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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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Table of Contents Index to Financial Statements
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS
Southern Company and Subsidiary Companies 2020 Annual Report
OVERVIEW
Business Activities
Southern Company is a holding company that owns all of the common stock of three traditional electric operating companies, as well as Southern Power and Southern Company Gas, and owns other direct and indirect subsidiaries. The primary businesses of the Southern Company system are electricity sales by the traditional electric operating companies and Southern Power and the distribution of natural gas by Southern 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 by Southern Power, and the sale of natural gas and other complementary products and services by Southern Company Gas. See Note 16 to the financial statements for additional information.
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The traditional electric operating companies – Alabama Power, Georgia Power, and Mississippi Power – are vertically integrated utilities providing electric service to retail customers in three Southeastern states in addition to wholesale customers in the Southeast.
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Southern Power develops, constructs, acquires, owns, and manages power generation assets, including renewable energy and battery energy storage projects, and sells electricity at market-based rates in the wholesale market. Southern Power continually seeks opportunities to execute its strategy to create value through various transactions including acquisitions, dispositions, and sales of partnership interests, development and construction of new generating facilities, and entry into PPAs primarily with investor-owned utilities, IPPs, municipalities, electric cooperatives, and other load-serving entities, as well as commercial and industrial customers. In general, Southern Power commits to the construction or acquisition of new generating capacity only after entering into or assuming long-term PPAs for the new facilities.
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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, and Tennessee – and is also involved in several other complementary businesses. Southern Company Gas manages its business through four reportable segments – gas distribution operations, gas pipeline investments, wholesale gas services, which includes Sequent, a natural gas asset optimization company, and gas marketing services, which includes SouthStar, a Marketer and provider of energy-related products and services to natural gas markets – and one non-reportable segment, all other. See Notes 7 and 16 to the financial statements for additional information.
Many factors affect the opportunities, challenges, and risks of the Southern Company system's electric service and natural gas businesses. These factors include the ability to maintain constructive regulatory environments, to maintain and grow sales and customers, and to effectively manage and secure timely recovery of prudently-incurred costs. These costs include those related to projected long-term demand growth; stringent environmental standards, including CCR rules; safety; system reliability and resilience; fuel; natural gas; restoration following major storms; and capital expenditures, including constructing new electric generating plants and expanding and improving the electric transmission and electric and natural gas distribution systems.
The traditional electric operating companies and the natural gas distribution utilities have various regulatory mechanisms that address cost recovery. Effectively operating pursuant to these regulatory mechanisms and appropriately balancing required costs and capital expenditures with customer prices will continue to challenge the Southern Company system for the foreseeable future. See Note 2 to the financial statements for additional information.
Southern Power's future earnings will depend upon the parameters of the wholesale market and the efficient operation of its wholesale generating assets, as well as Southern Power's ability to execute its growth strategy and to develop and construct generating facilities. In addition, Southern Power's future earnings will depend upon the availability of federal and state ITCs and PTCs on its renewable energy projects, which could be impacted by future tax legislation. See FUTURE EARNINGS POTENTIAL – "Income Tax Matters" herein and Notes 10 and 15 to the financial statements for additional information.
Southern Company's other business activities include providing energy solutions to electric utilities and their customers in the areas of distributed generation, energy storage and renewables, and energy efficiency. Other business activities also include investments in telecommunications, leveraged lease projects, and gas storage facilities. Management continues to evaluate the contribution of each of these activities to total shareholder return and may pursue acquisitions, dispositions, and other strategic ventures or investments accordingly.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
Recent Developments
COVID-19
During March 2020, COVID-19 was declared a pandemic by the World Health Organization and the Centers for Disease Control and Prevention and has spread globally, including throughout the United States. The Southern Company system provides an essential service to its customers; therefore, it is critical that Southern Company system employees are able to continue to perform their essential duties safely and effectively. The Southern Company system has implemented applicable business continuity plans, including teleworking, canceling non-essential business travel, increasing cleaning frequency at business locations, implementing applicable safety and health guidelines issued by federal and state officials, and establishing protocols for required work on customer premises. To date, these procedures have been effective in maintaining the Southern Company system's critical operations. As a result of the COVID-19 pandemic, there have been economic disruptions in the Registrants' operating territories. The traditional electric operating companies and the natural gas distribution utilities temporarily suspended disconnections for non-payment by customers and waived late fees for certain periods. See Note 2 to the financial statements for information regarding deferral of certain incremental COVID-19-related costs, including bad debt, to a regulatory asset by certain of the traditional electric operating companies and the natural gas distribution utilities. In addition, the COVID-19 pandemic has impacted productivity and the pace of activity completion at Plant Vogtle Units 3 and 4, as discussed further herein. Additional information regarding the COVID-19 pandemic and its past and potential future impacts on the Registrants is provided throughout Management's Discussion and Analysis of Financial Condition and Results of Operations and in Item 1A herein.
Alabama Power
On August 14, 2020, the Alabama PSC issued an order granting Alabama Power a CCN to procure additional capacity, and, on August 31, 2020, Alabama Power completed its acquisition of the Central Alabama Generating Station.
In October 2020, Alabama Power reduced its over-collected fuel balance by $94.3 million in accordance with an August 7, 2020 Alabama PSC order authorizing Alabama Power to reduce its over-collected fuel balance by $100 million and return that amount to customers in the form of bill credits, with any undistributed amount remaining in the regulatory liability for the benefit of customers.
For the year ended December 31, 2020, Alabama Power's weighted common equity return exceeded 6.15%, resulting in Alabama Power establishing a current regulatory liability of $50 million for Rate RSE refunds, which will be refunded to customers through bill credits in April 2021.
During 2020, Alabama Power recorded $51 million and $67 million against the NDR for damages incurred to its transmission and distribution facilities from Hurricane Sally and Hurricane Zeta, respectively. Alabama Power made an additional accrual of $100 million to the NDR in December 2020.
Effective for the billing month of January 2021, Alabama Power's Rate RSE increased 4.09%, or approximately $228 million annually, and Alabama Power's Rate ECR decreased 1.84%, or approximately $103 million annually, as approved by the Alabama PSC.
See Notes 2 and 15 to the financial statements under "Alabama Power" for additional information.
Georgia Power
Rate Plans
On December 15, 2020, in accordance with the terms of the 2019 ARP, the Georgia PSC approved tariff adjustments effective January 1, 2021 as follows: (i) increased traditional base tariffs by approximately $120 million; (ii) increased the Environmental Compliance Cost Recovery (ECCR) tariff by approximately $2 million; (iii) decreased Demand-Side Management tariffs by approximately $15 million; and (iv) increased Municipal Franchise Fee tariffs by approximately $4 million, for a total net increase in annual base revenues of approximately $111 million. Georgia Power expects to submit a compliance filing in the third quarter 2021 to request tariff adjustments approved pursuant to the 2019 ARP effective January 1, 2022. The amounts requested in the 2019 ARP were as follows: (i) increase traditional base tariffs by approximately $192 million; (ii) increase the ECCR tariff by approximately $184 million; (iii) increase Demand-Side Management tariffs by approximately $1 million; and (iv) increase Municipal Franchise Fee tariffs by approximately $9 million, for a total increase in annual base revenues of approximately $386 million. The ultimate outcome of this matter cannot be determined at this time. See Note 2 to the financial statements under "Georgia Power – Rate Plans – 2019 ARP" for additional information.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
Plant Vogtle Units 3 and 4 Status
Construction continues on Plant Vogtle Units 3 and 4 (with electric generating capacity of approximately 1,100 MWs each), in which Georgia Power holds a 45.7% ownership interest. Georgia Power's share of the total project capital cost forecast is $8.7 billion, with expected in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4.
As of June 30, 2020, assignments of contingency to the base capital cost forecast exceeded the remaining balance of the construction contingency originally established in the second quarter 2018 and Georgia Power established $115 million of additional construction contingency. During the third and fourth quarters 2020, this construction contingency, plus an additional $5 million, was fully assigned to the base capital cost forecast. Assignment of contingency during 2020 addressed cost risks related to construction productivity, including the April 2020 reduction in workforce designed to mitigate impacts of the COVID-19 pandemic described below; other COVID-19 impacts; craft labor incentives; additional resources for supervision, field support, project management, initial test program, start-up, engineering support, and operations and maintenance support; subcontracts; and procurement, among other factors. These factors continue to represent further potential cost risk to the project; therefore, Georgia Power established $171 million of additional contingency as of December 31, 2020.
After considering the significant level of uncertainty that exists regarding the future recoverability of these costs since the ultimate outcome of these matters is subject to the outcome of future assessments by management, as well as Georgia PSC decisions in future regulatory proceedings, Georgia Power recorded total pre-tax charges to income of $149 million ($111 million after tax) and $176 million ($131 million after tax) for the increases in the total project capital cost forecast as of June 30, 2020 and December 31, 2020, respectively. As and when these amounts are spent, Georgia Power may request the Georgia PSC to evaluate those expenditures for rate recovery.
In mid-March 2020, Southern Nuclear began implementing policies and procedures designed to mitigate the risk of transmission of COVID-19 at the construction site. In April 2020, Georgia Power, acting for itself and as agent for the other Vogtle Owners, announced a reduction in workforce at Plant Vogtle Units 3 and 4 and began reducing the then-existing site workforce by approximately 20%. This workforce reduction lowered absenteeism, providing an improvement in operational efficiency and allowing for increased social distancing. Since April 2020, the number of active cases at the site has fluctuated and has continued to impact productivity levels and pace of activity completion.
From November 2020 through January 2021, the number of active COVID-19 cases at the site increased significantly, consistent with a national rise in cases, and the project continued to face challenges. As a result, overall production levels were not achieved at the levels anticipated, contributing to the December 31, 2020 allocation of construction contingency and increase in total project capital cost forecast. Also, after considering these factors, Southern Nuclear has further extended certain milestone dates, including the start of hot functional testing and fuel load for Unit 3, from those established in October 2020. These updated milestone dates are expected to support the regulatory-approved in-service dates of November 2021 and November 2022 for Units 3 and 4, respectively. With minimal schedule margin remaining, the Unit 3 schedule is challenged, and any further extension of the hot functional testing or fuel load milestones, or other delays from the challenges described in Note 2 to the financial statements under "Georgia Power – Nuclear Construction," could impact the ability to achieve the November 2021 in-service date.
The continuing effects of the COVID-19 pandemic could further disrupt or delay construction and testing activities at Plant Vogtle Units 3 and 4. Georgia Power's proportionate share of the estimated incremental cost associated with COVID-19 mitigation actions and impacts on construction productivity is currently estimated to be between $150 million and $190 million and is included in the total project capital cost. The ultimate impact of the COVID-19 pandemic and other factors on the construction schedule and budget for Plant Vogtle Units 3 and 4 cannot be determined at this time.
See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information.
Mississippi Power
On March 17, 2020, the Mississippi PSC approved a settlement agreement between Mississippi Power and the Mississippi Public Utilities Staff related to Mississippi Power's base rate case filed in November 2019 (Mississippi Power Rate Case Settlement Agreement). Under the terms of the Mississippi Power Rate Case Settlement Agreement, annual retail rates decreased approximately $16.7 million, or 1.85%, effective for the first billing cycle of April 2020.
During 2020, Mississippi Power substantially completed mine reclamation activities at the Kemper County energy facility. On September 3, 2020, Mississippi Power and Southern Company executed an agreement with the DOE completing Mississippi Power's 2018 request for property closeout certification under the contract related to DOE grants received for the Kemper County energy facility, which enabled Mississippi Power to proceed with full dismantlement of the abandoned gasifier-related assets and
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
site restoration activities. These activities are expected to be completed by 2026. See Note 3 to the financial statements under "Other Matters – Mississippi Power – Kemper County Energy Facility" for additional information.
On February 12, 2021, Mississippi Power submitted its 2021 ECO Plan filing to the Mississippi PSC, which requested an annual decrease in revenues of approximately $9 million, as well as its ad valorem tax adjustment filing for 2021, which requested an annual increase in revenues of approximately $28 million. Mississippi Power plans to submit its 2021 PEP filing in March 2021.
On December 17, 2020, the Mississippi PSC issued an order concluding the RMP docket and requiring Mississippi Power to incorporate into its 2021 IRP a schedule of early or anticipated retirement of 950 MWs of fossil-steam generation by year-end 2027 to reduce Mississippi Power's excess reserve margin. Mississippi Power's IRP is scheduled to be filed in April 2021.
See Note 2 to the financial statements under "Mississippi Power" for additional information. The ultimate outcome of these matters cannot be determined at this time.
Southern Power
During 2020, Southern Power completed construction of and placed in service the 200-MW Reading and 136-MW Skookumchuck wind facilities, commenced construction of the 88-MW Garland and 72-MW Tranquillity battery energy storage facilities, and acquired and commenced construction of the 118-MW Glass Sands wind facility.
In January 2020, Southern Power completed the sale of its equity interests in Plant Mankato (including the 385-MW expansion unit completed in May 2019) to a subsidiary of Xcel for a purchase price of approximately $663 million, including final working capital adjustments.
In March 2020, Southern Power entered into an agreement to acquire a controlling membership interest in an approximately 300-MW wind facility located in South Dakota. The acquisition is subject to certain customary conditions to closing, including commercial operation of the facility, which is expected to occur in the first quarter 2021. Subsequent to the acquisition, Southern Power expects to complete a tax equity transaction. The facility's output is contracted under two long-term PPAs. The ultimate outcome of this matter cannot be determined at this time.
In May 2020, Southern Power purchased a controlling interest in the 56-MW Beech Ridge II wind facility located in West Virginia from Invenergy Renewables LLC. The facility's output is contracted under a 12-year PPA.
Southern Power calculates an investment coverage ratio for its generating assets, including those owned with various partners, based on the ratio of investment under contract to total investment using the respective generation facilities' net book value (or expected in-service value for facilities under construction) as the investment amount. With the inclusion of investments associated with the facilities currently under construction, as well as other capacity and energy contracts, Southern Power's average investment coverage ratio at December 31, 2020 was 94% through 2025 and 91% through 2030, with an average remaining contract duration of approximately 14 years.
See Note 15 to the financial statements under "Southern Power" for additional information.
Southern Company Gas
On March 24, 2020, Southern Company Gas completed the sale of its interests in Pivotal LNG and Atlantic Coast Pipeline with aggregate proceeds of $178 million, including final working capital adjustments. On December 1, 2020, Southern Company Gas completed the sale of Jefferson Island for a purchase price of $33 million, including estimated working capital adjustments. See Note 15 to the financial statements under "Southern Company Gas" for additional information.
On June 1, 2020, Virginia Natural Gas filed a general rate case with the Virginia Commission seeking an increase in annual base revenues of $49.6 million based on a ROE of 10.35% and an equity ratio of 54%. Interim rate adjustments became effective November 1, 2020, subject to refund. The Virginia Commission is expected to rule on the requested increase in the second quarter 2021. The ultimate outcome of this matter cannot be determined at this time.
On July 1, 2020, Atlanta Gas Light filed its 2020 GRAM filing with the Georgia PSC requesting an annual base rate increase of $37.6 million. Rates became effective on January 1, 2021 in accordance with Atlanta Gas Light's 2019 rate case order.
