) (4) (2)
Reclassification adjustments:
Amortization of prior service costs 1 - 1 - -
Amortization of net loss (6) - (3) - -
Amortization of regulatory assets(*) - - - - (9)
Total reclassification adjustments (5) - (2) - (9)
Total change (125) (41) (57) (4) (11)
Balance at December 31, 2021 $ (74) $ (62) $ (10) $ 1 $ (34)
Net (gain) loss (64) 41 (27) (10) (13)
Reclassification adjustments:
Amortization of prior service costs 1 - - - -
Amortization of net gain (loss) 1 - (2) - -
Amortization of regulatory assets(*) - - - - (11)
Total reclassification adjustments 2 - (2) - (11)
Total change (62) 41 (29) (10) (24)
Balance at December 31, 2022 $ (136) $ (21) $ (39) $ (9) $ (58)
(*)Amounts for Southern Company exclude regulatory assets of $32 million and $40
million at December 31, 2022 and 2021, 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
Presented below are the amounts included in AOCI at December 31, 2022 and 2021
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, 2022
AOCI:
Prior service cost $ 1 $ - $ -
Net (gain) loss (5) - (2)
Total AOCI $ (4) $ - $ (2)
Balance at December 31, 2021
AOCI:
Prior service cost $ 1 $ - $ 1
Net (gain) loss (1) 2 (6)
Total AOCI $ - $ 2 $ (5)
The components of OCI related to the other postretirement benefit plans for the
plan years ended December 31, 2022 and 2021 are presented in the following
table:
Southern
Southern Company Power Southern Company Gas
(in millions)
AOCI:
Balance at December 31, 2020 $ 8 $ 3 $ -
Net gain (11) (1)
-
Reclassification adjustments:
Amortization of net gain (loss) 3 - (5)
Total change (8) (1) (5)
Balance at December 31, 2021 $ - $ 2 $ (5)
Net gain (3) (2) -
Reclassification adjustments:
Amortization of net gain (loss) (1) - 3
Total change (4) (2) 3
Balance at December 31, 2022 $ (4) $ - $ (2)
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COMBINED NOTES TO FINANCIAL STATEMENTS
Components of the other postretirement benefit plans' net periodic cost for the Registrants were as follows:
Southern Georgia Southern Company
Company Alabama Power Power Mississippi Power Southern Power Gas
(in millions)
2022
Service cost $ 23 $ 6 $ 6 $ 1 $ - $ 1
Interest cost 42 10 15 2 - 5
Expected return on plan assets (80) (32) (28) (2) 1 (9)
Net amortization (1) - 2 - - 6
Net periodic postretirement benefit
cost (income) $ (16) $ (16) $ (5) $ 1 $ 1 $ 3
2021
Service cost $ 24 $ 6 $ 7 $ 1 $ - $ 2
Interest cost 35 9 12 1 - 4
Expected return on plan assets (76) (30) (26) (1) 1 (10)
Net amortization 2 - 2 - - 6
Net periodic postretirement benefit
cost (income) $ (15) $ (15) $ (5) $ 1 $ 1 $ 2
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 (income) $ 5 $ (10) $ 2 $ 2 $ 1 $ 5
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:
2023 $ 115 $ 25 $ 41 $ 5 $ 1 $ 18
2024 110 24 39 5 1 17
2025 114 26 41 5 1 17
2026 113 26 41 5 1 16
2027 113 26 41 5 1 16
2028 to 2032 551 130 199 22 1 68
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS
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. Southern Company's investment strategy also includes adjusting the established asset allocation to invest a larger portion of the portfolio in fixed rate debt securities should the qualified pension plan achieve a predetermined funding threshold, which occurred during 2022.
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.
Real estate: Investments in traditional private
market, equity-oriented investments in real Investments in real estate, special situations, and
properties (indirectly through pooled funds or private equity are generally classified as Net Asset
partnerships) and in publicly traded real estate Value as a Practical Expedient, since the underlying
securities. assets typically do not have publicly available
observable inputs. The fund manager values the
Special situations: Investments in opportunistic assets using various inputs and techniques depending
strategies with the objective of diversifying and on the nature of the underlying investments.
enhancing returns and exploiting short-term Techniques may include purchase multiples for
inefficiencies, as well as investments in promising comparable transactions, comparable public company
new strategies of a longer-term nature. trading multiples, discounted cash flow analysis,
prevailing market capitalization rates, recent sales
Private equity: Investments in private partnerships of comparable investments, and independent
that invest in private or public securities third-party appraisals. The fair value of
typically through privately-negotiated and/or partnerships is determined by aggregating the value
structured transactions, including leveraged of the underlying assets less liabilities.
buyouts, venture capital, and distressed debt.
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COMBINED NOTES TO FINANCIAL STATEMENTS
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 fair values, and actual allocations relative to the target allocations, of
the Southern Company system's pension plans at December 31, 2022 and 2021 are
presented below.
Fair Value Measurements Using
Significant
Quoted Prices in Other Significant Net Asset Value
Active Markets for Observable Unobservable as a Practical
Identical Assets Inputs Inputs Expedient
At December 31, 2022: (Level 1) (Level 2) (Level 3) (NAV) Total Target Allocation Actual Allocation
(in millions)
Southern Company
Assets:
Equity: 45 % 43 %
Domestic equity $ 2,078 $ 691 $ - $ - $ 2,769
International equity 2,166 1,090 - - 3,256
Fixed income: 30 28
U.S. Treasury, government, and
agency bonds - 1,469 - - 1,469
Mortgage- and asset-backed
securities - 29 - - 29
Corporate bonds - 1,494 - - 1,494
Pooled funds - 607 - - 607
Cash equivalents and other 399 7 - - 406
Real estate investments 376 - - 1,887 2,263 13 15
Special situations - - - 187 187 3 2
Private equity - - - 1,717 1,717 9 12
Total $ 5,019 $ 5,387 $ - $ 3,791 $ 14,197 100 % 100 %
Liabilities:
Derivatives (4) - - - (4)
Total $ 5,015 $ 5,387 $ - $ 3,791 $ 14,193 100 % 100 %
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS
Fair Value Measurements Using
Significant
Quoted Prices in Other Significant Net Asset Value
Active Markets for Observable Unobservable as a Practical
Identical Assets Inputs Inputs Expedient
At December 31, 2022: (Level 1) (Level 2) (Level 3) (NAV) Total Target Allocation Actual Allocation
(in millions)
Alabama Power
Assets:
Equity: 45 % 43 %
Domestic equity $ 500 $ 167 $ - $ - $ 667
International equity 522 263 - - 785
Fixed income: 30 28
U.S. Treasury, government, and
agency bonds - 354 - - 354
Mortgage- and asset-backed
securities - 7 - - 7
Corporate bonds - 360 - - 360
Pooled funds - 146 - - 146
Cash equivalents and other 96 2 - - 98
Real estate investments 91 - - 455 546 13 15
Special situations - - - 45 45 3 2
Private equity - - - 414 414 9 12
Total $ 1,209 $ 1,299 $ - $ 914 $ 3,422 100 % 100 %
Liabilities:
Derivatives (1) - - - (1)
Total $ 1,208 $ 1,299 $ - $ 914 $ 3,421 100 % 100 %
Georgia Power
Assets:
Equity: 45 % 43 %
Domestic equity $ 651 $ 217 $ - $ - $ 868
International equity 678 342 - - 1,020
Fixed income: 30 28
U.S. Treasury, government, and
agency bonds - 460 - - 460
Mortgage- and asset-backed
securities - 9 - - 9
Corporate bonds - 468 - - 468
Pooled funds - 190 - - 190
Cash equivalents and other 125 2 - - 127
Real estate investments 118 - - 591 709 13 15
Special situations - - - 59 59 3 2
Private equity - - - 538 538 9 12
Total $ 1,572 $ 1,688 $ - $ 1,188 $ 4,448 100 % 100 %
Liabilities:
Derivatives (1) - - - (1)
Total $ 1,571 $ 1,688 $ - $ 1,188 $ 4,447 100 % 100 %
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS
Fair Value Measurements Using
Significant Net Asset
Quoted Prices in Other Significant Value as a
Active Markets for Observable Unobservable Practical
Identical Assets Inputs Inputs Expedient
At December 31, 2022: (Level 1) (Level 2) (Level 3) (NAV) Total Target Allocation Actual Allocation
(in millions)
Mississippi Power
Assets:
Equity: 45 % 43 %
Domestic equity $ 95 $ 32 $ - $ - $ 127
International equity 99 50 - - 149
Fixed income: 30 28
U.S. Treasury, government, and
agency bonds - 67 - - 67
Mortgage- and asset-backed
securities - 1 - - 1
Corporate bonds - 68 - - 68
Pooled funds - 28 - - 28
Cash equivalents and other 18 - - - 18
Real estate investments 17 - - 86 103 13 15
Special situations - - - 9 9 3 2
Private equity - - - 78 78 9 12
Total $ 229 $ 246 $ - $ 173 $ 648 100 % 100 %
Southern Power
Assets:
Equity: 45 % 43 %
Domestic equity $ 25 $ 9 $ - $ - $ 34
International equity 27 14 - - 41
Fixed income: 30 28
U.S. Treasury, government, and
agency bonds - 18 - - 18
Corporate bonds - 19 - - 19
Pooled funds - 8 - - 8
Cash equivalents and other 5 - - - 5
Real estate investments 5 - - 24 29 13 15
Special situations - - - 2 2 3 2
Private equity - - - 21 21 9 12
Total $ 62 $ 68 $ - $ 47 $ 177 100% 100 %
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS
Fair Value Measurements Using
Significant Net Asset
Quoted Prices in Other Significant Value as a
Active Markets for Observable Unobservable Practical
Identical Assets Inputs Inputs Expedient
At December 31, 2022: (Level 1) (Level 2) (Level 3) (NAV) Total Target Allocation Actual Allocation
(in millions)
Southern Company Gas
Assets:
Equity: 45 % 43 %
Domestic equity $ 146 $ 49 $ - $ - $ 195
International equity 152 77 - - 229
Fixed income: 30 28
U.S. Treasury, government, and
agency bonds - 104 - - 104
Mortgage- and asset-backed
securities - 2 - - 2
Corporate bonds - 105 - - 105
Pooled funds - 43 - - 43
Cash equivalents and other 28 1 - - 29
Real estate investments 27 - - 133 160 13 15
Special situations - - - 13 13 3 2
Private equity - - - 121 121 9 12
Total $ 353 $ 381 $ - $ 267 $ 1,001 100 % 100 %
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS
Fair Value Measurements Using
Significant
Quoted Prices in Other Significant Net Asset Value
Active Markets for Observable Unobservable as a Practical
Identical Assets Inputs Inputs Expedient
At December 31, 2021: (Level 1) (Level 2) (Level 3) (NAV) Total Target Allocation Actual Allocation
(in millions)
Southern Company
Assets:
Equity: 51 % 53 %
Domestic equity $ 3,095 $ 1,326 $ - $ - $ 4,421
International equity 2,740 1,402 3 - 4,145
Fixed income: 23 22
U.S. Treasury, government, and
agency bonds - 1,209 - - 1,209
Mortgage- and asset-backed
securities - 10 - - 10
Corporate bonds - 1,752 - - 1,752
Pooled funds - 771 - - 771
Cash equivalents and other 405 7 - - 412
Real estate investments 706 - - 2,038 2,744 14 15
Special situations - - - 171 171 3 1
Private equity - - - 1,590 1,590 9 9
Total $ 6,946 $ 6,477 $ 3 $ 3,799 $ 17,225 100 % 100 %
Alabama Power
Assets:
Equity: 51 % 53 %
Domestic equity $ 743 $ 319 $ - $ - $ 1,062
International equity 659 337 1 - 997
Fixed income: 23 22
U.S. Treasury, government, and
agency bonds - 291 - - 291
Mortgage- and asset-backed
securities - 2 - - 2
Corporate bonds - 421 - - 421
Pooled funds - 186 - - 186
Cash equivalents and other 97 2 - - 99
Real estate investments 170 - - 490 660 14 15
Special situations - - - 41 41 3 1
Private equity - - - 382 382 9 9
Total $ 1,669 $ 1,558 $
1 $ 913 $ 4,141 100 % 100 %
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS
Fair Value Measurements Using
Significant
Quoted Prices in Other Significant Net Asset Value
Active Markets for Observable Unobservable as a Practical
Identical Assets Inputs Inputs Expedient
At December 31, 2021: (Level 1) (Level 2) (Level 3) (NAV) Total Target Allocation Actual Allocation
(in millions)
Georgia Power
Assets:
Equity: 51 % 53 %
Domestic equity $ 972 $ 417 $ - $ - $ 1,389
International equity 861 441 1 - 1,303
Fixed income: 23 22
U.S. Treasury, government, and
agency bonds - 380 - - 380
Mortgage- and asset-backed
securities - 3 - - 3
Corporate bonds - 551 - - 551
Pooled funds - 243 - - 243
Cash equivalents and other 127 2 - - 129
Real estate investments 222 - - 641 863 14 15
Special situations - - - 54 54 3 1
Private equity - - - 500 500 9 9
Total $ 2,182 $ 2,037 $ 1 $ 1,195 $ 5,415 100 % 100 %
Mississippi Power
Assets:
Equity: 51 % 53 %
Domestic equity $ 142 $ 61 $ - $ - $ 203
International equity 126 64 - - 190
Fixed income: 23 22
U.S. Treasury, government, and
agency bonds - 55 - - 55
Corporate bonds - 80 - - 80
Pooled funds - 35 - - 35
Cash equivalents and other 18 - - - 18
Real estate investments 32 - - 93 125 14 15
Special situations - - - 8 8 3 1
Private equity - - - 73 73 9 9
Total $ 318 $ 295 $ - $ 174 $ 787 100 % 100 %
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS
Fair Value Measurements Using
Significant Net Asset
Quoted Prices in Other Significant Value as a
Active Markets for Observable Unobservable Practical
Identical Assets Inputs Inputs Expedient
At December 31, 2021: (Level 1) (Level 2) (Level 3) (NAV) Total Target Allocation Actual Allocation
(in millions)
Southern Power
Assets:
Equity: 51 % 53 %
Domestic equity $ 38 $ 16 $ - $ - $ 54
International equity 34 17 - - 51
Fixed income: 23 22
U.S. Treasury, government, and
agency bonds - 15 - - 15
Corporate bonds - 22 - - 22
Pooled funds - 10 - - 10
Cash equivalents and other 5 - - - 5
Real estate investments 9 - - 25 34 14 15
Special situations - - - 2 2 3 1
Private equity - - - 20 20 9 9
Total $ 86 $ 80 $ - $ 47 $ 213 100 % 100 %
Southern Company Gas
Assets:
Equity: 51 % 53 %
Domestic equity $ 223 $ 96 $ - $ - $ 319
International equity 197 101 - - 298
Fixed income: 23 22
U.S. Treasury, government, and
agency bonds - 87 - - 87
Mortgage- and asset-backed
securities - 1 - - 1
Corporate bonds - 126 - - 126
Pooled funds - 56 - - 56
Cash equivalents and other 29 - - - 29
Real estate investments 51 - - 147 198 14 15
Special situations - - - 12 12 3 1
Private equity - - - 115 115 9 9
Total $ 500 $ 467 $ - $ 274 $ 1,241 100 % 100 %
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS
The fair values, and actual allocations relative to the target allocations, of the applicable Registrants' other postretirement benefit plan assets at December 31, 2022 and 2021 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, 2022: (Level 1) (Level 2) (NAV) Total Target Allocation Actual Allocation
(in millions)
Southern Company
Assets:
Equity: 61 % 59 %
Domestic equity $ 85 $ 74 $ - $ 159
International equity 58 79 - 137
Fixed income: 30 28
U.S. Treasury, government, and agency bonds - 43 - 43
Mortgage- and asset-backed securities - 1 - 1
Corporate bonds - 40 - 40
Pooled funds - 79 - 79
Cash equivalents and other 19 - - 19
Trust-owned life insurance - 406 - 406
Real estate investments 11 - 51 62 5 7
Special situations - - 6 6 1 1
Private equity - - 46 46 3 5
Total $ 173 $ 722 $ 103 $ 998 100 % 100 %
Alabama Power
Assets:
Equity: 69 % 65 %
Domestic equity $ 17 $ 6 $ - $ 23
International equity 18 9 - 27
Fixed income: 23 23
U.S. Treasury, government, and agency bonds - 12 - 12
Corporate bonds - 12 - 12
Pooled funds - 7 - 7
Cash equivalents and other 3 - - 3
Trust-owned life insurance - 252 - 252
Real estate investments 3 - 16 19 4 7
Special situations - - 2 2 1 1
Private equity - - 14 14 3 4
Total $ 41 $ 298 $ 32 $ 371 100 % 100 %
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS
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, 2022: (Level 1) (Level 2) (NAV) Total Target Allocation Actual Allocation
(in millions)
Georgia Power
Assets:
Equity: 58 % 56 %
Domestic equity $ 46 $ 6 $ - $ 52
International equity 17 39 - 56
Fixed income: 35 34
U.S. Treasury, government, and agency
bonds - 10 - 10
Corporate bonds - 12 - 12
Pooled funds - 40 - 40
Cash equivalents and other 9 - - 9