On January 14, 2021, Nicor Gas filed a general base rate case with the Illinois Commission, requesting a $293 million increase in annual base rate revenues, including $94 million related to the recovery of investments under the Investing in Illinois program. The requested increase is based on a projected test year ending December 31, 2022, a ROE of 10.35%, and an equity ratio of 54.5%. The Illinois Commission has an 11-month statutory time limit to rule on the requested increase, after which rate adjustments will be effective. The ultimate outcome of this matter cannot be determined at this time.
See Note 2 to the financial statements under "Southern Company Gas – Rate Proceedings" for additional information.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
Key Performance Indicators
In striving to achieve attractive risk-adjusted returns while providing cost-effective energy to approximately 8.6 million electric and gas utility customers collectively, the traditional electric operating companies and Southern 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 on Southern 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 and Southern 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 on Alabama Power's Rate RSE and Mississippi Power's PEP rate plan, respectively, both of which contain mechanisms that directly tie customer service indicators to the allowed equity return.
Southern Power continues to focus on several key performance indicators, including, but not limited to, the equivalent forced outage rate and contract availability to evaluate operating results and help ensure its ability to meet its contractual commitments to customers.
RESULTS OF OPERATIONS
Southern Company
Consolidated net income attributable to Southern Company was $3.1 billion in 2020, a decrease of $1.6 billion, or 34.2%, from the prior year. The decrease was primarily due to the $2.6 billion ($1.4 billion after tax) gain on the sale of Gulf Power in 2019 and after-tax charges totaling $242 million in 2020 related to Georgia Power's construction of Plant Vogtle Units 3 and 4. See Notes 2 and 15 to the financial statements under "Georgia Power – Nuclear Construction" and "Southern Company," respectively, for additional information.
Basic EPS was $2.95 in 2020 and $4.53 in 2019. Diluted EPS, which factors in additional shares related to stock-based compensation, was $2.93 in 2020 and $4.50 in 2019. EPS for 2020 and 2019 was negatively impacted by $0.03 and $0.11 per share, respectively, as a result of increases in the average shares outstanding. See Note 8 to the financial statements under "Outstanding Classes of Capital Stock – Southern Company" for additional information.
Dividends paid per share of common stock were $2.54 in 2020 and $2.46 in 2019. In January 2021, Southern Company declared a quarterly dividend of 64 cents per share. For 2020, the dividend payout ratio was 86% compared to 54% for 2019. The increase was due to the decrease in earnings in 2020.
Discussion of Southern Company's results of operations is divided into three parts – the Southern Company system's primary business of electricity sales, its gas business, and its other business activities.
| 2020 | 2019 | ||||||||||||||||
| (in millions) | |||||||||||||||||
| Electricity business | $ | 3,115 | $ | 3,268 | |||||||||||||
| Gas business | 590 | 585 | |||||||||||||||
| Other business activities | (586) | 886 | |||||||||||||||
| Net Income | $ | 3,119 | $ | 4,739 |
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
Electricity Business
Southern Company's electric utilities generate and sell electricity to retail and wholesale customers. A condensed statement of income for the electricity business follows:
| 2020 | Increase (Decrease) from 2019 | ||||||||||
| (in millions) | |||||||||||
| Electric operating revenues | $ | 16,497 | $ | (598) | |||||||
| Fuel | 2,967 | (655) | |||||||||
| Purchased power | 799 | (17) | |||||||||
| Cost of other sales | 94 | 18 | |||||||||
| Other operations and maintenance | 4,250 | (253) | |||||||||
| Depreciation and amortization | 2,941 | 469 | |||||||||
| Taxes other than income taxes | 1,024 | 13 | |||||||||
| Estimated loss on Plant Vogtle Units 3 and 4 | 325 | 325 | |||||||||
| Impairment charges | — | (3) | |||||||||
| (Gain) loss on dispositions, net | (42) | (21) | |||||||||
| Total electric operating expenses | 12,358 | (124) | |||||||||
| Operating income | 4,139 | (474) | |||||||||
| Allowance for equity funds used during construction | 138 | 17 | |||||||||
| Interest expense, net of amounts capitalized | 976 | (11) | |||||||||
| Other income (expense), net | 315 | 81 | |||||||||
| Income taxes | 517 | (191) | |||||||||
| Net income | 3,099 | (174) | |||||||||
| Less: | |||||||||||
| Dividends on preferred stock of subsidiaries | 15 | — | |||||||||
| Net income (loss) attributable to noncontrolling interests | (31) | (21) | |||||||||
| Net Income Attributable to Southern Company | $ | 3,115 | $ | (153) |
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
Electric Operating Revenues
Electric operating revenues for 2020 were $16.5 billion, reflecting a $598 million decrease from 2019. Details of electric operating revenues were as follows:
| 2020 | 2019 | ||||||||||
| (in millions) | |||||||||||
| Retail electric — prior year | $ | 14,084 | |||||||||
| Estimated change resulting from — | |||||||||||
| Rates and pricing | 484 | ||||||||||
| Sales decline | (132) | ||||||||||
| Weather | (288) | ||||||||||
| Fuel and other cost recovery | (505) | ||||||||||
| Retail electric — current year | $ | 13,643 | $ | 14,084 | |||||||
| Wholesale electric revenues | 1,945 | 2,152 | |||||||||
| Other electric revenues | 672 | 636 | |||||||||
| Other revenues | 237 | 223 | |||||||||
| Electric operating revenues | $ | 16,497 | $ | 17,095 | |||||||
| Percent change | (3.5) | % | (7.9) | % |
Retail electric revenues decreased $441 million, or 3.1%, in 2020 as compared to the prior year. The significant factors driving this change are shown in the preceding table. The increase in rates and pricing in 2020 was primarily due to Georgia Power's recovery of environmental compliance costs and the impacts of accruals for customer refunds in 2019 related to the Tax Reform Legislation and earnings in excess of the allowed retail ROE range as well as the rate pricing effects of decreased customer usage throughout 2020. The increase was also due to customer bill credits at Alabama Power in 2019 related to the Tax Reform Legislation. These increases were partially offset by lower contributions from commercial and industrial customers with variable demand-driven pricing at Georgia Power.
Electric rates for the traditional electric operating companies include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the energy component of PPA costs, and do not affect net income. The traditional electric operating companies each have one or more regulatory mechanisms to recover other costs such as environmental and other compliance costs, storm damage, new plants, and PPA capacity costs.
See Note 2 to the financial statements under "Alabama Power" and "Georgia Power" for additional information. Also see "Energy Sales" herein for a discussion of changes in the volume of energy sold, including changes related to sales growth (decline) and weather.
Wholesale electric revenues consist of PPAs and short-term opportunity sales. Wholesale electric revenues from PPAs (other than solar and wind PPAs) have both capacity and energy components. Capacity revenues generally represent the greatest contribution to net income and are designed to provide recovery of fixed costs plus a return on investment. Energy revenues will vary depending on fuel prices, the market prices of wholesale energy compared to the Southern Company system's generation, demand for energy within the Southern Company system's electric service territory, and the availability of the Southern Company system's generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a significant impact on net income. Energy sales from solar and wind PPAs do not have a capacity charge and customers either purchase the energy output of a dedicated renewable facility through an energy charge or through a fixed price related to the energy. As a result, the ability to recover fixed and variable operations and maintenance expenses is dependent upon the level of energy generated from these facilities, which can be impacted by weather conditions, equipment performance, transmission constraints, and other factors. Wholesale electric revenues at Mississippi Power include FERC-regulated MRA sales as well as market-based sales. Short-term opportunity sales are made at market-based rates that generally provide a margin above the Southern Company system's variable cost to produce the energy.
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Southern Company and Subsidiary Companies 2020 Annual Report
Wholesale electric revenues from power sales were as follows:
| 2020 | 2019 | ||||||||||
| (in millions) | |||||||||||
| Capacity and other | $ | 476 | $ | 529 | |||||||
| Energy | 1,469 | 1,623 | |||||||||
| Total | $ | 1,945 | $ | 2,152 |
In 2020, wholesale electric revenues decreased $207 million, or 9.6%, as compared to the prior year due to decreases of $154 million in energy revenues and $53 million in capacity revenues. Energy revenues decreased $98 million at Southern Power and $56 million at the traditional electric operating companies. The decrease at Southern Power primarily resulted from a net decrease in the volume of KWHs sold due to decreased demand and lower natural gas prices, partially offset by increases in sales from solar facilities, wind facilities, and fuel cell generation. The decrease at the traditional electric operating companies was primarily due to lower energy prices. The decrease in capacity revenues was primarily related to the sales of Southern Power's Plant Mankato in the first quarter 2020 and Southern Power's Plant Nacogdoches in the second quarter 2019. See Note 15 to the financial statements for additional information.
Other Electric Revenues
Other electric revenues increased $36 million, or 5.7%, in 2020 as compared to the prior year. The increase was primarily due to an increase of $23 million in transmission revenues, an increase of $15 million from outdoor lighting at Georgia Power, and an increase of $10 million in energy service revenues at Alabama Power, as well as an increase of $6 million from pole attachment agreements at Alabama Power and Georgia Power. These increases were partially offset by a reduction of $26 million largely resulting from the temporary suspension of customer disconnections and late fees related to the COVID-19 pandemic.
Energy Sales
Changes in revenues are influenced heavily by the change in the volume of energy sold from year to year. KWH sales for 2020 and the percent change from the prior year were as follows:
| 2020 | |||||||||||||||||
| Total KWHs | Total KWH Percent Change | Weather-Adjusted Percent Change**(*)** | |||||||||||||||
| (in billions) | |||||||||||||||||
| Residential | 47.4 | (2.2) | % | 3.1 | % | ||||||||||||
| Commercial | 45.4 | (7.5) | (5.7) | ||||||||||||||
| Industrial | 47.0 | (6.2) | (6.2) | ||||||||||||||
| Other | 0.7 | (9.5) | (9.3) | ||||||||||||||
| Total retail | 140.5 | (5.3) | (3.0) | % | |||||||||||||
| Wholesale | 45.7 | (4.9) | |||||||||||||||
| Total energy sales | 186.2 | (5.2) | % |
(*)Weather-adjusted KWH sales are estimated by removing from KWH sales the effect of deviations from normal temperature conditions, based on statistical models of the historical relationship between temperatures and energy sales. Normal temperature conditions are defined as those experienced in the applicable service territory over a specified historical period. This metric is useful because it allows trends in historical operations to be evaluated apart from the influence of weather conditions. Management also considers this metric in developing long-term capital and financial plans.
Changes in retail energy sales are generally the result of changes in electricity usage by customers, weather, and the number of customers. Weather-adjusted retail energy sales decreased 4.4 billion KWHs in 2020 as compared to the prior year largely due to the COVID-19 pandemic. Weather-adjusted residential usage increases are primarily due to customer growth and an increase in average customer usage, primarily due to work-from-home policies. Weather-adjusted commercial usage decreases are primarily due to lower customer usage resulting from changes in consumer and business behavior in response to the COVID-19 pandemic. Industrial usage decreases are primarily a result of disruptions in supply chain and business operations related to the COVID-19 pandemic and the overall decrease in business activity due to the resulting recession.
See "Electric Operating Revenues" above for a discussion of significant changes in wholesale revenues related to changes in price and KWH sales.
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Southern Company and Subsidiary Companies 2020 Annual Report
Other Revenues
Other revenues increased $14 million, or 6.3%, in 2020 as compared to the prior year. The increase was primarily due to increases in unregulated sales of products and services of $9 million at Georgia Power and $5 million at Alabama Power.
Fuel and Purchased Power Expenses
The mix of fuel sources for the generation of electricity is determined primarily by demand, the unit cost of fuel consumed, and the availability of generating units. Additionally, the electric utilities purchase a portion of their electricity needs from the wholesale market.
Details of the Southern Company system's generation and purchased power were as follows:
| 2020 | 2019 | ||||||||||
| Total generation (in billions of KWHs) | 176 | 187 | |||||||||
| Total purchased power (in billions of KWHs) | 18 | 18 | |||||||||
| Sources of generation (percent) — | |||||||||||
| Gas | 53 | 52 | |||||||||
| Coal | 18 | 22 | |||||||||
| Nuclear | 17 | 16 | |||||||||
| Hydro | 4 | 3 | |||||||||
| Wind, Solar, and Other | 8 | 7 | |||||||||
| Cost of fuel, generated (in cents per net KWH) — | |||||||||||
| Gas | 2.00 | 2.36 | |||||||||
| Coal | 2.91 | 2.87 | |||||||||
| Nuclear | 0.78 | 0.79 | |||||||||
| Average cost of fuel, generated (in cents per net KWH) | 1.95 | 2.20 | |||||||||
| Average cost of purchased power (in cents per net KWH)**()* | 4.65 | 4.66 |
(*)Average cost of purchased power includes fuel purchased by the Southern Company system for tolling agreements where power is generated by the provider.
In 2020, total fuel and purchased power expenses were $3.8 billion, a decrease of $672 million, or 15.1%, as compared to the prior year. The decrease was primarily the result of a $363 million decrease in the volume of KWHs generated and purchased and a $309 million decrease primarily in the average cost of fuel.
Fuel and purchased power energy transactions at the traditional electric operating companies are generally offset by fuel revenues and do not have a significant impact on net income. See Note 2 to the financial statements for additional information. Fuel expenses incurred under Southern Power's PPAs are generally the responsibility of the counterparties and do not significantly impact net income.
Fuel
In 2020, fuel expense was $3.0 billion, a decrease of $655 million, or 18.1%, as compared to the prior year. The decrease was primarily due to a 23.9% decrease in the volume of KWHs generated by coal, a 15.3% decrease in the average cost of natural gas per KWH generated, and a 2.5% decrease in the volume of KWHs generated by natural gas, partially offset by a 1.4% increase in the average cost of coal per KWH generated.
Purchased Power
In 2020, purchased power expense was $799 million, a decrease of $17 million, or 2.1%, as compared to the prior year. The decrease was primarily due to a 2.7% decrease in the volume of KWHs purchased.
Energy purchases will vary depending on demand for energy within the Southern Company system's electric service territory, the market prices of wholesale energy as compared to the cost of the Southern Company system's generation, and the availability of the Southern Company system's generation.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
Other Operations and Maintenance Expenses
Other operations and maintenance expenses decreased $253 million, or 5.6%, in 2020 as compared to the prior year. The decrease reflects the impacts of cost containment activities implemented in 2020 to help offset the effects of the recessionary economy resulting from the COVID-19 pandemic. The decrease primarily results from decreases of $195 million in transmission and distribution expenses at the traditional electric operating companies, including $37 million of increases in reliability NDR credits at Alabama Power, $180 million in scheduled generation outage and maintenance expenses, and $32 million in compliance and environmental expenses at the traditional electric operating companies, partially offset by a $183 million increase in storm damage recovery at Georgia Power as authorized in the 2019 ARP and a $45 million increase in employee compensation and benefit expenses. The decrease also reflects a $32 million increase in nuclear property insurance refunds at Alabama Power and Georgia Power. See Note 2 to the financial statements under "Alabama Power – Rate NDR" and "Georgia Power – Storm Damage Recovery" for additional information.