Trust-owned life insurance - 154 - 154
Real estate investments 4 - 15 19 4 5
Special situations - - 2 2 1 1
Private equity - - 14 14 2 4
Total $ 76 $ 261 $ 31 $ 368 100 % 100 %
Mississippi Power
Assets:
Equity: 37 % 35 %
Domestic equity $ 3 $ 1 $ - $ 4
International equity 3 2 - 5
Fixed income: 43 41
U.S. Treasury, government, and agency
bonds - 4 - 4
Corporate bonds - 2 - 2
Pooled funds - 1 - 1
Cash equivalents and other 2 - - 2
Real estate investments 1 - 3 4 11 12
Special situations - - - - 2 2
Private equity - - 2 2 7 10
Total $ 9 $ 10 $ 5 $ 24 100 % 100 %
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS
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, 2022: (Level 1) (Level 2) (NAV) Total Target Allocation Actual Allocation
(in millions)
Southern Company Gas
Assets:
Equity: 72 % 70 %
Domestic equity $ 2 $ 56 $ - $ 58
International equity 2 20 - 22
Fixed income: 26 27
U.S. Treasury, government, and agency
bonds - 1 - 1
Corporate bonds - 1 - 1
Pooled funds - 27 - 27
Cash equivalents and other 1 - - 1
Real estate investments - - 2 2 1 2
Private equity - - 1 1 1 1
Total $ 5 $ 105 $ 3 $ 113 100 % 100 %
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Table of Contents Index to Financial Statements
COMBINED NOTES TO FINANCIAL STATEMENTS
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, 2021: (Level 1) (Level 2) (NAV) Total Target Allocation Actual Allocation
(in millions)
Southern Company
Assets:
Equity: 64 % 66 %
Domestic equity $ 123 $ 112 $ - $ 235
International equity 73 99 - 172
Fixed income: 27 25
U.S. Treasury, government, and agency
bonds - 37 - 37
Corporate bonds - 50 - 50
Pooled funds - 90 - 90
Cash equivalents and other 14 - - 14
Trust-owned life insurance - 530 - 530
Real estate investments 20 - 54 74 5 6
Special situations - - 5 5 1 -
Private equity - - 42 42 3 3
Total $ 230 $ 918 $ 101 $ 1,249 100 % 100 %
Alabama Power
Assets:
Equity: 71 % 69 %
Domestic equity $ 26 $ 11 $ - $ 37
International equity 23 12 - 35
Fixed income: 21 21
U.S. Treasury, government, and agency
bonds - 10 - 10
Corporate bonds - 18 - 18
Pooled funds - 6 - 6
Cash equivalents and other 3 - - 3
Trust-owned life insurance - 341 - 341
Real estate investments 6 - 17 23 4 7
Special situations - - 2 2 1 -
Private equity - - 13 13 3 3
Total $ 58 $ 398 $ 32 $ 488 100 % 100 %
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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, 2021: (Level 1) (Level 2) (NAV) Total Target Allocation Actual Allocation
(in millions)
Georgia Power
Assets:
Equity: 60 % 62 %
Domestic equity $ 65 $ 13 $ - $ 78
International equity 22 50 - 72
Fixed income: 33 30
U.S. Treasury, government, and
agency bonds - 9 - 9
Corporate bonds - 14 - 14
Pooled funds - 46 - 46
Cash equivalents and other 5 - - 5
Trust-owned life insurance - 189 - 189
Real estate investments 7 - 16 23 4 5
Special situations - - 1 1 1 -
Private equity - - 13 13 2 3
Total $ 99 $ 321 $ 30 $ 450 100 % 100 %
Mississippi Power
Assets:
Equity: 43 % 44 %
Domestic equity $ 4 $ 2 $ - $ 6
International equity 4 2 - 6
Fixed income: 36 34
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 - 3 4 11 13
Special situations - - - - 2 1
Private equity - - 2 2 8 8
Total $ 10 $ 12 $ 5 $ 27 100 % 100 %
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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, 2021: (Level 1) (Level 2) (NAV) Total Target Allocation Actual Allocation
(in millions)
Southern Company Gas
Assets:
Equity: 72 % 73 %
Domestic equity $ 3 $ 76 $ - $ 79
International equity 2 24 - 26
Fixed income: 26 24
U.S. Treasury, government, and agency
bonds - 1 - 1
Corporate bonds - 1 - 1
Pooled funds - 30 - 30
Cash equivalents and other 2 - - 2
Real estate investments 1 - 2 3 1 2
Private equity - - 1 1 1 1
Total $ 8 $ 132 $ 3 $ 143 100 % 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 2022, 2021, and 2020 were as follows:
Alabama Georgia Mississippi Southern
Southern Company Power Power Power Power
Southern Company Gas
(in millions)
2022 $ 124 $ 26 $ 29 $ 5 $ 3 $ 17
2021 119 26 28 5 2 16
2020 120 26 29 5 2 16
12. STOCK 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
Equity and Incentive Compensation Plan to Southern Company system employees
ranging from line management to executives.
At December 31, 2022, 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 1,586 221 236 64 45 186
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.
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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 2022 2021 2020 Expected volatility 29.6% 30.0% 15.4% Expected term (in years) 3 3 3 Interest rate 1.7% 0.2% 1.4%
Weighted average grant-date fair value $79.69 $69.06 $77.65
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 2022, 2021, and 2020 was $66.87, $59.49, and $68.42, 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 2.2 million unvested PSUs outstanding at December 31, 2021. In February 2022, the PSUs that vested for the three-year performance period ended December 31, 2021 were converted into 2.5 million shares outstanding at a share price of $66.57. During 2022, Southern Company granted 1.3 million PSUs and 1.1 million PSUs were vested or forfeited, resulting in 2.4 million unvested PSUs outstanding at December 31, 2022. In February 2023, the PSUs that vested for the three-year performance period ended December 31, 2022 were converted into 1.8 million shares outstanding at a weighted average share price of $67.13.
Total PSU compensation cost, and the related tax benefit recognized in income, for the years ended December 31, 2022, 2021, and 2020 are as follows:
2022 2021 2020
(in millions)
Southern Company
Compensation cost recognized in income $ 101 $ 112 $ 84
Tax benefit of compensation cost recognized in income 26 29 22
Southern Company Gas
Compensation cost recognized in income $ 12 $ 17 $ 13
Tax benefit of compensation cost recognized in income 4 4 4
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
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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, 2022, Southern Company's total unrecognized compensation cost
related to PSUs was $31 million and is expected to be recognized over a
weighted-average period of approximately 19 months. The total unrecognized
compensation cost related to PSUs at December 31, 2022 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 2022, 2021, and 2020 were $67.20, $59.56, and
$67.60, 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 1.1 million RSUs outstanding at December 31, 2021. During
2022, Southern Company granted 0.4 million RSUs and 0.6 million RSUs were vested
or forfeited, resulting in 0.9 million unvested RSUs outstanding at December 31,
2022, including RSUs related to employee retention agreements.
For the years ended December 31, 2022, 2021, and 2020, Southern Company's total
compensation cost for RSUs recognized in income was $26 million, $32 million,
and $29 million, respectively. The related tax benefit also recognized in income
was $7 million, $8 million, and $8 million for the years ended December 31,
2022, 2021, and 2020, respectively. Total unrecognized compensation cost related
to RSUs at December 31, 2022, which is being recognized over a weighted-average
period of approximately 18 months, is immaterial for Southern Company.
Total RSUs outstanding and total compensation cost and related tax benefit for
the RSUs recognized in income for the years ended December 31, 2022, 2021, and
2020, as well as the total unrecognized compensation cost at December 31, 2022,
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. At
December 31, 2022, the weighted average remaining contractual term for the
options outstanding and exercisable was approximately 10 months.