Depreciation and Amortization
Depreciation and amortization increased $469 million, or 19.0%, in 2020 as compared to the prior year. The increase was due to increased amortization of regulatory assets related to CCR AROs of $203 million and higher depreciation of $178 million as authorized in Georgia Power's 2019 ARP, as well as an increase of $104 million in depreciation associated with additional plant in service. See Note 2 to the financial statements under "Georgia Power – Rate Plans" for additional information.
Estimated Loss on Plant Vogtle Units 3 and 4
In the second and fourth quarters 2020, estimated probable losses of $149 million and $176 million, respectively, were recorded to reflect Georgia Power's revised total project capital cost forecast to complete construction and start-up of Plant Vogtle Units 3 and 4. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information.
(Gain) Loss on Dispositions, Net
Gain on dispositions, net increased $21 million in 2020 as compared to the prior year primarily related to the sale of Plant Mankato in the first quarter 2020 and the sale of Plant Nacogdoches in the second quarter 2019. See Note 15 to the financial statements under "Southern Power – Sales of Natural Gas and Biomass Plants" for additional information.
Allowance for Equity Funds Used During Construction
Allowance for equity funds used during construction increased $17 million, or 14.0%, in 2020 as compared to the prior year primarily associated with the construction of Plant Vogtle Units 3 and 4 at Georgia Power. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction – Regulatory Matters" for additional information.
Other Income (Expense), Net
Other income (expense), net increased $81 million, or 34.6%, in 2020 as compared to the prior year primarily related to a $131 million increase in non-service cost-related retirement benefits income, partially offset by a $24 million net decrease associated with a 2019 litigation settlement at Southern Power and a $21 million increase in charitable donations, primarily at Georgia Power. See Note 11 to the financial statements for additional information.
Income Taxes
Income taxes decreased $191 million, or 27.0%, in 2020 as compared to the prior year. The decrease was primarily due to $208 million of flowback of excess deferred income taxes in 2020 as authorized in Georgia Power's 2019 ARP and a $90 million decrease associated with lower pre-tax earnings, primarily from charges associated with the construction of Plant Vogtle Units 3 and 4 at Georgia Power, partially offset by a $75 million income tax benefit in 2019 resulting from ITCs recognized upon the sale of Plant Nacogdoches and a $24 million net increase related to the application of an accounting order associated with the Tax Reform Legislation in the prior year at Alabama Power. See Note 2 to the financial statements under "Georgia Power – Rate Plans" and – "Nuclear Construction" for additional information.
Net Income (Loss) Attributable to Noncontrolling Interests
Substantially all noncontrolling interests relate to renewable projects at Southern Power. Net loss attributable to noncontrolling interests increased $21 million in 2020 as compared to the prior year. The increased loss was primarily due to an allocation to the noncontrolling interest partner of approximately $26 million of income related to a litigation settlement at Southern Power in 2019.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
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, and gas marketing services.
A condensed statement of income for the gas business follows:
| 2020 | Increase (Decrease) from 2019 | ||||||||||
| (in millions) | |||||||||||
| Operating revenues | $ | 3,434 | $ | (358) | |||||||
| Cost of natural gas | 972 | (347) | |||||||||
| Other operations and maintenance | 966 | 78 | |||||||||
| Depreciation and amortization | 500 | 13 | |||||||||
| Taxes other than income taxes | 206 | (7) | |||||||||
| Impairment charges | — | (115) | |||||||||
| (Gain) loss on dispositions, net | (22) | (22) | |||||||||
| Total operating expenses | 2,622 | (400) | |||||||||
| Operating income | 812 | 42 | |||||||||
| Earnings from equity method investments | 141 | (16) | |||||||||
| Interest expense, net of amounts capitalized | 231 | (1) | |||||||||
| Other income (expense), net | 41 | 21 | |||||||||
| Income taxes | 173 | 43 | |||||||||
| Net income | $ | 590 | $ | 5 |
Seasonality of Results
During the period from November through March when natural gas usage and operating revenues are generally higher (Heating Season), more customers are connected to Southern Company Gas' distribution systems and natural gas usage is higher in periods of colder weather. Occasionally in the summer, operating revenues are impacted due to peak usage by power generators in response to summer energy demands. Southern Company Gas' base operating expenses, excluding cost of natural gas, bad debt expense, and certain incentive compensation costs, are incurred relatively equally over any given year. Thus, operating results can vary significantly from quarter to quarter as a result of seasonality. For 2020, the percentage of operating revenues and net income generated during the Heating Season (January through March and November through December) were 67.6% and 85.6%, respectively. For 2019, the percentage of operating revenues and net income generated during the Heating Season were 68.7% and 86.8%, respectively.
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Southern Company and Subsidiary Companies 2020 Annual Report
Operating Revenues
Operating revenues in 2020 were $3.4 billion, a $358 million decrease compared to 2019. Details of operating revenues were as follows:
| 2020 | |||||
| (in millions) | |||||
| Operating revenues – prior year | $ | 3,792 | |||
| Estimated change resulting from – | |||||
| Infrastructure replacement programs and base rate changes | 186 | ||||
| Gas costs and other cost recovery | (319) | ||||
| Wholesale gas services | (220) | ||||
| Other | (5) | ||||
| Operating revenues – current year | $ | 3,434 | |||
| Percent change | (9.4) | % |
Revenues at the natural gas distribution utilities increased in 2020 compared to the prior year due to base rate increases and continued investments recovered through infrastructure replacement programs, including increases of $107 million at Nicor Gas and $68 million at Atlanta Gas Light. See Note 2 to the financial statements under "Southern Company Gas" for additional information.
Revenues associated with gas costs and other cost recovery decreased in 2020 compared to the prior year primarily due to lower natural gas prices and lower sales volumes as a result of warmer weather. The natural gas distribution utilities have weather or revenue normalization mechanisms that mitigate revenue fluctuations from customer consumption changes. Natural gas distribution rates include provisions to adjust billings for fluctuations in natural gas costs. Therefore, gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas and do not affect net income from the natural gas distribution utilities. See "Cost of Natural Gas" herein for additional information.
Revenues from wholesale gas services decreased in 2020 primarily due to lower derivative gains and decreased commercial activity as a result of warmer weather.
Southern Company Gas hedged its exposure to warmer-than-normal weather in Illinois for gas distribution operations and in Illinois and Georgia for gas marketing services. The remaining impacts of weather on earnings were immaterial.
Cost of Natural Gas
Excluding Atlanta Gas Light, which does not sell natural gas to end-use customers, the natural gas distribution utilities charge their utility customers for natural gas consumed using natural gas cost recovery mechanisms set by the applicable state regulatory agencies. Under these mechanisms, all prudently-incurred natural gas costs are passed through to customers without markup, subject to regulatory review. The natural gas distribution utilities defer or accrue the difference between the actual cost of natural gas and the amount of commodity revenue earned in a given period. The deferred or accrued amount is either billed or refunded to customers prospectively through adjustments to the commodity rate. Deferred natural gas costs are reflected as regulatory assets and accrued natural gas costs are reflected as regulatory liabilities. Therefore, gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas and do not affect net income from the natural gas distribution utilities. Cost of natural gas at the natural gas distribution utilities represented 88.3% of the total cost of natural gas for 2020.
Gas marketing services customers are charged for actual and estimated natural gas consumed. Cost of natural gas includes the cost of fuel and associated transportation costs, lost and unaccounted for gas, adjustments to reduce the value of inventories to market value, if applicable, and gains and losses associated with certain derivatives.
Cost of natural gas was $1.0 billion, a decrease of $347 million, or 26.3%, in 2020 compared to the prior year, which reflects a 23.6% decrease in natural gas prices compared to 2019 and decreased volumes primarily as a result of warmer weather.
Other Operations and Maintenance Expenses
Other operations and maintenance expenses increased $78 million, or 8.8%, in 2020 compared to the prior year. The increase was primarily due to increases of $40 million in compensation and benefit expenses, $10 million in charitable donations, $12 million
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
in pipeline repair, compliance, and maintenance activities, and $19 million in expenses passed through directly to customers primarily related to bad debt.
Depreciation and Amortization
Depreciation and amortization increased $13 million, or 2.7%, in 2020 compared to the prior year. This increase was primarily due to continued infrastructure investments at the natural gas distribution utilities. See Note 2 to the financial statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects" for additional information.
Impairment Charges
In 2019, Southern Company Gas recorded impairment charges of $91 million related to Jefferson Island and $24 million in contemplation of the sale of its interests in Pivotal LNG and Atlantic Coast Pipeline. See Notes 3 and 15 to the financial statements under "Other Matters – Southern Company Gas" and "Southern Company Gas," respectively, for additional information.
(Gain) Loss on Dispositions, Net
In 2020, gain on dispositions, net was $22 million resulting from the sale of Jefferson Island. See Note 15 to the financial statements under "Southern Company Gas" for additional information.
Earnings from Equity Method Investments
Earnings from equity method investments decreased $16 million, or 10.2%, in 2020 compared to the prior year. This decrease was primarily due to a $12 million decrease in earnings from SNG as a result of lower demand and firm revenues and a $9 million decrease in earnings as a result of the sale of Atlantic Coast Pipeline in the first quarter 2020, partially offset by a $6 million pre-tax loss on the sale of Triton in May 2019. See Notes 7 and 15 to the financial statements under "Southern Company Gas" for additional information.
Other Income (Expense), Net
Other income (expense), net increased $21 million in 2020 compared to the prior year. This increase primarily resulted from an increase in non-service cost-related retirement benefits income. See Note 11 to the financial statements for additional information.
Income Taxes
Income taxes increased $43 million, or 33.1%, in 2020 compared to the prior year. This increase was primarily due to the reversal of a federal income tax valuation allowance in connection with the sale of Triton in 2019, a decrease in the flowback of excess deferred income taxes in 2020 at Atlanta Gas Light as previously authorized by the Georgia PSC, and higher pre-tax earnings. See Note 2 to the financial statements under "Southern Company Gas," Note 10 to the financial statements, and Note 15 to the financial statements under "Southern Company Gas" for additional information.
Other Business Activities
Southern Company's other business activities primarily include the parent company (which does not allocate operating expenses to business units); PowerSecure, a provider of energy solutions to electric utilities and their customers in the areas of distributed generation, energy storage and renewables, and energy efficiency; Southern Holdings, which invests in various projects, including leveraged lease projects; and Southern Linc, which provides digital wireless communications for use by the Southern Company system and also markets these services to the public and provides fiber optics services within the Southeast.
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Southern Company and Subsidiary Companies 2020 Annual Report
A condensed statement of income for Southern Company's other business activities follows:
| 2020 | Increase (Decrease) from 2019 | ||||||||||
| (in millions) | |||||||||||
| Operating revenues | $ | 444 | $ | (88) | |||||||
| Cost of other sales | 234 | (125) | |||||||||
| Other operations and maintenance | 196 | (35) | |||||||||
| Depreciation and amortization | 77 | (3) | |||||||||
| Taxes other than income taxes | 4 | (2) | |||||||||
| Impairment charges | — | (50) | |||||||||
| (Gain) loss on dispositions, net | (1) | 2,547 | |||||||||
| Total operating expenses | 510 | 2,332 | |||||||||
| Operating income (loss) | (66) | (2,420) | |||||||||
| Interest expense | 614 | 97 | |||||||||
| Impairment of leveraged leases | 206 | 206 | |||||||||
| Other income (expense), net | 3 | (6) | |||||||||
| Income taxes (benefit) | (297) | (1,257) | |||||||||
| Net income (loss) | $ | (586) | $ | (1,472) |
Operating Revenues
Southern Company's operating revenues for these other business activities decreased $88 million, or 16.5%, in 2020 as compared to the prior year primarily from the sales of PowerSecure's utility infrastructure services business in July 2019 and its lighting business in December 2019, as well as the wind-down of a segment of PowerSecure's distributed infrastructure business in the first quarter 2020. These decreases were partially offset by PowerSecure's continued growth in the core distributed infrastructure business and an increase at Southern Linc related to a contract for the design and construction of a fiber optic system. See Note 15 to the financial statements under "Southern Company" for additional information.
Cost of Other Sales
Cost of other sales for these other business activities decreased $125 million, or 34.8%, in 2020 as compared to the prior year primarily from the sales of PowerSecure's utility infrastructure services business in July 2019 and its lighting business in December 2019, as well as the wind-down of a segment of PowerSecure's distributed infrastructure business in the first quarter 2020. These decreases were partially offset by PowerSecure's continued growth in the core distributed infrastructure business. See Note 15 to the financial statements under "Southern Company" for additional information.
Other Operations and Maintenance Expenses
Other operations and maintenance expenses for these other business activities decreased $35 million, or 15.2%, in 2020 as compared to the prior year. The decrease was primarily due to the sales of PowerSecure's utility infrastructure services business in July 2019 and its lighting business in December 2019, partially offset by an increase at Southern Linc related to the design and construction of a fiber optic system. See Note 15 to the financial statements under "Southern Company" for additional information.
Impairment Charges
In 2019, goodwill and asset impairment charges totaling $50 million were recorded related to the sale of PowerSecure's utility infrastructure services business and in contemplation of the sale of its lighting business. See Note 15 to the financial statements under "Southern Company" for additional information.
(Gain) Loss on Dispositions, Net
The 2019 gain on dispositions, net primarily relates to the gain of $2.6 billion ($1.4 billion after tax) on the sale of Gulf Power. See Note 15 to the financial statements under "Southern Company" for additional information.
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Southern Company and Subsidiary Companies 2020 Annual Report
Interest Expense
Interest expense for these other business activities increased $97 million, or 18.8%, in 2020 as compared to the prior year primarily due to an increase in average outstanding long-term borrowings and fees associated with the extinguishment of debt at the parent company. See Note 8 to the financial statements for additional information.
Impairment of Leveraged Leases
Impairment charges totaling $206 million were recorded in 2020 related to leveraged lease investments at Southern Holdings. See Notes 1 and 3 to the financial statements under "Leveraged Leases" and "Other Matters – Southern Company," respectively, for additional information.
Other Income (Expense), Net
Other income (expense), net for these other business activities decreased $6 million, or 66.7%, in 2020 as compared to the prior year primarily due to a $32 million increase in charitable donations at the parent company, partially offset by a $15 million increase in leveraged lease income at Southern Holdings, primarily due to an impairment charge in 2019, and a $9 million increase related to investment income at Southern Holdings.
Income Taxes (Benefit)
Income taxes for these other business activities decreased $1.3 billion in 2020 as compared to the prior year primarily due to the tax impacts related to the sale of Gulf Power. See Note 10 to the financial statements and Note 15 to the financial statements under "Southern Company" for additional information.
Alabama Power
Alabama Power's 2020 net income after dividends on preferred stock was $1.15 billion, representing an $80 million, or 7.5%, increase over the previous year. The increase was primarily due to a decrease in operations and maintenance expenses, an increase in retail revenues associated with the impact of customer bill credits issued in 2019 related to the Tax Reform Legislation, and an increase in non-service cost-related retirement benefits income. These increases to income were partially offset by decreases in retail revenues associated with milder weather in 2020 when compared to 2019 and lower customer usage in the industrial and commercial sectors as a result of the COVID-19 pandemic. See Note 2 to the financial statements under "Alabama Power – Rate RSE" for additional information.