Southern Company's activity in the stock option program for 2022 is summarized
below:
Weighted Average
Shares Subject to Option Exercise Price
(in millions)
Outstanding at December 31, 2021 2.8 $ 42.95
Exercised 1.8 43.37
Outstanding and Exercisable at December 31, 2022 1.0 $ 42.22
Southern Company's cash receipts from issuances related to stock options exercised under the share-based payment arrangements for the years ended December 31, 2022, 2021, and 2020 were $75 million, $66 million, and $66 million, respectively.
At December 31, 2022, the aggregate intrinsic value for options outstanding and
exercisable was $29 million for Southern Company and immaterial for all other
Registrants.
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Total intrinsic value of options exercised, and the related tax benefit, for the
years ended December 31, 2022, 2021, and 2020 are presented below for Southern
Company and Georgia Power and were immaterial for all other Registrants:
Year Ended December 31 2022 2021 2020
(in millions)
Southern Company
Intrinsic value of options exercised $ 49 $ 34 $ 38
Tax benefit of options exercised 12 7 9
Georgia Power
Intrinsic value of options exercised $ 15 $ 14 $ 9
Tax benefit of options exercised 4 3 2
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.
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.
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At December 31, 2022, 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, 2022: (Level 1) (Level 2) (Level 3) (NAV) Total
(in millions)
Southern Company
Assets:
Energy-related derivatives(a) $ 18 $ 181 $ - $ - $ 199
Interest rate derivatives - 12 - - 12
Investments in trusts:(b)(c)
Domestic equity 651 178 - - 829
Foreign equity 125 150 - - 275
U.S. Treasury and government agency
securities - 285 - - 285
Municipal bonds - 51 - - 51
Pooled funds - fixed income - 7 - - 7
Corporate bonds - 412 - - 412
Mortgage and asset backed securities - 90 - - 90
Private equity - - - 161 161
Cash and cash equivalents 4 - - - 4
Other 37 12 - - 49
Cash equivalents 1,427 20 - - 1,447
Other investments 9 26 - - 35
Total $ 2,271 $ 1,424 $ - $ 161 $ 3,856
Liabilities:
Energy-related derivatives(a) $ 32 $ 178 $ - $ - $ 210
Interest rate derivatives - 302 - - 302
Foreign currency derivatives - 216 - - 216
Contingent consideration - - 12 - 12
Other - 13 - - 13
Total $ 32 $ 709 $ 12 $ - $ 753
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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, 2022: (Level 1) (Level 2) (Level 3) (NAV) Total
(in millions)
Alabama Power
Assets:
Energy-related derivatives $ - $ 62 $ - $ - $ 62 Nuclear decommissioning trusts:(b) Domestic equity
396 169 - - 565
Foreign equity 125 - - - 125
U.S. Treasury and government agency
securities - 19 - - 19
Municipal bonds - 1 - - 1
Corporate bonds - 225 - - 225
Mortgage and asset backed securities - 22 - - 22
Private equity - - - 161 161
Other 7 - - - 7
Cash equivalents 438 20 - - 458
Other investments - 26 - - 26
Total $ 966 $ 544 $ - $ 161 $ 1,671
Liabilities:
Energy-related derivatives $ - $ 39 $ - $ - $ 39
Georgia Power
Assets:
Energy-related derivatives $ - $ 42 $ - $ - $ 42
Nuclear decommissioning trusts:(b)(c)
Domestic equity 255 1 - - 256
Foreign equity - 149 - - 149
U.S. Treasury and government agency
securities - 266 - - 266
Municipal bonds - 50 - - 50
Corporate bonds - 187 - - 187
Mortgage and asset backed securities - 68 - - 68
Other 30 12 - - 42
Cash equivalents 355 - - - 355
Total $ 640 $ 775 $ - $ - $ 1,415
Liabilities:
Energy-related derivatives $ - $ 62 $ - $ - $ 62
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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 ObservableInputs Unobservable Inputs Expedient At December 31, 2022:
(Level 1) (Level 2) (Level 3) (NAV) Total
(in millions)
Mississippi Power
Assets:
Energy-related derivatives $ - $ 59 $ - $ - $ 59
Cash equivalents 47 - - - 47
Total $ 47 $ 59 $ - $ - $ 106
Liabilities:
Energy-related derivatives $ - $ 32 $ - $ - $ 32
Southern Power
Assets:
Energy-related derivatives $ - $ 8 $ - $ - $ 8
Liabilities:
Energy-related derivatives $ - $ 12 $ - $ - $ 12
Foreign currency derivatives - 47 - - 47
Contingent consideration - - 12 - 12
Other - 13 - - 13
Total $ - $ 72 $ 12 $ - $ 84
Southern Company Gas
Assets:
Energy-related derivatives(a) $ 18 $ 10 $ - $ - $ 28
Non-qualified deferred compensation
trusts:
Domestic equity - 8 - - 8
Foreign equity - 1 - - 1
Pooled funds - fixed income - 7 - - 7
Cash and cash equivalents 4 - - - 4
Cash equivalents 50 - - - 50
Total $ 72 $ 26 $ - $ - $ 98
Liabilities:
Energy-related derivatives(a)(b) $ 32 $ 33 $ - $ - $ 65
Interest rate derivatives - 86 - - 86
Total $ 32 $ 119 $ - $ - $ 151
(a)Excludes cash collateral of $41 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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At December 31, 2021, 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, 2021:
(Level 1) (Level 2) (Level 3) (NAV) Total
(in millions)
Southern Company
Assets:
Energy-related derivatives(a) $ 24 $ 195 $ - $ - $ 219
Interest rate derivatives - 19 - - 19
Investments in trusts:(b)(c)
Domestic equity 791 225 - - 1,016
Foreign equity 165 188 - - 353
U.S. Treasury and government agency
securities - 314 - - 314
Municipal bonds - 56 - - 56
Pooled funds - fixed income - 13 - - 13
Corporate bonds 1 522 - - 523
Mortgage and asset backed securities - 93 - - 93
Private equity - - - 150 150
Cash and cash equivalents 2 - - - 2
Other 22 25 - - 47
Cash equivalents 1,160 14 - - 1,174
Other investments 9 35 - - 44
Total $ 2,174 $ 1,699 $ - $ 150 $ 4,023
Liabilities:
Energy-related derivatives(a) $ 10 $ 36 $ - $ - $ 46
Interest rate derivatives - 29 - - 29
Foreign currency derivatives - 79 - - 79
Contingent consideration - - 14 - 14
Other - 13 - - 13
Total $ 10 $ 157 $ 14 $ - $ 181
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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, 2021: (Level 1) (Level 2) (Level 3) (NAV) Total
(in millions)
Alabama Power
Assets:
Energy-related derivatives $ - $ 55 $ - $ - $ 55 Nuclear decommissioning trusts:(b) Domestic equity
468 216 - - 684
Foreign equity 165 - - - 165
U.S. Treasury and government agency
securities - 21 - - 21
Municipal bonds - 1 - - 1
Corporate bonds 1 271 - - 272
Mortgage and asset backed securities - 22 - - 22
Private equity - - - 150 150
Other 9 - - - 9
Cash equivalents 839 14 - - 853
Other investments - 35 - - 35
Total $ 1,482 $ 635 $ - $ 150 $ 2,267
Liabilities:
Energy-related derivatives $ - $ 11 $ - $ - $ 11
Georgia Power
Assets:
Energy-related derivatives $ - $ 75 $ - $ - $ 75
Nuclear decommissioning trusts:(b)(c)
Domestic equity 323 1 - - 324
Foreign equity - 185 - - 185
U.S. Treasury and government agency
securities - 293 - - 293
Municipal bonds - 55 - - 55
Corporate bonds - 251 - - 251
Mortgage and asset backed securities - 71 - - 71
Other 13 25 - - 38
Total $ 336 $ 956 $ - $ - $ 1,292
Liabilities:
Energy-related derivatives $ - $ 8 $ - $ - $ 8
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Fair Value Measurements Using
Quoted Prices in Significant Net Asset
Active Markets Other Value as a
for Identical Observable Significant Practical
Assets Inputs Unobservable Inputs Expedient
At December 31, 2021: (Level 1) (Level 2) (Level 3) (NAV) Total
(in millions)
Mississippi Power
Assets:
Energy-related derivatives $ - $ 56 $ - $ - $ 56
Cash equivalents 40 - - - 40
Total $ 40 $ 56 $ - $ - $ 96
Liabilities:
Energy-related derivatives $ - $ 5 $ - $ - $ 5
Southern Power
Assets:
Energy-related derivatives $ - $ 4 $ - $ - $ 4
Liabilities:
Foreign currency derivatives $ - $ 16 $ - $ - $ 16
Contingent consideration - - 14 - 14
Other - 13 - - 13
Total $ - $ 29 $ 14 $ - $ 43
Southern Company Gas
Assets:
Energy-related derivatives(a) $ 24 $ 5 $ - $ - $ 29
Interest rate derivatives - 6 - - 6
Non-qualified deferred compensation
trusts:
Domestic equity - 8 - - 8
Foreign equity - 3 - - 3
Pooled funds - fixed income - 13 - - 13
Cash equivalents 2 - - - 2
Total $ 26 $ 35 $ - $ - $ 61
Liabilities:Energy-related derivatives(a)(b) $ 10 $ 12
$ - $ - $ 22
Interest rate derivatives - 5 - - 5
Total $ 10 $ 17 $ - $ - $ 27
(a)Excludes immaterial cash collateral.