A condensed income statement for Alabama Power follows:
| 2020 | Increase (Decrease) from 2019 | ||||||||||
| (in millions) | |||||||||||
| Operating revenues | $ | 5,830 | $ | (295) | |||||||
| Fuel | 970 | (142) | |||||||||
| Purchased power | 319 | (84) | |||||||||
| Other operations and maintenance | 1,619 | (202) | |||||||||
| Depreciation and amortization | 812 | 19 | |||||||||
| Taxes other than income taxes | 416 | 13 | |||||||||
| Total operating expenses | 4,136 | (396) | |||||||||
| Operating income | 1,694 | 101 | |||||||||
| Allowance for equity funds used during construction | 46 | (6) | |||||||||
| Interest expense, net of amounts capitalized | 338 | 2 | |||||||||
| Other income (expense), net | 100 | 54 | |||||||||
| Income taxes | 337 | 67 | |||||||||
| Net income | 1,165 | 80 | |||||||||
| Dividends on preferred stock | 15 | — | |||||||||
| Net income after dividends on preferred stock | $ | 1,150 | $ | 80 |
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Southern Company and Subsidiary Companies 2020 Annual Report
Operating Revenues
Operating revenues for 2020 were $5.8 billion, reflecting a $295 million decrease from 2019. Details of operating revenues were as follows:
| 2020 | 2019 | ||||||||||
| (in millions) | |||||||||||
| Retail — prior year | $ | 5,501 | |||||||||
| Estimated change resulting from — | |||||||||||
| Rates and pricing | 51 | ||||||||||
| Sales decline | (50) | ||||||||||
| Weather | (105) | ||||||||||
| Fuel and other cost recovery | (184) | ||||||||||
| Retail — current year | $ | 5,213 | $ | 5,501 | |||||||
| Wholesale revenues — | |||||||||||
| Non-affiliates | 269 | 258 | |||||||||
| Affiliates | 46 | 81 | |||||||||
| Total wholesale revenues | 315 | 339 | |||||||||
| Other operating revenues | 302 | 285 | |||||||||
| Total operating revenues | $ | 5,830 | $ | 6,125 | |||||||
| Percent change | (4.8) | % | 1.5 | % |
Retail revenues in 2020 were $5.2 billion. These revenues decreased $288 million, or 5.2%, in 2020 as compared to the prior year. The decrease in 2020 was primarily due to fuel and other cost recovery driven by decreases in generation and the average cost of fuel, milder weather in 2020 when compared to 2019, and a decline in commercial and industrial sales due to social distancing and safer-at-home guidelines related to the COVID-19 pandemic. These decreases were partially offset by customer bill credits issued in 2019 related to the Tax Reform Legislation and an increase in Rate CNP Compliance revenue in 2020.
See Note 2 to the financial statements under "Alabama Power – Rate RSE" and " – Rate CNP Compliance" for additional information. See "Energy Sales" herein for a discussion of changes in the volume of energy sold, including changes related to sales decline and weather.
Electric rates include provisions to recognize the recovery of fuel costs, purchased power costs, PPAs certificated by the Alabama PSC, and costs associated with the NDR. Under these provisions, fuel and other cost recovery revenues generally equal fuel and other cost recovery expenses and do not affect net income. See Note 2 to the financial statements under "Alabama Power – Rate ECR" for additional information.
Wholesale revenues from power sales to non-affiliated utilities were as follows:
| 2020 | 2019 | ||||||||||
| (in millions) | |||||||||||
| Capacity and other | $ | 127 | $ | 102 | |||||||
| Energy | 142 | 156 | |||||||||
| Total non-affiliated | $ | 269 | $ | 258 |
Wholesale revenues from sales to non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared to the cost of Alabama Power's and the Southern Company system's generation, demand for energy within the Southern Company system's electric service territory, and availability of the Southern Company system's generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not affect net income. Short-term opportunity energy sales are also included in wholesale energy sales to non-affiliates. These opportunity sales are made at market-based rates that generally provide a margin above Alabama Power's variable cost to produce the energy.
In 2020, wholesale revenues from sales to non-affiliates increased $11 million, or 4.3%, as compared to the prior year primarily due to a $25 million increase in non-affiliated capacity revenues as a result of a new power sales agreement which began in
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Southern Company and Subsidiary Companies 2020 Annual Report
September 2020, partially offset by a 17% decrease in the price of energy due to lower natural gas prices. See Notes 2 and 15 to the financial statements under "Alabama Power – Petition for Certificate of Convenience and Necessity" and "Alabama Power," respectively, for additional information.
Wholesale revenues from sales to affiliated companies will vary depending on demand and the availability and cost of generating resources at each company. These affiliate sales and purchases are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost and energy purchases are generally offset by energy revenues through Alabama Power's energy cost recovery clause.
In 2020, wholesale revenues from sales to affiliates decreased $35 million, or 43.2%, as compared to the prior year. In 2020, KWH sales decreased 30% due to decreased generation related to lower demand and the price of energy decreased 18.4% as a result of lower natural gas prices.
In 2020, other operating revenues increased $17 million, or 6.0%, as compared to the prior year primarily due to increases in transmission and energy service revenues and unregulated sales of products and services, partially offset by decreased revenues resulting from the temporary suspension of customer disconnections and late fees related to the COVID-19 pandemic.
Energy Sales
Changes in revenues are influenced heavily by the change in the volume of energy sold from year to year. KWH sales for 2020 and the percent change from the prior year were as follows:
| 2020 | |||||||||||||||||
| Total KWHs | Total KWH Percent Change | Weather-Adjusted Percent Change | |||||||||||||||
| (in billions) | |||||||||||||||||
| Residential | 17.6 | (3.5) | % | 2.7 | % | ||||||||||||
| Commercial | 12.4 | (8.3) | (6.3) | ||||||||||||||
| Industrial | 20.4 | (8.0) | (8.0) | ||||||||||||||
| Other | 0.2 | (11.3) | (11.3) | ||||||||||||||
| Total retail | 50.6 | (6.6) | (4.0) | % | |||||||||||||
| Wholesale | |||||||||||||||||
| Non-affiliates | 6.3 | 23.8 | |||||||||||||||
| Affiliates | 2.5 | (30.0) | |||||||||||||||
| Total wholesale | 8.8 | 1.9 | |||||||||||||||
| Total energy sales | 59.4 | (5.4) | % |
Changes in retail energy sales are generally the result of changes in electricity usage by customers, weather, and the number of customers. Revenues attributable to changes in sales decreased in 2020 when compared to 2019 largely due to the COVID-19 pandemic. In 2020, weather-adjusted residential KWH sales were 2.7% higher compared to 2019 primarily due to COVID-19 pandemic impacts. Weather-adjusted commercial KWH sales decreased 6.3% primarily due to lower customer usage resulting from social distancing and safer-at-home guidelines related to the COVID-19 pandemic. Industrial KWH sales decreased 8.0% primarily as a result of disruptions in supply chain and business operations related to the COVID-19 pandemic.
See "Operating Revenues" above for a discussion of significant changes in wholesale revenues from sales to non-affiliates and wholesale revenues from sales to affiliated companies related to changes in price and KWH sales.
Fuel and Purchased Power Expenses
The mix of fuel sources for generation of electricity is determined primarily by the unit cost of fuel consumed, demand, and the availability of generating units. Additionally, Alabama Power purchases a portion of its electricity needs from the wholesale market.
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Southern Company and Subsidiary Companies 2020 Annual Report
Details of Alabama Power's generation and purchased power were as follows:
| 2020 | 2019 | ||||||||||
| Total generation (in billions of KWHs) | 55.2 | 56.9 | |||||||||
| Total purchased power (in billions of KWHs) | 6.9 | 9.5 | |||||||||
| Sources of generation (percent) — | |||||||||||
| Coal | 39 | 45 | |||||||||
| Nuclear | 27 | 25 | |||||||||
| Gas | 24 | 21 | |||||||||
| Hydro | 10 | 9 | |||||||||
| Cost of fuel, generated (in cents per net KWH) — | |||||||||||
| Coal | 2.74 | 2.69 | |||||||||
| Nuclear | 0.75 | 0.77 | |||||||||
| Gas | 1.90 | 2.47 | |||||||||
| Average cost of fuel, generated (in cents per net KWH)**(a) | 1.92 | 2.11 | |||||||||
| Average cost of purchased power (in cents per net KWH)**(b) | 4.82 | 4.39 |
(a)KWHs generated by hydro are excluded from the average cost of fuel, generated.
(b)Average cost of purchased power includes fuel, energy, and transmission purchased by Alabama Power for tolling agreements where power is generated by the provider.
Fuel and purchased power expenses were $1.3 billion in 2020, a decrease of $226 million, or 14.9%, compared to 2019. The decrease was primarily due to a $189 million decrease related to the volume of KWHs purchased and generated and a $37 million net decrease in the average cost of fuel and purchased power.
Fuel and purchased power energy transactions do not have a significant impact on earnings, since energy expenses are generally offset by energy revenues through Alabama Power's energy cost recovery clause. Alabama Power, along with the Alabama PSC, continuously monitors the under/over recovered balance to determine whether adjustments to billing rates are required. See Note 2 to the financial statements under "Alabama Power – Rate ECR" for additional information.
Fuel
Fuel expenses were $970 million in 2020, a decrease of $142 million, or 12.8%, compared to 2019. The decrease was primarily due to a 23.1% decrease in the average cost of KWHs generated by natural gas, which excludes tolling agreements, a 15.6% decrease in the volume of KWHs generated by coal, and a 14.2% increase in the volume of KWHs generated by hydro.
Purchased Power – Non-Affiliates
Purchased power expense from non-affiliates was $191 million in 2020, a decrease of $12 million, or 5.9%, compared to 2019. This decrease was primarily due to a 6.4% decrease in the amount of energy purchased as a result of milder weather during 2020 as compared to 2019, partially offset by a 1.9% increase in the average cost per KWH purchased due to decreased generation from PPAs.
Energy purchases from non-affiliates will vary depending on the market prices of wholesale energy as compared to the cost of the Southern Company system's generation, demand for energy within the Southern Company system's service territory, and the availability of the Southern Company system's generation.
Purchased Power – Affiliates
Purchased power expense from affiliates was $128 million in 2020, a decrease of $72 million, or 36.0%, compared to 2019. This decrease was primarily due to a 41.9% decrease in the amount of energy purchased primarily related to milder weather during 2020 as compared to 2019. This decrease was partially offset by a 10.3% increase in the average cost per KWH purchased due to decreased generation from PPAs.
Energy purchases from affiliates will vary depending on demand for energy and the availability and cost of generating resources at each company within the Southern Company system. These purchases are made in accordance with the IIC or other contractual agreements, as approved by the FERC.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
Other Operations and Maintenance Expenses
In 2020, other operations and maintenance expenses decreased $202 million, or 11.1%, as compared to the prior year. The decrease reflects the impact of cost containment activities implemented to help offset the effects of the recessionary economy resulting from the COVID-19 pandemic. The decrease was primarily due to decreases of $88 million in generation expenses, $27 million in vegetation management costs, $27 million in accruals to the NDR, and $20 million in Rate CNP Compliance-related expenses, as well as a $37 million increase in reliability NDR credits. See Note 2 to the financial statements under "Alabama Power – Rate NDR" and " – Rate CNP Compliance" for additional information.
Other Income (Expense), Net
Other income (expense), net increased $54 million, or 117.4%, in 2020 as compared to the prior year primarily due to an increase in non-service cost-related retirements benefits income. See Note 11 to the financial statements for additional information.
Income Taxes
Income taxes increased $67 million, or 24.8%, in 2020 as compared to the prior year primarily due to an increase in pre-tax net income and the application in 2019 of an Alabama PSC accounting order related to the Tax Reform Legislation. See Note 2 to the financial statements under "Alabama Power – Tax Reform Accounting Order" for additional information.
Georgia Power
Georgia Power's 2020 net income was $1.6 billion, representing a $145 million, or 8.4%, decrease from the previous year. The decrease was primarily due to after-tax charges totaling $242 million in 2020 related to the construction of Plant Vogtle Units 3 and 4, as well as lower retail revenues associated with milder weather as compared to 2019 and decreased customer usage resulting from the COVID-19 pandemic, partially offset by related cost containment activities and the impacts of accruals in 2019 for customer refunds. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information on the construction of Plant Vogtle Units 3 and 4.
A condensed income statement for Georgia Power follows:
| 2020 | Increase (Decrease) from 2019 | ||||||||||||||||
| (in millions) | |||||||||||||||||
| Operating revenues | $ | 8,309 | $ | (99) | |||||||||||||
| Fuel | 1,141 | (303) | |||||||||||||||
| Purchased power | 1,049 | (47) | |||||||||||||||
| Other operations and maintenance | 1,953 | (19) | |||||||||||||||
| Depreciation and amortization | 1,425 | 444 | |||||||||||||||
| Taxes other than income taxes | 444 | (10) | |||||||||||||||
| Estimated loss on Plant Vogtle Units 3 and 4 | 325 | 325 | |||||||||||||||
| Total operating expenses | 6,337 | 390 | |||||||||||||||
| Operating income | 1,972 | (489) | |||||||||||||||
| Interest expense, net of amounts capitalized | 425 | 16 | |||||||||||||||
| Other income (expense), net | 180 | 40 | |||||||||||||||
| Income taxes | 152 | (320) | |||||||||||||||
| Net income | $ | 1,575 | $ | (145) | |||||||||||||
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Southern Company and Subsidiary Companies 2020 Annual Report
Operating Revenues
Operating revenues for 2020 were $8.3 billion, a $99 million decrease from 2019. Details of operating revenues were as follows:
| 2020 | 2019 | ||||||||||
| (in millions) | |||||||||||
| Retail — prior year | $ | 7,707 | |||||||||
| Estimated change resulting from — | |||||||||||
| Rates and pricing | 462 | ||||||||||
| Sales decline | (71) | ||||||||||
| Weather | (179) | ||||||||||
| Fuel cost recovery | (310) | ||||||||||
| Retail — current year | 7,609 | $ | 7,707 | ||||||||
| Wholesale revenues | 115 | 140 | |||||||||
| Other operating revenues | 585 | 561 | |||||||||
| Total operating revenues | $ | 8,309 | $ | 8,408 | |||||||
| Percent change | (1.2) | % | (0.1) | % |
Retail revenues of $7.6 billion in 2020 decreased $98 million, or 1.3%, compared to 2019. The significant factors driving this change are shown in the preceding table. The increase in rates and pricing was primarily due to an increase in revenue recognized under the ECCR tariff effective January 1, 2020 as authorized in the 2019 ARP and the impacts of accruals in 2019 for customer refunds related to the Tax Reform Legislation and earnings in excess of the allowed retail ROE range, as well as the rate pricing effects of decreased customer usage throughout 2020 in the commercial and industrial classes. Partially offsetting these increases were lower contributions from commercial and industrial customers with variable demand-driven pricing. See Note 2 to the financial statements under "Georgia Power – Rate Plans" for additional information.
See "Energy Sales" below for a discussion of changes in the volume of energy sold, including changes related to the sales decline in 2020.
Electric rates include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these fuel cost recovery provisions, fuel revenues generally equal fuel expenses and do not affect net income. See Note 2 to the financial statements under "Georgia Power – Fuel Cost Recovery" for additional information.