(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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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.
Southern Power also has payment obligations through 2040 whereby it must
reimburse the transmission owners for interconnection facilities and network
upgrades constructed to support connection of a Southern Power generating
facility to the transmission system. The obligations are categorized as Level 2
under Fair Value Measurements as the fair value is determined using observable
inputs for the contracted amounts and reimbursement period, as well as a
discount rate. The fair value of the obligations reflects the net present value
of expected payments.
"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 $161 million and
$150 million at December 31, 2022 and 2021, respectively. Unfunded commitments
related to the private equity investments totaled $78 million and $69 million at
December 31, 2022 and 2021, 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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At December 31, 2022 and 2021, other financial instruments for which the carrying amount did not equal fair value were as follows:
Southern
Southern Company
Company(*) Alabama Power Georgia Power Mississippi Power Southern Power Gas(*)
(in billions)
At December 31, 2022:
Long-term debt, including
securities due within one year:
Carrying amount $ 54.6 $ 10.6 $ 14.7 $ 1.5 $ 3.0 $ 7.4
Fair value 48.6 9.2 13.0 1.3 2.8 6.5
At December 31, 2021:
Long-term debt, including
securities due within one year:
Carrying amount $ 52.1 $ 9.7 $ 13.6 $ 1.5 $ 3.7 $ 6.9
Fair value 57.1 10.9 15.1 1.6 4.1 7.8
(*)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.
14. DERIVATIVES
The Registrants 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. Prior to the sale of Sequent on July 1, 2021, Southern Company Gas' wholesale gas operations used various contracts in its commercial activities that generally met 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. See Note 15 under "Southern Company Gas" for additional information regarding the sale of Sequent.
Energy-Related Derivatives
The Subsidiary Registrants 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 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
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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.
At December 31, 2022, 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(*) 431 2030 2025
Alabama Power 111 2026 -
Georgia Power 125 2026 -
Mississippi Power 94 2027 -
Southern Power 8 2030 2023
Southern Company Gas(*) 93 2025 2025
(*)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 98 million mmBtu and short
natural gas positions of 5 million mmBtu at December 31, 2022, which is also
included in Southern Company's total volume. See Note 15 under "Southern Company
Gas" for information regarding the sale of Sequent.
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 23 million mmBtu for Southern Company, which includes 6 million mmBtu
for Alabama Power, 8 million mmBtu for Georgia Power, 3 million mmBtu for
Mississippi Power, and 6 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, 2023 are $(27) million for Southern Company, $(11) million for
Southern Power, and $(16) million for Southern Company Gas.
Interest Rate Derivatives
Southern Company and certain subsidiaries may enter into interest rate
derivatives to hedge exposure to changes in interest rates. 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, 2022, the following interest rate derivatives were outstanding:
Fair Value
Interest Hedge Gain (Loss)
Notional Weighted Average Rate Maturity December 31,
Amount Interest Rate Paid Received Date 2022
(in millions) (in millions)
Cash Flow Hedges of Forecasted Debt
Southern Company parent $ 400 3.50% N/A June 2033 $ 12
Fair Value Hedges of Existing Debt
1-month LIBOR +
Southern Company parent 400 0.68% 1.75% March 2028 (55)
1-month LIBOR +
Southern Company parent 1,000 2.36% 3.70% April 2030 (161)
1-month LIBOR +
Southern Company Gas 500 0.38% 1.75% January 2031 (86)
Southern Company $ 2,300 $ (290)
For cash flow hedges of interest rate derivatives, the estimated pre-tax gains
(losses) expected to be reclassified from AOCI to interest expense for the year
ending December 31, 2023 are $(16) million for Southern Company and immaterial
for the other Registrants. Deferred gains and losses related to interest rate
derivatives are expected to be amortized into earnings through 2052 for Southern
Company, Alabama Power, and 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. 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, including foreign currency gains or losses arising from
changes in the U.S. currency exchange rates. Southern Company has elected to
exclude the cross-currency basis spread from the assessment of effectiveness in
the fair value hedges of its foreign currency risk and record any difference
between the change in the fair value of the excluded components and the amounts
recognized in earnings as a component of OCI.
At December 31, 2022, the following foreign currency derivatives were
outstanding:
Fair Value
Hedge Gain (Loss)
Pay Notional Pay Rate Receive Notional Receive Rate Maturity Date December 31, 2022
(in millions) (in millions) (in millions)
Cash Flow Hedges of Existing Debt
Southern Power $ 564 3.78% € 500 1.85% June 2026 $ (47)
Fair Value Hedges of Existing Debt
Southern Company parent 1,476 3.39% 1,250 1.88% September 2027 (169)
Southern Company $ 2,040 € 1,750 $ (216)
For cash flow hedges of foreign currency derivatives, the estimated pre-tax losses expected to be reclassified from AOCI to earnings for the year ending December 31, 2023 are $11 million for Southern Power.
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Derivative Financial Statement Presentation and Amounts
The Registrants 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.