Wholesale revenues from power sales were as follows:
| 2020 | 2019 | ||||||||||
| (in millions) | |||||||||||
| Capacity and other | $ | 51 | $ | 55 | |||||||
| Energy | 64 | 85 | |||||||||
| Total | $ | 115 | $ | 140 |
Wholesale capacity revenues from PPAs are recognized in amounts billable under the contract terms and provide for recovery of fixed costs and a return on investment. Wholesale revenues from sales to non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared to the cost of Georgia Power's and the Southern Company system's generation, demand for energy within the Southern Company system's electric service territory, and the availability of the Southern Company system's generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a significant impact on net income. Short-term opportunity sales are made at market-based rates that generally provide a margin above Georgia Power's variable cost of energy.
Wholesale revenues from sales to affiliated companies will vary depending on demand and the availability and cost of generating resources at each company. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost.
In 2020, wholesale revenues decreased $25 million, or 17.9%, as compared to 2019 primarily due to the expiration of a non-affiliate PPA and lower energy prices.
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Southern Company and Subsidiary Companies 2020 Annual Report
Other operating revenues increased $24 million, or 4.3%, in 2020 from the prior year primarily due to increases of $33 million in unregulated sales associated with power delivery construction and maintenance contracts and outdoor lighting, $8 million in pole attachment revenues, and $6 million in open access transmission tariff sales, partially offset by decreases of $13 million largely resulting from the temporary suspension of customer disconnections and late fees related to the COVID-19 pandemic and $10 million from unregulated sales associated with energy conservation projects.
Energy Sales
Changes in revenues are influenced heavily by the change in the volume of energy sold from year to year. KWH sales for 2020 and the percent change from the prior year were as follows:
| 2020 | |||||||||||||||||||||||||||||
| Total KWHs | Total KWH Percent Change | Weather-Adjusted Percent Change | |||||||||||||||||||||||||||
| (in billions) | |||||||||||||||||||||||||||||
| Residential | 27.8 | (1.3) | % | 3.4 | % | ||||||||||||||||||||||||
| Commercial | 30.5 | (7.1) | (5.3) | ||||||||||||||||||||||||||
| Industrial | 22.0 | (4.8) | (4.5) | ||||||||||||||||||||||||||
| Other | 0.5 | (9.3) | (9.1) | ||||||||||||||||||||||||||
| Total retail | 80.8 | (4.6) | (2.2) | % | |||||||||||||||||||||||||
| Wholesale | 2.7 | (9.8) | |||||||||||||||||||||||||||
| Total energy sales | 83.5 | (4.8) | % |
Changes in retail energy sales are generally the result of changes in electricity usage by customers, weather, and the number of customers. Revenues attributable to changes in sales decreased in 2020 when compared to 2019 largely due to the COVID-19 pandemic. In 2020, weather-adjusted residential KWH sales increased 3.4% compared to 2019 primarily due to customer growth and an increase in average customer usage, primarily due to work-from-home policies. Weather-adjusted commercial KWH sales decreased 5.3% primarily due to lower customer usage resulting from changes in consumer and business behavior in response to the COVID-19 pandemic. Weather-adjusted industrial KWH sales decreased 4.5% primarily as a result of disruptions in supply chain and business operations related to the COVID-19 pandemic.
See "Operating Revenues" above for a discussion of significant changes in wholesale sales to non-affiliates and affiliated companies.
Fuel and Purchased Power Expenses
Fuel costs constitute one of the largest expenses for Georgia Power. The mix of fuel sources for the generation of electricity is determined primarily by demand, the unit cost of fuel consumed, and the availability of generating units. Additionally, Georgia Power purchases a portion of its electricity needs from the wholesale market.
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Southern Company and Subsidiary Companies 2020 Annual Report
Details of Georgia Power's generation and purchased power were as follows:
| 2020 | 2019 | ||||||||||||||||
| Total generation (in billions of KWHs) | 56.8 | 62.6 | |||||||||||||||
| Total purchased power (in billions of KWHs) | 30.5 | 29.1 | |||||||||||||||
| Sources of generation (percent) — | |||||||||||||||||
| Gas | 52 | 47 | |||||||||||||||
| Nuclear | 27 | 26 | |||||||||||||||
| Coal | 16 | 24 | |||||||||||||||
| Hydro and other | 5 | 3 | |||||||||||||||
| Cost of fuel, generated (in cents per net KWH) — | |||||||||||||||||
| Gas | 2.19 | 2.42 | |||||||||||||||
| Nuclear | 0.80 | 0.81 | |||||||||||||||
| Coal | 3.23 | 3.09 | |||||||||||||||
| Average cost of fuel, generated (in cents per net KWH) | 1.96 | 2.16 | |||||||||||||||
| Average cost of purchased power (in cents per net KWH)()* | 3.69 | 4.21 |
(*) Average cost of purchased power includes fuel purchased by Georgia Power for tolling agreements where power is generated by the provider.
Fuel and purchased power expenses were $2.2 billion in 2020, a decrease of $350 million, or 13.8%, compared to 2019. The decrease was due to a decrease of $215 million related to the average cost of fuel and purchased power and a net decrease of $135 million related to the volume of KWHs generated and purchased.
Fuel and purchased power energy transactions do not have a significant impact on earnings since these fuel expenses are generally offset by fuel revenues through Georgia Power's fuel cost recovery mechanism. See Note 2 to the financial statements under "Georgia Power – Fuel Cost Recovery" for additional information.
Fuel
Fuel expense was $1.1 billion in 2020, a decrease of $303 million, or 21.0%, compared to 2019. The decrease was primarily due to a 40.3% decrease in the volume of KWHs generated by coal and a 9.5% decrease in the average cost of natural gas per KWH generated.
Purchased Power - Non-Affiliates
Purchased power expense from non-affiliates was $540 million in 2020, an increase of $19 million, or 3.6%, compared to 2019. The increase was primarily due to an increase of 4.7% in the volume of KWHs purchased primarily due to the availability of lower cost market resources, partially offset by a 2.8% decrease in the average cost per KWH purchased primarily resulting from lower energy prices.
Energy purchases from non-affiliates will vary depending on the market prices of wholesale energy as compared to the cost of 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.
Purchased Power - Affiliates
Purchased power expense from affiliates was $509 million in 2020, a decrease of $66 million, or 11.5%, compared to 2019. The decrease was primarily due to the expiration of a PPA and a 19.9% decrease in the average cost per KWH purchased primarily resulting from lower energy prices, partially offset by an increase of 4.4% in the volume of KWHs purchased due to lower cost Southern Company system resources as compared to available Georgia Power-owned generation.
Energy purchases from affiliates will vary depending on the demand and the availability and cost of generating resources at each company within the Southern Company system. These purchases are made in accordance with the IIC or other contractual agreements, all as approved by the FERC.
Other Operations and Maintenance Expenses
In 2020, other operations and maintenance expenses decreased $19 million, or 1.0%, compared to 2019. The decrease was primarily due to decreases of $85 million in distribution- and transmission-related expenses, $78 million associated with
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Southern Company and Subsidiary Companies 2020 Annual Report
generation maintenance and scheduled outages, $19 million in customer service and sales expense, and $12 million associated with generation environmental projects. These decreases reflect the impacts of cost containment activities implemented to help offset the effects of the recessionary economy resulting from the COVID-19 pandemic. Other expense reductions include a decrease of $15 million related to an adjustment in 2019 for FERC fees following the conclusion of a multi-year audit of headwater benefits associated with hydro facilities and an $11 million increase in nuclear property insurance refunds. Partially offsetting these decreases were increases of $183 million in storm damage recovery as authorized in the 2019 ARP and $20 million in employee benefit expenses. See Note 2 to the financial statements under "Georgia Power – Storm Damage Recovery" for additional information.
Depreciation and Amortization
Depreciation and amortization increased $444 million, or 45.3%, in 2020 compared to 2019. The increase primarily reflects increased amortization of regulatory assets related to CCR AROs of $203 million and higher depreciation of $178 million as authorized in the 2019 ARP. Also contributing to the increase was a $67 million increase in depreciation associated with additional plant in service. See Notes 2 and 5 to the financial statements under "Georgia Power – Rate Plans – 2019 ARP" and "Depreciation and Amortization," respectively, for additional information.
Estimated Loss on Plant Vogtle Units 3 and 4
In the second and fourth quarters 2020, estimated probable losses of $149 million and $176 million, respectively, were recorded to reflect Georgia Power's revised total project capital cost forecast to complete construction and start-up of Plant Vogtle Units 3 and 4. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information.
Interest Expense, Net of Amounts Capitalized
In 2020, interest expense, net of amounts capitalized increased $16 million, or 3.9%, compared to 2019. The increase was primarily due to a $36 million increase in interest expense associated with an increase in average outstanding long-term borrowings, partially offset by a $20 million increase in amounts capitalized in connection with the construction of Plant Vogtle Units 3 and 4. See FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" and "Financing Activities" herein for additional information on borrowings and Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information regarding Plant Vogtle Units 3 and 4.
Other Income (Expense), Net
In 2020, other income (expense), net increased $40 million, or 28.6%, compared to the prior year primarily due to a $42 million increase in non-service cost-related retirement benefits income and a $23 million increase in AFUDC equity primarily associated with the construction of Plant Vogtle Units 3 and 4, partially offset by a $20 million increase in charitable donations. See Note 11 to the financial statements for additional information on Georgia Power's net periodic pension and other postretirement benefit costs and Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information regarding Plant Vogtle Units 3 and 4.
Income Taxes
Income taxes decreased $320 million, or 67.8%, in 2020 compared to the prior year primarily as a result of the flowback of excess deferred income taxes in 2020 as authorized in the 2019 ARP and lower pre-tax earnings, which includes the charges in the second and fourth quarters 2020 associated with the construction of Plant Vogtle Units 3 and 4. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" and Note 10 to the financial statements for additional information.
Mississippi Power
Mississippi Power's net income was $152 million in 2020 compared to $139 million in 2019. The increase was primarily due to a decrease in operations and maintenance expenses primarily associated with a 2019 accrual for the closeout of a DOE contract related to the Kemper County energy facility, a decrease in income taxes associated with the flowback of excess deferred income taxes, and a decrease in amortization associated with ECO Plan regulatory assets, substantially offset by a decrease in revenues as a result of a base rate reduction that became effective for the first billing cycle of April 2020, as well as a decrease in customer usage due to the COVID-19 pandemic.
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Southern Company and Subsidiary Companies 2020 Annual Report
A condensed income statement for Mississippi Power follows:
| 2020 | Increase (Decrease) from 2019 | ||||||||||
| (in millions) | |||||||||||
| Operating revenues | $ | 1,172 | $ | (92) | |||||||
| Fuel | 350 | (57) | |||||||||
| Purchased power | 22 | 2 | |||||||||
| Other operations and maintenance | 284 | (23) | |||||||||
| Depreciation and amortization | 183 | (9) | |||||||||
| Taxes other than income taxes | 124 | 11 | |||||||||
| Total operating expenses | 963 | (76) | |||||||||
| Operating income | 209 | (16) | |||||||||
| Interest expense, net of amounts capitalized | 60 | (9) | |||||||||
| Other income (expense), net | 17 | 4 | |||||||||
| Income taxes (benefit) | 14 | (16) | |||||||||
| Net income | $ | 152 | $ | 13 |
Operating Revenues
Operating revenues for 2020 were $1.2 billion, a $92 million decrease from 2019. Details of operating revenues were as follows:
| 2020 | 2019 | ||||||||||
| (in millions) | |||||||||||
| Retail — prior year | $ | 877 | |||||||||
| Estimated change resulting from — | |||||||||||
| Rates and pricing | (29) | ||||||||||
| Sales decline | (11) | ||||||||||
| Weather | (5) | ||||||||||
| Fuel and other cost recovery | (11) | ||||||||||
| Retail — current year | 821 | $ | 877 | ||||||||
| Wholesale revenues — | |||||||||||
| Non-affiliates | 215 | 237 | |||||||||
| Affiliates | 111 | 132 | |||||||||
| Total wholesale revenues | 326 | 369 | |||||||||
| Other operating revenues | 25 | 18 | |||||||||
| Total operating revenues | $ | 1,172 | $ | 1,264 | |||||||
| Percent change | (7.3) | % | (0.1) | % |
Total retail revenues for 2020 decreased $56 million, or 6.4%, compared to 2019 primarily due to decreases in rates in accordance with the Mississippi Power Rate Case Settlement Agreement, a decrease in customer usage due to the COVID-19 pandemic, and a decrease in fuel and other cost recovery revenues primarily as a result of lower recoverable fuel costs.
See Note 2 to the financial statements under "Mississippi Power – 2019 Base Rate Case" for additional information. See "Energy Sales" below for a discussion of changes in the volume of energy sold, including changes related to sales and weather.
Electric rates for Mississippi Power include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the energy component of purchased power costs, and do not affect net income. Recoverable fuel costs include fuel and purchased power expenses reduced by the fuel and emissions portion of wholesale revenues from energy sold to customers outside Mississippi
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Southern Company and Subsidiary Companies 2020 Annual Report
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 FERC-regulated MRA sales as well as market-based sales, were as follows:
| 2020 | 2019 | ||||||||||
| (in millions) | |||||||||||
| Capacity and other | $ | 3 | $ | 3 | |||||||
| Energy | 212 | 234 | |||||||||
| Total non-affiliated | $ | 215 | $ | 237 |
Wholesale revenues from sales to non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared to the cost of Mississippi Power's and the Southern Company system's generation, demand for energy within the Southern Company system's electric service territory, and the availability of the Southern Company system's generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a significant impact on net income. In addition, Mississippi Power provides service under long-term contracts with rural electric cooperative associations and a municipality located in southeastern Mississippi under full requirements cost-based electric tariffs which are subject to regulation by the FERC. The contracts with these wholesale customers represented 15.3% of Mississippi Power's total operating revenues in 2020 and are generally subject to 10-year rolling cancellation notices. Historically, these wholesale customers have acted as a group and any changes in contractual relationships for one customer are likely to be followed by the other wholesale customers. Short-term opportunity energy sales are also included in sales for resale to non-affiliates. These opportunity sales are made at market-based rates that generally provide a margin above Mississippi Power's variable cost to produce the energy.
Wholesale revenues from sales to non-affiliates decreased $22 million, or 9.3%, compared to 2019. This decrease was primarily due to decreases in revenue from MRA customers as a result of lower fuel costs, milder weather, decreased customer usage as a result of the COVID-19 pandemic, and fewer opportunity sales.
Wholesale revenues from sales to affiliates will vary depending on demand and the availability and cost of generating resources at each company. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost.
Wholesale revenues from sales to affiliates decreased $21 million, or 15.9%, in 2020 compared to 2019. This decrease was primarily due to a $34 million decrease associated with lower natural gas prices, partially offset by a $13 million increase associated with higher KWH sales due to the dispatch of Mississippi Power's generation resources to serve the Southern Company system's territorial load.
Other operating revenues increased $7 million, or 38.9%, in 2020 as compared to the prior year primarily due to an increase in open access transmission tariff revenues.
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Energy Sales
Changes in revenues are influenced heavily by the change in the volume of energy sold from year to year. KWH sales for 2020 and the percent change from the prior year were as follows:
| 2020 | |||||||||||||||||
| Total KWHs | Total KWH Percent Change | Weather-Adjusted Percent Change | |||||||||||||||
| (in millions) | |||||||||||||||||
| Residential | 2,023 | (1.9) | % | 3.3 | % | ||||||||||||
| Commercial | 2,513 | (7.4) | (7.0) | ||||||||||||||
| Industrial | 4,558 | (4.9) | (4.9) | ||||||||||||||
| Other | 35 | (3.3) | (3.3) | ||||||||||||||
| Total retail | 9,129 | (5.0) | (3.8) | % | |||||||||||||
| Wholesale | |||||||||||||||||
| Non-affiliated | 3,784 | (4.6) | |||||||||||||||
| Affiliated | 5,226 | 9.8 | |||||||||||||||
| Total wholesale | 9,010 | 3.3 | |||||||||||||||
| Total energy sales | 18,139 | (1.1) | % |
Changes in retail energy sales are generally the result of changes in electricity usage by customers, weather, and the number of customers. Revenues attributable to changes in sales decreased in 2020 when compared to 2019 largely due to the COVID-19 pandemic. Weather-adjusted residential KWH sales increased 3.3% compared to 2019 primarily due to an increase in average customer usage as a result of changes in customer behavior and work-from-home policies in response to the COVID-19 pandemic. Weather-adjusted commercial KWH sales decreased 7.0% primarily due to lower customer usage resulting from changes in consumer and business behavior, including the temporary closure of casinos, in response to the COVID-19 pandemic. Industrial KWH sales decreased 4.9% primarily as a result of disruptions in supply chain and business operations driven by the COVID-19 pandemic and the overall decrease in business activity due to the resulting recession.
See "Operating Revenues" above for a discussion of significant changes in wholesale revenues to affiliated companies.
Fuel and Purchased Power Expenses
The mix of fuel sources for generation of electricity is determined primarily by demand, the unit cost of fuel consumed, and the availability of generating units. Additionally, Mississippi Power purchases a portion of its electricity needs from the wholesale market.
Details of Mississippi Power's generation and purchased power were as follows:
| 2020 | 2019 | ||||||||||
| Total generation (in millions of KWHs) | 17,833 | 18,269 | |||||||||
| Total purchased power (in millions of KWHs) | 688 | 529 | |||||||||
| Sources of generation (percent) – | |||||||||||
| Gas | 94 | 94 | |||||||||
| Coal | 6 | 6 | |||||||||
| Cost of fuel, generated (in cents per net KWH) – | |||||||||||
| Gas | 1.97 | 2.26 | |||||||||
| Coal | 3.62 | 4.05 | |||||||||
| Average cost of fuel, generated (in cents per net KWH) | 2.08 | 2.37 | |||||||||
| Average cost of purchased power (in cents per net KWH) | 3.27 | 3.71 |
Fuel and purchased power expenses were $372 million in 2020, a decrease of $55 million, or 12.9%, as compared to the prior year. The decrease was primarily due to the lower average cost of natural gas.
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Southern Company and Subsidiary Companies 2020 Annual Report
Fuel and purchased power energy transactions do not have a significant impact on earnings, since energy expenses are generally offset by energy revenues through Mississippi Power's fuel cost recovery clauses. See Note 2 to the financial statements under "Mississippi Power – Fuel Cost Recovery and Note 1 to the financial statements under "Fuel Costs" for additional information.
Fuel
Fuel expense decreased $57 million, or 14.0%, in 2020 compared to 2019 primarily due to a 12.6% decrease in the average cost of natural gas per KWH generated, a 10.7% decrease in the average cost of coal per KWH generated, and a 3.0% decrease in the volume of KWHs generated by natural gas.
Purchased Power
Purchased power expense increased $2 million, or 10.0%, in 2020 compared to 2019. The increase was primarily the result of a 30.2% increase in the volume of KWHs purchased, partially offset by an 11.9% decrease in the average cost per KWH purchased.
Energy purchases will vary depending on the market prices of wholesale energy as compared to the cost of the Southern Company system's generation, demand for energy within the Southern Company system's service territory, and the availability of the Southern Company system's generation. These purchases are made in accordance with the IIC or other contractual agreements, as approved by the FERC.
Other Operations and Maintenance Expenses
Other operations and maintenance expenses decreased $23 million, or 7.5%, in 2020 compared to the prior year. The decrease primarily reflects the impacts of a $23 million accrual in 2019 for the closeout of a DOE contract related to the Kemper County energy facility. See Note 3 to the financial statements under "Other Matters – Mississippi Power – Kemper County Energy Facility" for additional information.
Depreciation and Amortization
Depreciation and amortization decreased $9 million, or 4.7%, in 2020 compared to 2019. The decrease was primarily due to a decrease in regulatory asset amortization of $21 million primarily as a result of completing amortization of the ECO Plan regulatory asset in 2019. This decrease was partially offset by an increase in depreciation of $12 million related to additional plant in service and an increase in depreciation rates in accordance with the Mississippi Power Rate Case Settlement Agreement. See Note 2 to the financial statements under "Mississippi Power – 2019 Base Rate Case" and " – Environmental Compliance Overview Plan" for additional information.
Taxes Other Than Income Taxes
Taxes other than income taxes increased $11 million, or 9.7%, in 2020 compared to 2019 primarily due to an increase in ad valorem taxes.
Interest Expense, Net of Amounts Capitalized
Interest expense, net of amounts capitalized decreased $9 million, or 13.0%, in 2020 compared to 2019 primarily as the result of a decrease in outstanding long-term borrowings. See Note 8 to the financial statements for additional information.
Income Taxes (Benefit)
Income tax expense decreased $16 million, or 53.3%, in 2020 compared to 2019 primarily due to the flowback of excess deferred income taxes as a result of the Mississippi Power Rate Case Settlement Agreement. See Note 2 to the financial statements under "Mississippi Power – 2019 Base Rate Case" and Note 10 to the financial statements for additional information.
Southern Power
Net income attributable to Southern Power for 2020 was $238 million, a $101 million decrease from 2019, primarily due to the $88 million after-tax gain on the sale of Plant Nacogdoches in the second quarter 2019, partially offset by the $23 million after-tax gain on the sale of Plant Mankato in the first quarter 2020. In addition, the decrease reflects the reduced net income resulting from these dispositions. See Note 15 to the financial statements under "Southern Power – Sales of Natural Gas and Biomass Plants" for additional information.
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A condensed statement of income follows:
| 2020 | Increase (Decrease) from 2019 | ||||||||||
| (in millions) | |||||||||||
| Operating revenues | $ | 1,733 | $ | (205) | |||||||
| Fuel | 470 | (107) | |||||||||
| Purchased power | 74 | (34) | |||||||||
| Other operations and maintenance | 353 | (6) | |||||||||
| Depreciation and amortization | 494 | 15 | |||||||||
| Taxes other than income taxes | 39 | (1) | |||||||||
| Asset impairment | — | (3) | |||||||||
| (Gain) loss on dispositions, net | (39) | (16) | |||||||||
| Total operating expenses | 1,391 | (152) | |||||||||
| Operating income | 342 | (53) | |||||||||
| Interest expense, net of amounts capitalized | 151 | (18) | |||||||||
| Other income (expense), net | 19 | (28) | |||||||||
| Income taxes (benefit) | 3 | 59 | |||||||||
| Net income | 207 | (122) | |||||||||
| Net income (loss) attributable to noncontrolling interests | (31) | (21) | |||||||||
| Net income attributable to Southern Power | $ | 238 | $ | (101) |
Operating Revenues
Total operating revenues include PPA capacity revenues, which are derived primarily from long-term contracts involving natural gas facilities and a biomass generating facility (through the second quarter 2019 sale of Plant Nacogdoches), and PPA energy revenues from Southern Power's generation facilities. To the extent Southern 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 the FERC-approved IIC, it may sell power into the Southern Company power pool.
Natural Gas and Biomass Capacity and Energy Revenue
Capacity revenues generally represent the greatest contribution to operating income and are designed to provide recovery of fixed costs plus a return on investment.
Energy is generally sold at variable cost or is indexed to published natural gas indices. Energy revenues will vary depending on the energy demand of Southern Power's customers and their generation capacity, as well as the market prices of wholesale energy compared to the cost of Southern Power's energy. Energy revenues also include fees for support services, fuel storage, and unit start charges. Increases and decreases in energy revenues under PPAs that are driven by fuel or purchased power prices are accompanied by an increase or decrease in fuel and purchased power costs and do not have a significant impact on net income.
Solar and Wind Energy 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.
See FUTURE EARNINGS POTENTIAL – "Southern Power's Power Sales Agreements" herein for additional information regarding Southern Power's PPAs.
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Southern Company and Subsidiary Companies 2020 Annual Report
Operating Revenues Details
Details of Southern Power's operating revenues were as follows:
| 2020 | 2019 | ||||||||||
| (in millions) | |||||||||||
| PPA capacity revenues | $ | 384 | $ | 482 | |||||||
| PPA energy revenues | 1,019 | 1,081 | |||||||||
| Total PPA revenues | 1,403 | 1,563 | |||||||||
| Non-PPA revenues | 316 | 363 | |||||||||
| Other revenues | 14 | 12 | |||||||||
| Total operating revenues | $ | 1,733 | $ | 1,938 |
Operating revenues for 2020 were $1.7 billion, a $205 million, or 11%, decrease from 2019. The decrease in operating revenues was primarily due to the following:
-
PPA capacity revenues decreased $98 million, or 20%, primarily due to decreases of $72 million related to the dispositions of Plant Nacogdoches in the second quarter 2019 and Plant Mankato in the first quarter 2020 and $24 million from the contractual expiration of an affiliate natural gas PPA.
-
PPA energy revenues decreased $62 million, or 6%, primarily due to a $125 million decrease in sales from natural gas facilities resulting from an $89 million decrease in the volume of KWHs sold due to decreased demand and a $36 million decrease in the price of fuel and purchased power. This decrease was partially offset by increases of $33 million in sales primarily driven by the volume of KWHs generated by solar and wind facilities and $30 million in sales from fuel cell generation acquired in 2019.
-
Non-PPA revenues decreased $47 million, or 13%, due to a $99 million decrease in the market price of energy, partially offset by a $52 million increase in the volume of KWHs sold through short-term sales.
Fuel and Purchased Power Expenses
Details of Southern Power's generation and purchased power were as follows:
| Total KWHs | Total KWH % Change | Total KWHs | ||||||||||||
| 2020 | 2019 | |||||||||||||
| (in billions of KWHs) | ||||||||||||||
| Generation | 44 | 47 | ||||||||||||
| Purchased power | 3 | 3 | ||||||||||||
| Total generation and purchased power | 47 | (6)% | 50 | |||||||||||
| Total generation and purchased power (excluding solar, wind, and tolling agreements) | 28 | (3)% | 29 |
Southern Power's PPAs for natural gas generation generally provide that the purchasers are responsible for either procuring the fuel (tolling agreements) or reimbursing Southern Power for substantially all of the cost of fuel relating to the energy delivered under such PPAs. Consequently, changes in such fuel costs are generally accompanied by a corresponding change in related fuel revenues and do not have a significant impact on net income. Southern Power is responsible for the cost of fuel for generating units that are not covered under PPAs. Power from these generating units is sold into the wholesale market or into the Southern Company power pool for capacity owned directly by Southern Power.
Purchased power expenses will vary depending on demand, availability, and the cost of generating resources throughout the Southern Company system and other contract resources. Load requirements are submitted to the Southern Company power pool on an hourly basis and are fulfilled with the lowest cost alternative, whether that is generation owned by Southern Power, an affiliate company, or external parties. Such purchased power costs are generally recovered through PPA revenues.
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Southern Company and Subsidiary Companies 2020 Annual Report
Details of Southern Power's fuel and purchased power expenses were as follows:
| 2020 | 2019 | ||||||||||
| (in millions) | |||||||||||
| Fuel | $ | 470 | $ | 577 | |||||||
| Purchased power | 74 | 108 | |||||||||
| Total fuel and purchased power expenses | $ | 544 | $ | 685 |
In 2020, total fuel and purchased power expenses decreased $141 million, or 21%, compared to 2019. Fuel expense decreased $107 million, or 19%, due to an $82 million decrease in the average cost of fuel per KWH generated and a $25 million decrease associated with the volume of KWHs generated. Purchased power expense decreased $34 million, or 31%, due to a $21 million decrease associated with the average cost of purchased power and a $13 million decrease associated with the volume of KWHs purchased.
(Gain) Loss on Dispositions, Net
In 2020, gain on dispositions, net increased $16 million, or 70%, compared to 2019 reflecting the sale of Plant Mankato in the first quarter 2020 and the sale of Plant Nacogdoches in the second quarter 2019. See Note 15 to the financial statements under "Southern Power – Sales of Natural Gas and Biomass Plants" for additional information.
Interest Expense, Net of Amounts Capitalized
In 2020, interest expense, net of amounts capitalized decreased $18 million, or 11%, compared to 2019, primarily due to a decrease in the amount of outstanding debt. See Note 8 to the financial statements for additional information.
Other Income (Expense), Net
In 2020, other income (expense), net decreased $28 million, or 60%, compared to 2019 primarily due to a $36 million gain arising from a litigation settlement in 2019, partially offset by the resolution of certain related contingencies in the third quarter 2020.
Income Taxes (Benefit)
In 2020, income tax expense was $3 million compared to a $56 million benefit for 2019, a change of $59 million, primarily due to a $75 million income tax benefit in 2019 resulting from ITCs recognized upon the sale of Plant Nacogdoches, partially offset by a decrease in income tax expense as a result of lower pre-tax earnings in 2020. See Notes 1, 10, and 15 to the financial statements under "Income Taxes," "Effective Tax Rate," and "Southern Power," respectively, for additional information.
Net Income (Loss) Attributable to Noncontrolling Interests
In 2020, net loss attributable to noncontrolling interests increased $21 million compared to 2019. The increased loss was primarily due to an allocation to the noncontrolling interest partner of approximately $26 million of income related to a litigation settlement in 2019.
Southern Company Gas
Operating Metrics
Southern Company Gas continues to focus on several operating metrics, including Heating Degree Days, customer count, and volumes of natural gas sold.
Southern Company Gas measures weather and the effect on its business using Heating Degree Days. Generally, increased Heating Degree Days result in higher demand for natural gas on Southern 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, including Nicor Gas following the approval of a revenue decoupling mechanism for residential customers in its base rate case that concluded in 2019. Southern Company Gas also utilizes weather hedges to limit the negative income impacts in the event of warmer-than-normal weather.
The number of customers served by gas distribution operations and gas marketing services can be impacted by natural gas prices, economic conditions, and competition from alternative fuels. Gas distribution operations and gas marketing services' customers are primarily located in Georgia and Illinois.
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Southern Company and Subsidiary Companies 2020 Annual Report
Southern Company Gas' natural gas volume metrics for gas distribution operations and gas marketing services illustrate the effects of weather and customer demand for natural gas. Wholesale gas services' physical sales volumes represent the daily average natural gas volumes sold to its customers.