At December 31, 2022 and 2021, the fair value of energy-related derivatives,
interest rate derivatives, and foreign currency derivatives was reflected in the
balance sheets as follows:
2022 2021Derivative Category and Balance Sheet Location Assets Liabilities Assets Liabilities
(in millions)
Southern Company
Energy-related derivatives designated as hedging
instruments for regulatory purposes
Assets from risk management activities/Other current liabilities
$ 123 $ 121 $ 129 $ 30
Other deferred charges and assets/Other deferred
credits and liabilities 52 44 72 6
Total derivatives designated as hedging instruments for regulatory purposes
175 165 201 36
Derivatives designated as hedging instruments in
cash flow and fair value hedges
Energy-related derivatives:
Assets from risk management activities/Other current
liabilities 3 27 7 5
Other deferred charges and assets/Other deferred
credits and liabilities 6 4 1 -
Interest rate derivatives:
Assets from risk management activities/Other current 12 62 19 -
liabilities
Other deferred charges and assets/Other deferred credits and liabilities - 240 - 29
Foreign currency derivatives: Assets from risk management activities/Other current liabilities
- 34 - 39
Other deferred charges and assets/Other deferred
credits and liabilities - 182 - 40
Total derivatives designated as hedging instruments in cash flow and fair value hedges
21 549 27 113
Energy-related derivatives not designated as hedging instruments
Assets from risk management activities/Other current liabilities
13 13 9 4
Other deferred charges and assets/Other deferred
credits and liabilities 2 1 1 -
Total derivatives not designated as hedging
instruments 15 14 10 4
Gross amounts recognized 211 728 238 153
Gross amounts offset(a) (70) (111) (25) (28)Net amounts recognized in the Balance Sheets(b) $ 141 $ 617 $ 213 $ 125
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2022 2021
Derivative Category and Balance Sheet Location Assets Liabilities Assets Liabilities
(in millions)
Alabama Power(c)
Energy-related derivatives designated as hedging
instruments for regulatory purposes
Other current assets/Other current liabilities $ 42 $
21 $ 30 $ 9 Other deferred charges and assets/Other deferred credits and liabilities 20 18 25 2 Total derivatives designated as hedging instruments for regulatory purposes 62 39 55 11 Gross amounts offset (24) (24) (5) (5)
Net amounts recognized in the Balance Sheets $ 38 $
15 $ 50 $ 6
Georgia Power Energy-related derivatives designated as hedging instruments for regulatory purposes
Assets from risk management activities/Other current liabilities
$ 36 $ 43 $ 54 $ 6
Other deferred charges and assets/Other deferred
credits and liabilities 6 18 21 2
Total derivatives designated as hedging instruments for regulatory purposes
42 61 75 8
Energy-related derivatives not designated as hedging instruments
Other deferred charges and assets/Other deferred credits and liabilities - 1 - - Gross amounts recognized 42 62 75 8 Gross amounts offset (21) (21) (8) (8)
Net amounts recognized in the Balance Sheets $ 21 $
41 $ 67 $ -
Mississippi Power(c) Energy-related derivatives designated as hedging instruments for regulatory purposes
Assets from risk management activities/Other current liabilities
$ 33 $ 24 $ 30 $ 3
Other deferred charges and assets/Other deferred
credits and liabilities 26 8 26 2
Total derivatives designated as hedging instruments
for regulatory purposes 59 32 56 5
Gross amounts offset (17) (17) (4) (4)Net amounts recognized in the Balance Sheets $ 42 $
15 $ 52 $ 1
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2022 2021
Derivative Category and Balance Sheet Location Assets Liabilities Assets Liabilities
(in millions)
Southern Power
Derivatives designated as hedging instruments in
cash flow and fair value hedges
Energy-related derivatives:
Other current assets/Other current liabilities $ - $ 12 $ 2 $ -
Other deferred charges and assets/Other deferred
credits and liabilities 5 - 1 -
Foreign currency derivatives:
Other current assets/Other current liabilities - 11 - 16
Other deferred charges and assets/Other deferred
credits and liabilities - 36 - -
Total derivatives designated as hedging instruments in cash flow and fair value hedges
5 59 3 16
Energy-related derivatives not designated as
hedging instruments
Other current assets/Other current liabilities 2 - 1 -
Other deferred charges and assets/Other deferred
credits and liabilities 1 - - -
Total derivatives not designated as hedging
instruments 3 - 1 -
Net amounts recognized in the Balance Sheets $ 8 $ 59 $ 4 $ 16
Southern Company Gas Energy-related derivatives designated as hedging instruments for regulatory purposes
Other current assets/Other current liabilities $ 12 $ 33 $ 15 $ 12
Derivatives designated as hedging instruments in cash flow and fair value hedges Energy-related derivatives: Other current assets/Other current liabilities 3 15 5 5 Other deferred charges and assets/Other deferred credits and liabilities 1 4 - - Interest rate derivatives: Other current assets/Other current liabilities - 14 6 - Other deferred charges and assets/Other deferred credits and liabilities - 72 - 6
Total derivatives designated as hedging instruments in cash flow and fair value hedges
4 105 11 11
Energy-related derivatives not designated as
hedging instruments
Other current assets/Other current liabilities 11 12 8 4
Other deferred charges and assets/Other deferred
credits and liabilities 1 1 1 -
Total derivatives not designated as hedging
instruments 12 13 9 4
Gross amounts recognized 28 151 35 27
Gross amounts offset(a) - (41) (8) (11)Net amounts recognized in the Balance Sheets(b) $ 28 $ 110 $ 27 $ 16
(a)Gross amounts offset includes cash collateral held on deposit in broker margin accounts of $41 million and $3 million at December 31, 2022 and 2021, respectively.
(b)Net amounts of derivative instruments outstanding exclude immaterial premium and intrinsic value associated with weather derivatives for all periods presented.
(c)Energy-related derivatives not designated as hedging instruments were immaterial at December 31, 2022 and there were no such instruments at December 31, 2021.
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At December 31, 2022 and 2021, 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 Sheets
Derivative Category and Balance Sheet Southern Alabama Georgia Mississippi Southern
Location Company Power Power Power Company Gas
(in millions)
At December 31, 2022:
Energy-related derivatives:
Other regulatory assets, current $ (71) $ (8) $ (26) $ (13) $ (24)
Other regulatory assets, deferred (23) (7) (14) (2) -
Other regulatory liabilities, current 72 29 19 22 2
Other regulatory liabilities, deferred 31 9 2 20 -
Total energy-related derivative gains
(losses) $ 9 $ 23 $ (19) $ 27 $ (22)
At December 31, 2021:
Energy-related derivatives:
Other regulatory assets, current $ (17) $ (6) $ - $ - $ (11)
Other regulatory liabilities, current 107 28 48 27 4 Other regulatory liabilities, deferred 65 22 19 24 - Total energy-related derivative gains (losses) $ 155 $ 44 $
67 $ 51 $ (7)
For the years ended December 31, 2022, 2021, and 2020, the pre-tax effects of cash flow and fair value hedge accounting on AOCI for the applicable Registrants were as follows:
Gain (Loss) From Derivatives Recognized in OCI 2022 2021 2020
(in millions)
Southern Company
Cash flow hedges:
Energy-related derivatives $ 3 $ 34 $ (8)
Interest rate derivatives 46 5 (26)
Foreign currency derivatives (105) (103) 48
Fair value hedges(*):
Foreign currency derivatives (24) (3) -
Total $ (80) $ (67) $ 14
Georgia Power
Interest rate derivatives $ 31 $ - $ (3)
Southern Power
Cash flow hedges:
Energy-related derivatives $ (15) $ 12 $ (2)
Foreign currency derivatives (105) (103) 48
Total $ (120) $ (91) $ 46
Southern Company Gas
Cash flow hedges:
Energy-related derivatives $ 18 $ 22 $ (6)
Interest rate derivatives - - (23)
Total $ 18 $ 22 $ (29)
(*)Represents amounts excluded from the assessment of effectiveness for which the difference between changes in fair value and periodic amortization is recorded in OCI.
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The pre-tax effects of interest rate derivatives designated as cash flow hedging instruments on AOCI were immaterial for the other Registrants for all years presented.
The pre-tax effects of cash flow and fair value hedge accounting on income for the years ended December 31, 2022, 2021, and 2020 were as follows:
Location and Amount of Gain (Loss) Recognized in Income on Cash Flow and Fair Value Hedging Relationships
2022 2021 2020
(in millions)
Southern Company
Total cost of natural gas $ 3,004 $ 1,619 $ 972
Gain (loss) on energy-related cash flow hedges(a) 37 17 (8)
Total depreciation and amortization 3,663 3,565 3,518
Gain (loss) on energy-related cash flow hedges(a) (5) 9 (3)
Total interest expense, net of amounts capitalized (2,022) (1,837) (1,821)
Gain (loss) on interest rate cash flow hedges(a) (25) (27) (26)
Gain (loss) on foreign currency cash flow hedges(a) (19) (24) (23)
Gain (loss) on interest rate fair value hedges(b) (291) (30) 27
Total other income (expense), net 500 456 336
Gain (loss) on foreign currency cash flow hedges(a)(c) (83)
(104) 114 Gain (loss) on foreign currency fair value hedges (106) (63) -
Amount excluded from effectiveness testing recognized in earnings
24 3 -
Southern Power
Total depreciation and amortization $ 516 $ 517 $ 494
Gain (loss) on energy-related cash flow hedges(a) (5) 9 (3)
Total interest expense, net of amounts capitalized (138) (147) (151)
Gain (loss) on foreign currency cash flow hedges(a) (19) (24) (23)
Total other income (expense), net 7 10 19
Gain (loss) on foreign currency cash flow hedges(a)(c) (83)
(104) 114 Southern Company Gas Total cost of natural gas $ 3,004 $ 1,619 $ 972 Gain (loss) on energy-related cash flow hedges(a) 37 17 (8) Total interest expense, net of amounts capitalized (263) (238) (231) Gain (loss) on interest rate cash flow hedges(a) (4) - - Gain (loss) on interest rate fair value hedges(b) (86) - -
(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 and fair value hedge accounting on income for
interest rate derivatives and energy-related derivatives were immaterial for the
traditional electric operating companies for all years presented.
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At December 31, 2022 and 2021, the following amounts were recorded on the balance sheets related to cumulative basis adjustments for fair value hedges:
Cumulative Amount of Fair Value Hedging
Carrying Amount of Adjustment included in Carrying Amount of
the Hedged Item the Hedged Item
Balance Sheet Location of Hedged At December 31, At December 31, At December 31, Items
2022 2021 2022 At December 31, 2021
(in millions) (in millions)
Southern Company
Long-term debt $ (2,927) $ (3,280) $ 282 $ 9
Southern Company Gas
Long-term debt $ (415) $ (493) $ 81 $ 2
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, 2022, 2021, and 2020 were as follows:
Gain (Loss)
Derivatives in Non-Designated
Hedging Relationships Statements of Income Location 2022 2021 2020
(in millions)
Energy-related derivatives Natural gas revenues(*) $ (11) $ (117) $ 134
Cost of natural gas (65) (27) 15
Total derivatives in non-designated hedging relationships $ (76) $ (144) $ 149
(*) Excludes the impact of weather derivatives recorded in natural gas revenues of $(7) million and $9 million for 2022 and 2020, respectively, as they are accounted for based on intrinsic value rather than fair value. There was no weather derivatives impact for 2021.
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
The Registrants 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. Generally, collateral may be provided by a
Southern Company guaranty, letter of credit, or cash. At December 31, 2022, the
Registrants had no collateral posted with derivative counterparties to satisfy
these arrangements.
For Southern Company and Southern Power, the fair value of interest rate
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 $78 million and $23 million,
respectively, at December 31, 2022. For the traditional electric operating
companies and Southern Power, 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 at December 31, 2022. 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.
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, 2022,
cash collateral posted in these accounts was $15 million for Southern Power and
immaterial for Alabama Power. 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, 2022, cash collateral held on
deposit in broker margin accounts was $41 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
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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. 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
None of the dispositions discussed herein, both individually and combined, represented a strategic shift in operations for the applicable Registrants 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.
Southern Company
In connection with the annual impairment analysis of a leveraged lease investment during the fourth quarter 2020, 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 would continue to operate at the end of the lease term in 2040 and recorded a $34 million ($17 million after tax) impairment charge. Also during the fourth quarter 2020, Southern Company management initiated steps to sell the investment and reclassified it as held for sale. In the fourth quarter 2020 and the second quarter 2021, additional charges of $18 million ($14 million after tax) and $7 million ($6 million after tax), respectively, were recorded to further reduce the investment to its estimated fair value, less costs to sell. In October 2021, Southern Company completed the sale to the lessee for $45 million. No gain or loss was recognized on the sale; however, it did result in the recognition of approximately $16 million of additional tax benefits. In December 2021, Southern Company completed the termination of its leasehold interest in assets associated with its two international leveraged lease projects and received cash proceeds of approximately $673 million after the accelerated exercise of the lessee's purchase options. The pre-tax gain associated with the transaction was approximately $93 million ($99 million gain after tax). Alabama Power In 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 transaction was accounted for as a business combination. 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 reflected in property additions within the investing section of the statement of cash flows. 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 through May 2023. During the remaining term, the revenues from the power sales agreement are expected to substantially offset the associated costs of operation. See Note 9 under "Lessor" for additional information. On September 30, 2022, Alabama Power completed its acquisition of the Calhoun Generating Station, which was accounted for as an asset acquisition. The total purchase price was $179 million, of which $171 million was related to net assets recorded within property, plant, and equipment on the balance sheet and reflected in property additions within the investing section of the statement of cash flows. The remainder primarily related to fossil fuel stock and materials and supplies.
See Note 2 under "Alabama Power - Certificates of Convenience and Necessity" for additional information.
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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. There were no asset
acquisitions during 2022.
Asset Acquisitions
Southern
Power
Project Approximate Nameplate Ownership PPA
Facility Resource Seller Capacity (MW) Location Percentage COD Contract Period
Asset Acquisitions During 2021
25 years
Invenergy Renewables and
Deuel Harvest(a) Wind LLC 300 Deuel County, SD 100% of Class B February 2021 15 years
Asset Acquisitions During 2020
Invenergy Renewables May
Beech Ridge II(b) Wind LLC 56 Greenbrier County, WV 100% of Class A 2020 12 years
(a)In March 2021, Southern Power acquired a controlling interest in the project from Invenergy Renewables LLC and completed a tax equity transaction whereby it sold the Class A membership interests in the project. Southern Power consolidates the project's operating results in its financial statements and the tax equity partner and Invenergy Renewables LLC each own a noncontrolling interest.
(b)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.
Construction Projects
During 2022, Southern Power completed construction of and placed in service the
remaining 40 MWs of the Tranquillity battery energy storage facility and the
remaining 15 MWs of the Garland battery energy storage facility. See Note 9
under "Lessor" for additional information.
Project Approximate Nameplate
Facility Resource Capacity (MW) Location COD PPA Contract Period
Projects Completed During 2022
Garland Solar Storage(a) Battery energy storage 88 Kern County, CA September 2021 through 20 years
February 2022(b)
Tranquillity Solar 72 Fresno County, CA November 2021 through 20 years
Storage(a) Battery energy storage March 2022(c)
Projects Completed During 2021
Glass Sands(d) Wind 118 Murray County, OK November 2021 12 years
Projects Completed During 2020
Skookumchuck(e) Wind 136 Lewis and Thurston November 2020 20 years
Counties, WA
Reading(f) Wind 200 Osage and Lyon May 2020 12 years
Counties, KS
(a)In December 2020, Southern Power restructured its ownership of the project,
while retaining the controlling interests, by contributing the Class A
membership interests to an existing partnership and selling 100% of the Class B
membership interests. During 2021, Southern Power further restructured its
ownership in the battery energy storage projects and completed tax equity
transactions whereby it sold the Class A membership interests in the projects.
Southern Power consolidates each project's operating results in its financial
statements and the tax equity partner and two other partners each own a
noncontrolling interest.
(b)The facility has a total capacity of 88 MWs, of which 73 MWs were placed in service in 2021 and 15 MWs were placed in service in February 2022.
(c)The facility has a total capacity of 72 MWs, of which 32 MWs were placed in service in 2021 and 40 MWs were placed in service in March 2022.
(d)In December 2020, Southern Power purchased 100% of the membership interests of the Glass Sands facility.
(e)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.
(f)In June 2020, Southern Power completed a tax equity transaction whereby it received $156 million and owns 100% of the Class B membership interests.
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Development Projects
Southern Power purchased wind turbine equipment in 2016 and 2017 for deployment to development and construction projects. The significant majority of this equipment either has been deployed to projects that have been completed or has been sold to third parties. Gains on wind turbine equipment contributed to various equity method investments totaled approximately $37 million in 2021. Gains on wind turbine equipment sales were immaterial in 2020 and there were no sales in 2022. Sale of Plant Mankato In January 2020, Southern Power completed the sale of its equity interests in Plant Mankato (including the 385-MW expansion unit completed in 2019) to a subsidiary of Xcel Energy Inc. 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). Plant Mankato represented an individually significant component of Southern Power.
Southern Company Gas
Sale of Sequent
On July 1, 2021, Southern Company Gas affiliates completed the sale of Sequent to Williams Field Services Group for a total cash purchase price of $159 million, including final working capital adjustments. The pre-tax gain associated with the transaction was approximately $121 million ($92 million after tax). The sale resulted in $85 million of additional tax expense.
Sale of Pivotal LNG and Atlantic Coast Pipeline
In March 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. In connection with the sale, Southern Company Gas received two additional $5 million payments upon Dominion Modular LNG Holdings, Inc. meeting certain milestones related to Pivotal LNG in April 2021 and May 2022, respectively.
Sale of Natural Gas Storage Facilities
In December 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).
On September 7, 2022, certain affiliates of Southern Company Gas entered into
agreements to sell two natural gas storage facilities located in California and
Texas for an aggregate purchase price of $186 million, plus working capital and
certain other adjustments. The sale of the Texas facility was completed on
November 18, 2022. Completion of the sale of the California facility is expected
later in 2023 and is subject to certain closing conditions, including, among
others, approval from the California Public Utilities Commission without a
material burdensome condition. The ultimate outcome of this matter cannot be
determined at this time. Completion of the sale of the Texas facility was
subject to release of a Southern Company Gas parent guarantee, which was
executed on October 20, 2022 and, as a result, Southern Company Gas recorded
pre-tax impairment charges totaling approximately $131 million ($99 million
after tax) in the fourth quarter 2022.