Seasonality of Results
During the Heating Season, natural gas usage and operating revenues are generally higher as more customers are connected to the gas distribution systems and natural gas usage is higher in periods of colder weather. Occasionally in the summer, wholesale gas services' operating revenues are impacted due to peak usage by power generators in response to summer energy demands. Southern Company Gas' base operating expenses, excluding cost of natural gas, bad debt expense, and certain incentive compensation costs, are incurred relatively evenly throughout the year. Seasonality also affects the comparison of certain balance sheet items across quarters, including receivables, unbilled revenues, natural gas for sale, and notes payable. However, these items are comparable when reviewing Southern 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 | ||||||||||||||||||||
| Operating Revenues | Net Income | |||||||||||||||||||
| 2020 | 67.6 | % | 85.6 | % | ||||||||||||||||
| 2019 | 68.7 | % | 86.8 | % | ||||||||||||||||
Net Income
Net income attributable to Southern Company Gas in 2020 was $590 million, an increase of $5 million, or 0.9%, compared to the prior year. This increase was primarily due to impairment charges in 2019 of $69 million related to Jefferson Island and $17 million in contemplation of the sale of interests in Pivotal LNG and Atlantic Coast Pipeline, a $16 million gain in 2020 related to the sale of Jefferson Island, and a $53 million increase at gas distribution operations primarily due to base rate increases for all of the natural gas distribution utilities and continued investment in infrastructure replacement programs, partially offset by reduced flowback of excess deferred income taxes at Atlanta Gas Light in 2020. These increases were partially offset by a $149 million decrease at wholesale gas services in 2020 primarily due to lower commercial activity and lower derivative gains. See Note 2 to the financial statements under "Southern Company Gas" for additional information.
A condensed income statement for Southern Company Gas follows:
| 2020 | Increase (Decrease) from 2019 | ||||||||||
| (in millions) | |||||||||||
| Operating revenues | $ | 3,434 | $ | (358) | |||||||
| Cost of natural gas | 972 | (347) | |||||||||
| Other operations and maintenance | 966 | 78 | |||||||||
| Depreciation and amortization | 500 | 13 | |||||||||
| Taxes other than income taxes | 206 | (7) | |||||||||
| Impairment charges | — | (115) | |||||||||
| (Gain) loss on dispositions, net | (22) | (22) | |||||||||
| Total operating expenses | 2,622 | (400) | |||||||||
| Operating income | 812 | 42 | |||||||||
| Earnings from equity method investments | 141 | (16) | |||||||||
| Interest expense, net of amounts capitalized | 231 | (1) | |||||||||
| Other income (expense), net | 41 | 21 | |||||||||
| Income taxes | 173 | 43 | |||||||||
| Net Income | $ | 590 | $ | 5 |
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Southern Company and Subsidiary Companies 2020 Annual Report
Operating Revenues
Operating revenues in 2020 were $3.4 billion, a $358 million decrease compared to 2019. Details of operating revenues were as follows:
| 2020 | |||||
| (in millions) | |||||
| Operating revenues – prior year | $ | 3,792 | |||
| Estimated change resulting from – | |||||
| Infrastructure replacement programs and base rate changes | 186 | ||||
| Gas costs and other cost recovery | (319) | ||||
| Wholesale gas services | (220) | ||||
| Other | (5) | ||||
| Operating revenues – current year | $ | 3,434 | |||
| Percent change | (9.4) | % | |||
Revenues at the natural gas distribution utilities increased in 2020 compared to the prior year due to base rate increases and continued investments recovered through infrastructure replacement programs, including increases of $107 million at Nicor Gas and $68 million at Atlanta Gas Light. See Note 2 to the financial statements under "Southern Company Gas" for additional information.
Revenues associated with gas costs and other cost recovery decreased in 2020 compared to the prior year primarily due to lower natural gas prices and lower sales volumes as a result of warmer weather. The natural gas distribution utilities have weather or revenue normalization mechanisms that mitigate revenue fluctuations from customer consumption changes. Natural gas distribution rates include provisions to adjust billings for fluctuations in natural gas costs. Therefore, gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas and do not affect net income from gas distribution operations. See "Cost of Natural Gas" herein for additional information.
Revenues from wholesale gas services decreased in 2020 primarily due to lower derivative gains and decreased commercial activity as a result of warmer weather. See "Segment Information – Wholesale Gas Services" herein for additional information.
Heating Degree Days
During Heating Season, natural gas usage and operating revenues are generally higher. Weather typically does not have a significant net income impact other than during the Heating Season. The following table presents Heating Degree Days information for Illinois and Georgia, the primary locations where Southern Company Gas' operations are impacted by weather.
| Years Ended December 31, | 2020 vs. normal | 2020 vs. 2019 | ||||||||||||||||||||||||||||||||||||||||||
| Normal(a) | 2020 | 2019 | (warmer) | (warmer) | ||||||||||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
| Illinois(b) | 5,777 | 5,477 | 6,136 | (5.2) | % | (10.7) | % | |||||||||||||||||||||||||||||||||||||
| Georgia | 2,483 | 2,122 | 2,157 | (14.5) | % | (1.6) | % |
(a)Normal represents the 10-year average from January 1, 2010 through December 31, 2019 for Illinois at Chicago Midway International Airport and for Georgia at Atlanta Hartsfield-Jackson International Airport, based on information obtained from the National Oceanic and Atmospheric Administration, National Climatic Data Center.
(b)Heating Degree Days in Illinois had a limited financial impact in 2020 and the impact is expected to be limited in future years. In October 2019, Nicor Gas received approval for a volume balancing adjustment, a revenue decoupling mechanism for residential customers that provides a monthly benchmark level of revenue per rate class for recovery.
Southern Company Gas hedged its exposure to warmer-than-normal weather in Illinois for gas distribution operations and in Illinois and Georgia for gas marketing services. The remaining impacts of weather on earnings were immaterial.
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Southern Company and Subsidiary Companies 2020 Annual Report
Customer Count
The following table provides the number of customers served by Southern Company Gas at December 31, 2020 and 2019:
| 2020 | 2019 | |||||||||||||||||||
| (in thousands, except market share %) | ||||||||||||||||||||
| Gas distribution operations | 4,308 | 4,277 | ||||||||||||||||||
| Gas marketing services | ||||||||||||||||||||
| Energy customers(*) | 666 | 631 | ||||||||||||||||||
| Market share of energy customers in Georgia | 28.9 | % | 28.9 | % | ||||||||||||||||
(*)Gas marketing services' customers are primarily located in Georgia and Illinois. December 31, 2020 also includes approximately 50,000 customers in Ohio contracted through an annual auction process to serve for 12 months beginning April 1, 2020.
Southern Company Gas anticipates continued customer growth as it expects continued low natural gas prices. Southern Company Gas uses a variety of targeted marketing programs to attract new customers and to retain existing customers.
Cost of Natural Gas
Excluding Atlanta Gas Light, which does not sell natural gas to end-use customers, gas distribution operations charges its utility customers for natural gas consumed using natural gas cost recovery mechanisms set by the applicable state regulatory agencies. Under these mechanisms, all prudently-incurred natural gas costs are passed through to customers without markup, subject to regulatory review. Gas distribution operations defers or accrues the difference between the actual cost of natural gas and the amount of commodity revenue earned in a given period. The deferred or accrued amount is either billed or refunded to customers prospectively through adjustments to the commodity rate. Deferred natural gas costs are reflected as regulatory assets and accrued natural gas costs are reflected as regulatory liabilities. Therefore, gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas and do not affect net income from gas distribution operations. Cost of natural gas at gas distribution operations represented 88.3% of the total cost of natural gas for 2020.
Gas marketing services customers are charged for actual and estimated natural gas consumed. Cost of natural gas includes the cost of fuel and associated transportation costs, lost and unaccounted for gas, adjustments to reduce the value of inventories to market value, if applicable, and gains and losses associated with certain derivatives.
In 2020, cost of natural gas was $1.0 billion, a decrease of $347 million, or 26.3%, compared to the prior year, which reflects a 23.6% decrease in natural gas prices compared to 2019 and decreased volumes primarily as a result of warmer weather.
Volumes of Natural Gas Sold
The following table details the volumes of natural gas sold during all periods presented.
| 2020 vs. 2019 | |||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | |||||||||||||||||||||||||||
| Gas distribution operations (mmBtu in millions) | |||||||||||||||||||||||||||||
| Firm | 623 | 677 | (8.0) | % | |||||||||||||||||||||||||
| Interruptible | 92 | 92 | — | % | |||||||||||||||||||||||||
| Total | 715 | 769 | (7.0) | % | |||||||||||||||||||||||||
| Wholesale gas services (mmBtu in millions/day) | |||||||||||||||||||||||||||||
| Daily physical sales | 6.9 | 6.4 | 7.8 | % | |||||||||||||||||||||||||
| Gas marketing services (mmBtu in millions) | |||||||||||||||||||||||||||||
| Firm: | |||||||||||||||||||||||||||||
| Georgia | 33 | 33 | — | % | |||||||||||||||||||||||||
| Illinois | 9 | 12 | (25.0) | % | |||||||||||||||||||||||||
| Other | 13 | 15 | (13.3) | % | |||||||||||||||||||||||||
| Interruptible large commercial and industrial | 14 | 14 | — | % | |||||||||||||||||||||||||
| Total | 69 | 74 | (6.8) | % |
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Southern Company and Subsidiary Companies 2020 Annual Report
Other Operations and Maintenance Expenses
In 2020, other operations and maintenance expenses increased $78 million, or 8.8%, compared to the prior year. The increase was primarily due to increases of $40 million in compensation and benefit expenses, $10 million in charitable donations, $12 million in pipeline repair, compliance, and maintenance activities, and $19 million in expenses passed through directly to customers primarily related to bad debt.
Depreciation and Amortization
In 2020, depreciation and amortization increased $13 million, or 2.7%, compared to the prior year. This increase was primarily due to continued infrastructure investments at gas distribution operations. See Note 2 to the financial statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects" for additional information.
Impairment Charges
In 2019, Southern Company Gas recorded impairment charges of $91 million related to Jefferson Island and $24 million in contemplation of the sale of its interests in Pivotal LNG and Atlantic Coast Pipeline. See Notes 3 and 15 to the financial statements under "Other Matters – Southern Company Gas" and "Southern Company Gas," respectively, for additional information.
(Gain) Loss on Dispositions, Net
In 2020, gain on dispositions, net was $22 million resulting from the sale of Jefferson Island. See Note 15 to the financial statements under "Southern Company Gas" for additional information.
Earnings from Equity Method Investments
In 2020, earnings from equity method investments decreased $16 million, or 10.2%, compared to the prior year. This decrease was primarily due to a $12 million decrease in earnings from SNG as a result of lower demand and firm revenues and a $9 million decrease in earnings as a result of the sale of Atlantic Coast Pipeline in the first quarter 2020, partially offset by a $6 million pre-tax loss on the sale of Triton in May 2019. See Notes 7 and 15 to the financial statements under "Southern Company Gas" for additional information.
Other Income (Expense), Net
In 2020, other income (expense), net increased $21 million compared to the prior year. This increase primarily resulted from an increase in non-service cost-related retirement benefits income. See Note 11 to the financial statements for additional information.
Income Taxes
In 2020, income taxes increased $43 million, or 33.1%, compared to the prior year. This increase was primarily due to the reversal of a federal income tax valuation allowance in connection with the sale of Triton in 2019, a decrease in the flowback of excess deferred income taxes in 2020 at Atlanta Gas Light as previously authorized by the Georgia PSC, and higher pre-tax earnings. See Note 2 to the financial statements under "Southern Company Gas," Note 10 to the financial statements, and Note 15 to the financial statements under "Southern Company Gas" for additional information.
Performance and Non-GAAP Measures
Adjusted operating margin is a non-GAAP measure that is calculated as operating revenues less cost of natural gas, cost of other sales, and revenue tax expense. Adjusted operating margin excludes other operations and maintenance expenses, depreciation and amortization, taxes other than income taxes, impairment charges, and (gain) loss on dispositions, net, which are included in the calculation of operating income as calculated in accordance with GAAP and reflected in the statements of income. The presentation of adjusted operating margin is believed to provide useful information regarding the contribution resulting from base rate changes, infrastructure replacement programs and capital projects, and customer growth at gas distribution operations since the cost of natural gas and revenue tax expense can vary significantly and are generally billed directly to customers. Southern Company Gas further believes that utilizing adjusted operating margin at gas pipeline investments, wholesale gas services, and gas marketing services allows it to focus on a direct measure of performance before overhead costs. The applicable reconciliation of operating income to adjusted operating margin is provided herein.
Adjusted operating margin should not be considered an alternative to, or a more meaningful indicator of, Southern Company Gas' operating performance than operating income as determined in accordance with GAAP. In addition, Southern Company Gas' adjusted operating margin may not be comparable to similarly titled measures of other companies.
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Southern Company and Subsidiary Companies 2020 Annual Report
Detailed variance explanations of Southern Company Gas' financial performance are provided herein.
Reconciliations of operating income to adjusted operating margin are as follows:
| 2020 | 2019 | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Operating Income | $ | 812 | $ | 770 | ||||||||||||||||
| Other operating expenses(a) | 1,650 | 1,703 | ||||||||||||||||||
| Revenue taxes(b) | (104) | (114) | ||||||||||||||||||
| Adjusted Operating Margin | $ | 2,358 | $ | 2,359 |
(a)Includes other operations and maintenance, depreciation and amortization, taxes other than income taxes, impairment charges, and (gain) loss on dispositions, net.
(b)Nicor Gas' revenue tax expenses, which are passed through directly to customers.
Segment Information
| 2020 | 2019 | |||||||||||||||||||||||||||||||||||||
| Adjusted Operating Margin(*) | Operating Expenses(*) | Net Income (Loss) | Adjusted Operating Margin(*) | Operating Expenses (*) | Net Income (Loss) | |||||||||||||||||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||||||||||||||||
| Gas distribution operations | $ | 1,990 | $ | 1,335 | $ | 390 | $ | 1,799 | $ | 1,226 | $ | 337 | ||||||||||||||||||||||||||
| Gas pipeline investments | 32 | 12 | 99 | 32 | 12 | 94 | ||||||||||||||||||||||||||||||||
| Wholesale gas services | 73 | 53 | 14 | 273 | 54 | 163 | ||||||||||||||||||||||||||||||||
| Gas marketing services | 240 | 121 | 89 | 234 | 122 | 83 | ||||||||||||||||||||||||||||||||
| All other | 29 | 36 | (2) | 28 | 182 | (92) | ||||||||||||||||||||||||||||||||
| Intercompany eliminations | (6) | (11) | — | (7) | (7) | — | ||||||||||||||||||||||||||||||||
| Consolidated | $ | 2,358 | $ | 1,546 | $ | 590 | $ | 2,359 | $ | 1,589 | $ | 585 |
(*)Adjusted operating margin and operating expenses are adjusted for Nicor Gas' revenue tax expenses, which are passed through directly to customers.
Gas Distribution Operations
Gas distribution operations is the largest component of Southern Company Gas' business and is subject to regulation and oversight by regulatory agencies in each of the states it serves. These agencies approve natural gas rates designed to provide Southern Company Gas with the opportunity to generate revenues to recover the cost of natural gas delivered to its customers and its fixed and variable costs, including depreciation, interest expense, operations and maintenance, taxes, and overhead costs, and to earn a reasonable return on its investments.