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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 $875 million, $515 million, and $364 million in 2022, 2021, and 2020, respectively. Revenues from sales of natural gas from Southern Company Gas to the traditional electric operating companies were immaterial for all periods presented. Revenues from sales of natural gas from Southern Company Gas (prior to its sale of Sequent) to Southern Power were $18 million and $26 million in 2021 and 2020, respectively. 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 distributed energy and resilience solutions and deploying microgrids for commercial, industrial, governmental, and utility customers, as well as investments in telecommunications and leveraged lease projects. All other inter-segment revenues are not material.
Financial data for business segments and products and services for the years ended December 31, 2022, 2021, and 2020 was as follows:
Electric Utilities
Traditional
Electric
Operating Southern Southern All
Companies Power Eliminations Total Company Gas Other Eliminations Consolidated
(in millions)
2022
Operating revenues $ 20,408 $ 3,369 $ (904) $ 22,873 $ 5,962 $ 593 $ (149) $ 29,279
Depreciation and amortization 2,513 516 - 3,029 559 75 - 3,663
Interest income 44 3 - 47 3 16 (7) 59
Earnings from equity method investments - - - - 148 3 - 151
Interest expense 929 138 - 1,067 263 694 (2) 2,022
Income taxes (benefit) 828 20 - 848 180 (233) - 795
Segment net income (loss)(a)(b)(c)(d) 3,318 354 - 3,672 572 (711) (9) 3,524
Goodwill - 2 - 2 5,015 144 - 5,161
Total assets 95,861 13,081 (659) 108,283 24,621 2,665 (678) 134,891
2021
Operating revenues $ 16,614 $ 2,216 $ (530) $ 18,300 $ 4,380 $ 582 $ (149) $ 23,113
Depreciation and amortization 2,436 517 - 2,953 536 76 - 3,565
Interest income 20 1 - 21 - 4 (3) 22
Earnings from equity method investments 1 - - 1 50 24 1 76
Interest expense 821 147 - 968 238 631 - 1,837
Income taxes (benefit) 232 (13) - 219 275 (227) - 267
Segment net income (loss)(a)(b)(e)(f)(g)(h) 1,981 266 - 2,247 539 (384) (9) 2,393
Goodwill - 2 - 2 5,015 263 - 5,280
Total assets 89,051 13,390 (667) 101,774 23,560 2,975 (775) 127,534
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)(h)(i)(j) 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
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(a)Attributable to Southern Company.
(b)For the traditional electric operating companies, includes pre-tax charges to income at Georgia Power for the estimated probable loss associated with the construction of Plant Vogtle Units 3 and 4 of $183 million ($137 million after tax) in 2022, $1.7 billion ($1.3 billion after tax) in 2021, and $325 million ($242 million after tax) in 2020. See Note 2 under "Georgia Power - Nuclear Construction" for additional information.
(c)For Southern Company Gas, includes pre-tax impairment charges totaling approximately $131 million ($99 million after tax) related to the sale of natural gas storage facilities. See Note 15 under "Southern Company Gas" for additional information.
(d)For the "All Other" column, includes a $119 million goodwill impairment loss (pre-tax and after tax) at PowerSecure. See Note 1 under "Goodwill and Other Intangible Assets and Liabilities" for additional information. (e)For Southern Power, includes gains on wind turbine equipment contributed to various equity method investments totaling approximately $37 million pre-tax ($28 million after tax). See Notes 7 and 15 under "Southern Power" for additional information. (f)For Southern Company Gas, includes a pre-tax gain of $121 million ($92 million after tax) related to its sale of Sequent, as well as the resulting $85 million of additional tax expense due to changes in state apportionment rates, and pre-tax impairment charges totaling $84 million ($67 million after tax) related to its equity method investment in the PennEast Pipeline project. See Notes 7 and 15 under "Southern Company Gas" for additional information.
(g)For the "All Other" column, includes a pre-tax gain of $93 million ($99 million gain after tax) associated with the termination of two leveraged leases projects. See Note 15 under "Southern Company" for additional information.
(h)For the "All Other" column, includes pre-tax impairment charges totaling $7 million ($6 million after tax) in 2021 and $206 million ($105 million after tax) in 2020 related to leveraged lease investments. See Notes 9 and 15 under "Southern Company Leveraged Lease" and "Southern Company," respectively, for additional information. (i)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. (j)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.
Products and Services
Electric Utilities' Revenues
Year Retail Wholesale Other Total
(in millions)
2022 $ 18,197 $ 3,641 $ 1,035 $ 22,873
2021 14,852 2,455 993 18,300
2020 13,643 1,945 909 16,497
Southern Company Gas' Revenues
Gas Gas
Distribution Marketing
Year Operations Services All Other Total
(in millions)
2022 $ 5,240 $ 638 $ 84 $ 5,962
2021 3,656 475 249 4,380
2020 2,902 408 124 3,434
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Southern Company Gas
Southern Company Gas manages its business through three reportable segments - gas distribution operations, gas pipeline investments, and gas marketing services. Prior to the sale of Sequent on July 1, 2021, Southern Company Gas' reportable segments also included wholesale gas 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. Gas pipeline investments consists of joint ventures in natural gas pipeline investments including a 50% interest in SNG 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 includes a 20% ownership interest in the PennEast Pipeline project, which was cancelled in September 2021, and through its March 2020 sale, included a 5% ownership interest in the Atlantic Coast Pipeline construction project. See Notes 5 and 7 for additional information.
Through July 1, 2021, wholesale gas services provided 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 engaged 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.
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 a natural gas storage facility in
Texas through its sale on November 18, 2022, Jefferson Island through its sale
in December 2020, and Pivotal LNG through its sale in March 2020. See Note 15 to
the financial statements under "Southern Company Gas" for additional
information, including the sale of a natural gas storage facility in California
expected to be completed later in 2023.
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Financial data for business segments for the years ended December 31, 2022, 2021, and 2020 was as follows:
Gas Distribution Gas Pipeline Wholesale Gas Gas Marketing
Operations Investments Services(a) Services Total All Other Eliminations Consolidated
(in millions)
2022
Operating revenues $ 5,267 $ 32 $ - $ 638 $ 5,937 $ 55 $ (30) $ 5,962
Depreciation and amortization 516 5 - 16 537 22 - 559
Operating income (loss) 803 21 - 133 957 (135) (8) 814
Earnings from equity method investments - 148 - - 148 - - 148
Interest expense 229 27 - 3 259 4 - 263
Income taxes (benefit) 145 35 - 37 217 (37) - 180
Segment net income (loss)(b) 470 107 - 94 671 (99) - 572
Total assets 22,040 1,577 - 1,616 25,233 8,943 (9,555) 24,621
2021
Operating revenues $ 3,679 $ 32 $ 188 $ 475 $ 4,374 $ 38 $ (32) $ 4,380
Depreciation and amortization 482 5 - 18 505 31 - 536
Operating income (loss) 708 21 241 125 1,095 (40) - 1,055
Earnings from equity method investments - 50 - - 50 - - 50
Interest expense 207 25 2 3 237 1 - 238
Income taxes (benefit) 120 27 32 34 213 62 - 275
Segment net income (loss)(c)(d)(e) 412 19 107 88 626 (87) - 539
Total assets 20,917 1,467 31 1,556 23,971 12,114 (12,525) 23,560
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)(f) 390 99 14 89 592 (2) - 590
Total assets 19,090 1,597 850 1,503 23,040 11,336 (11,746) 22,630
(a)As a result of the sale of Sequent, wholesale gas services is no longer a
reportable segment in 2022. Prior to the sale of Sequent, the revenues for
wholesale gas services were 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)
2021 $ 3,881 $ 90 $ 3,971 $ 3,783 $ 188
2020 4,544 115 4,659 4,585 74
(b)For the "All Other" column, includes pre-tax impairment charges totaling approximately $131 million ($99 million after tax) related to the sale of natural gas storage facilities. See Note 15 under "Southern Company Gas" for additional information.
(c)For gas pipeline investments, includes pre-tax impairment charges totaling $84 million ($67 million after tax) related to the equity method investment in the PennEast Pipeline project. See Note 7 under "Southern Company Gas" for additional information.
(d)For wholesale gas services, includes a pre-tax gain of $121 million ($92 million after tax) related to the sale of Sequent.
(e)For the "All Other" column, includes $85 million of additional tax expense as a result of the sale of Sequent.
(f)For the "All Other" column includes a $22 million pre-tax gain ($16 million gain after tax) on the sale of Jefferson Island.
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