With the exception of Atlanta Gas Light, Southern Company Gas' second largest utility that operates in a deregulated natural gas market and has a straight-fixed-variable rate design that minimizes the variability of its revenues based on consumption, the earnings of the natural gas distribution utilities can be affected by customer consumption patterns that are a function of weather conditions, price levels for natural gas, and general economic conditions that may impact customers' ability to pay for natural gas consumed. Southern Company Gas has various regulatory and other mechanisms, such as weather and revenue normalization mechanisms and weather derivative instruments, that limit its exposure to changes in customer consumption, including weather changes within typical ranges in its natural gas distribution utilities' service territories.
In 2020, net income increased $53 million, or 16%, compared to the prior year. The increase primarily relates to $191 million in adjusted operating margin which reflects base rate increases for all of the natural gas distribution utilities and continued investments recovered through infrastructure replacement programs. The $109 million increase in operating expenses includes increases for compensation and benefit expenses and pipeline compliance as well as bad debt costs passed through directly to customers. The increase also reflects higher depreciation primarily due to additional assets placed in service. The $27 million increase in other income is primarily due to an increase in non-service cost-related retirement benefits income. The $51 million increase in income tax expense is primarily due to higher pre-tax earnings and a decrease in the flowback of excess deferred income taxes at Atlanta Gas Light as authorized by the Georgia PSC.
See Note 2 to the financial statements under "Southern Company Gas – Rate Proceedings – Atlanta Gas Light" and " – Infrastructure Replacement Programs and Capital Projects – Atlanta Gas Light" herein for additional information on Atlanta Gas
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Light's stipulation reflecting the impacts of the Tax Reform Legislation. Also see Note 11 to the financial statements for additional information on retirement benefits.
Gas Pipeline Investments
Gas pipeline investments consists primarily of joint ventures in natural gas pipeline investments including SNG, PennEast Pipeline, Dalton Pipeline, and Atlantic Coast Pipeline (until its sale on March 24, 2020). Net income in 2020 increased $5 million, or 5%, compared to the prior year. This increase primarily relates to a $25 million decrease in income taxes primarily related to a 2019 increase associated with changes in state apportionment rates, partially offset by a $12 million decrease in earnings from SNG and a $9 million decrease in earnings as a result of the sale of the interest in Atlantic Coast Pipeline. See Note 7 to the financial statements under "Southern Company Gas" for additional information.
Wholesale Gas Services
Wholesale gas services is involved in asset management and optimization, storage, transportation, producer and peaking services, natural gas supply, natural gas services, and wholesale gas marketing. Southern Company Gas has positioned the business to generate positive economic earnings on an annual basis even under low volatility market conditions that can result from a number of factors. When market price volatility increases, wholesale gas services is well positioned to capture significant value and generate stronger results. Operating expenses primarily reflect employee compensation and benefits.
Net income in 2020 decreased $149 million, or 91%, compared to the prior year. This decrease primarily relates to a $200 million decrease in adjusted operating margin, partially offset by a $49 million decrease in income taxes due to lower pre-tax earnings.
Details of adjusted operating margin are provided in the table below.
| 2020 | 2019 | ||||||||||||||||
| (in millions) | |||||||||||||||||
| Commercial activity recognized | $ | (40) | $ | 54 | |||||||||||||
| Gain on storage derivatives | 8 | 40 | |||||||||||||||
| Gain on transportation and forward commodity derivatives | 106 | 186 | |||||||||||||||
| LOCOM adjustments, net of current period recoveries | — | (16) | |||||||||||||||
| Purchase accounting adjustments to fair value inventory and contracts | (1) | 9 | |||||||||||||||
| Adjusted operating margin | $ | 73 | $ | 273 |
Change in Commercial Activity
The commercial activity at wholesale gas services includes recognition of storage and transportation values that were generated in prior periods, which reflect the impact of prior period hedge gains and losses as associated physical transactions occur. The decrease in commercial activity in 2020 compared to the prior year was primarily due to warmer-than-normal weather conditions and tightening transportation spreads.
Change in Storage and Transportation Derivatives
Volatility in the natural gas market arises from a number of factors, such as weather fluctuations or changes in supply or demand for natural gas in different regions of the U.S. The volatility of natural gas commodity prices has a significant impact on Southern Company Gas' customer rates, long-term competitive position against other energy sources, and the ability of wholesale gas services to capture value from locational and seasonal spreads. Forward storage or time spreads applicable to the locations of wholesale gas services' specific storage positions in 2020 resulted in storage derivative gains. Transportation and forward commodity derivative gains in 2020 are primarily the result of narrowing transportation spreads due to supply constraints and increases in natural gas supply, which impacted forward prices at natural gas receipt and delivery points, primarily in the Northeast and Midwest regions.
The natural gas that wholesale gas services purchases and injects into storage is accounted for at the LOCOM value utilizing gas daily or spot prices at the end of the year. See Note 1 to the financial statements under "Natural Gas for Sale" for additional information.
Withdrawal Schedule and Physical Transportation Transactions
The expected natural gas withdrawals from storage and expected offset to prior hedge losses/gains associated with the transportation portfolio of wholesale gas services are presented in the following table, along with the net operating revenues expected at the time of withdrawal from storage and the physical flow of natural gas between contracted transportation receipt and
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delivery points. Wholesale gas services' expected net operating revenues exclude storage and transportation demand charges, as well as other variable fuel, withdrawal, receipt, and delivery charges, and exclude estimated profit sharing under asset management agreements. Further, the amounts that are realizable in future periods are based on the inventory withdrawal schedule, planned physical flow of natural gas between the transportation receipt and delivery points, and forward natural gas prices at December 31, 2020. A portion of wholesale gas services' storage inventory and transportation capacity is economically hedged with futures contracts, which results in the realization of substantially fixed net operating revenues.
| Storage Withdrawal | Physical Transportation Transactions | ||||||||||||||||
| Total storage**(a)** | Expected net operating gains (losses)****(b) | Expected net operating gains (losses)****(c) | |||||||||||||||
| (in mmBtu in millions) | (in millions) | (in millions) | |||||||||||||||
| 2021 | 40 | $ | 23 | $ | (65) | ||||||||||||
| 2022 and thereafter | 7 | 6 | (41) | ||||||||||||||
| Total at December 31, 2020 | 47 | $ | 29 | $ | (106) |
(a)At December 31, 2020, the WACOG of wholesale gas services' expected natural gas withdrawals from storage was $1.81 per mmBtu.
(b)Represents expected operating gains from planned storage withdrawals associated with existing inventory positions and could change as wholesale gas services adjusts its daily injection and withdrawal plans in response to changes in future market conditions and forward NYMEX price fluctuations.
(c)Represents the expected net losses during the periods in which the derivatives will be settled and the physical transportation transactions will occur that offset the derivative gains and losses previously recognized.
Gas Marketing Services
Gas marketing services provides energy-related products and services to natural gas markets and participants in customer choice programs that were approved in various states to increase competition. These programs allow customers to choose their natural gas supplier while the local distribution utility continues to provide distribution and transportation services. Gas marketing services is weather sensitive and uses a variety of hedging strategies, such as weather derivative instruments and other risk management tools, to partially mitigate potential weather impacts.
Net income increased $6 million, or 7%, in 2020 compared to the prior year. This increase primarily relates to a $6 million increase in adjusted operating margin, which primarily reflects recovery of prior period hedge losses.
All Other
All other includes natural gas storage businesses, including Jefferson Island through its sale on December 1, 2020, fuels operations through the sale of Southern Company Gas' interest in Pivotal LNG on March 24, 2020, the investment in Triton through its sale on May 29, 2019, AGL Services Company, and Southern Company Gas Capital, as well as various corporate operating expenses that are not allocated to the reportable segments and interest income (expense) associated with affiliate financing arrangements.
Net loss decreased $90 million, or 98%, in 2020 compared to the prior year. This decrease primarily reflects a $146 million decrease in operating expenses primarily related to impairment charges in 2019 of $91 million related to Jefferson Island and $24 million in contemplation of the sale of Southern Company Gas' interests in Pivotal LNG and Atlantic Coast Pipeline. Also included was the $22 million pre-tax gain on the sale of Jefferson Island and a $5 million increase in earnings from equity method investments primarily due to a pre-tax loss on the sale of Triton in 2019, partially offset by a $65 million increase in income taxes as a result of lower pre-tax losses. See Note 15 to the financial statements under "Southern Company Gas" for additional information.
Segment Reconciliations
Reconciliations of operating income to adjusted operating margin for 2020 and 2019 are provided in the following tables. See Note 16 to the financial statements under "Southern Company Gas" for additional segment information.
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| 2020 | |||||||||||||||||||||||
| Gas Distribution Operations | Gas Pipeline Investments | Wholesale Gas Services | Gas Marketing Services | All Other | Intercompany Elimination | Consolidated | |||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Operating Income (Loss) | $ | 655 | $ | 20 | $ | 20 | $ | 119 | $ | (7) | $ | 5 | $ | 812 | |||||||||
| Other operating expenses(a) | 1,439 | 12 | 53 | 121 | 36 | (11) | 1,650 | ||||||||||||||||
| Revenue tax expense(b) | (104) | — | — | — | — | — | (104) | ||||||||||||||||
| Adjusted Operating Margin | $ | 1,990 | $ | 32 | $ | 73 | $ | 240 | $ | 29 | $ | (6) | $ | 2,358 |
| 2019 | |||||||||||||||||||||||
| Gas Distribution Operations | Gas Pipeline Investments | Wholesale Gas Services | Gas Marketing Services | All Other | Intercompany Elimination | Consolidated | |||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Operating Income (Loss) | $ | 573 | $ | 20 | $ | 219 | $ | 112 | $ | (154) | $ | — | $ | 770 | |||||||||
| Other operating expenses(a) | 1,340 | 12 | 54 | 122 | 182 | (7) | 1,703 | ||||||||||||||||
| Revenue tax expense(b) | (114) | — | — | — | — | — | (114) | ||||||||||||||||
| Adjusted Operating Margin | $ | 1,799 | $ | 32 | $ | 273 | $ | 234 | $ | 28 | $ | (7) | $ | 2,359 |
(a)Includes other operations and maintenance, depreciation and amortization, taxes other than income taxes, impairment charges and (gain) loss on dispositions, net.
(b)Nicor Gas' revenue tax expenses, which are passed through directly to customers.
FUTURE EARNINGS POTENTIAL
General
Prices for electric service provided by the traditional electric operating companies and natural gas distributed by the natural gas distribution utilities to retail customers are set by state PSCs or other applicable state regulatory agencies under cost-based regulatory principles. Retail rates and earnings are reviewed and may be adjusted periodically within certain limitations. Prices for wholesale electricity sales, interconnecting transmission lines, and the exchange of electric power are regulated by the FERC. Southern Power continues to focus on long-term PPAs. See ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates – Utility Regulation" herein and Note 2 to the financial statements for additional information about regulatory matters.
Each Registrant's results of operations are not necessarily indicative of its future earnings potential. The disposition activities described in Note 15 to the financial statements have reduced earnings for the applicable Registrants. The level of the Registrants' future earnings depends on numerous factors that affect the opportunities, challenges, and risks of the Registrants' primary businesses of selling electricity and/or distributing natural gas, as described further herein.
For the traditional electric operating companies, these factors include the ability to maintain constructive regulatory environments that allow for the timely recovery of prudently-incurred costs during a time of increasing costs, continued customer growth, and the trend of reduced electricity usage per customer, especially in residential and commercial markets. For Georgia Power, completing construction of Plant Vogtle Units 3 and 4 and related cost recovery proceedings is another major factor.
Earnings in the electricity business will also depend upon maintaining and growing sales, considering, among other things, the adoption and/or penetration rates of increasingly energy-efficient technologies and increasing volumes of electronic commerce transactions, which could contribute to a net reduction in customer usage.
Global and U.S. economic conditions have been significantly affected by a series of demand and supply shocks that have caused a global and national economic recession. Most prominently, the COVID-19 pandemic has negatively impacted global supply chains and global demand for goods and services and public policy responses of social distancing and closing non-essential businesses have further restricted economic activity. The drivers, speed, and depth of this economic contraction are unprecedented and have reduced energy demand across the Southern Company system's service territory, primarily in the commercial and industrial classes. The negative impacts, which started in late-March 2020, of the COVID-19 pandemic and related recession on the Southern Company system's retail electric sales began to improve in the middle of May 2020; however, retail electric revenues declined slightly in 2020 compared to 2019. Recovery is expected to continue into the second half of 2021, but responses to the
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COVID-19 pandemic by both customers and governments could significantly affect the pace of recovery. The ultimate extent of the negative impact on revenues depends on the depth and duration of the economic contraction in the Southern Company system's service territory and cannot be determined at this time. See RESULTS OF OPERATIONS herein for information on COVID-19-related impacts on energy demand in the Southern Company system's service territory during 2020.
The traditional electric operating companies have established installment payment plans to allow customers to repay over a period of time past due accounts resulting from the COVID-19 pandemic. See Note 2 to the financial statements for additional information on the status of disconnections and the deferral of costs resulting from the COVID-19 pandemic at Georgia Power, Mississippi Power, and the natural gas distribution utilities. The ultimate outcome of these matters cannot be determined at this time.
The level of future earnings for Southern Power's competitive wholesale electric business depends on numerous factors including Southern Power's ability to execute its growth strategy through the development or acquisition of renewable facilities and other energy projects while containing costs, as well as regulatory matters, creditworthiness of customers, total electric generating capacity available in Southern Power's market areas, and Southern Power's ability to successfully remarket capacity as current contracts expire. In addition, renewable portfolio standards, availability of tax credits, transmission constraints, cost of generation from units within the Southern Company power pool, and operational limitations could influence Southern Power's future earnings.
The level of future earnings for Southern Company Gas' primary business of distributing natural gas and its complementary businesses in the gas pipeline investments, wholesale gas services, and gas marketing services sectors depends on numerous factors. These factors include the natural gas distribution utilities' ability to maintain constructive regulatory environments that allow for the timely recovery of prudently-incurred costs, the completion and subsequent operation of ongoing infrastructure and other construction projects, creditworthiness of customers, and Southern Company Gas' ability to optimize its transportation and storage positions and to re-contract storage rates at favorable prices. The volatility of natural gas prices has an impact on Southern Company Gas' customer rates, its long-term competitive position against other energy sources, and the ability of Southern Company Gas' gas marketing services and wholesale gas services businesses to capture value from locational and seasonal spreads. Additionally, changes in commodity prices subject a portion of Southern Company Gas' operations to earnings variability. Over the longer term, volatility is expected to be low to moderate and locational and/or transportation spreads are expected to decrease as new pipelines are built to reduce the existing supply constraints in the shale areas of the Northeast U.S. To the extent these pipelines are delayed or not built, volatility could increase. See Note 3 to the financial statements under "Other Matters – Southern Company Gas – PennEast Pipeline Project" for additional information on permitting challenges experienced by the PennEast Pipeline. Additional economic factors may contribute to this environment, including a significant drop in oil and natural gas prices, which could lead to consolidation of natural gas producers or reduced levels of natural gas production. In addition, if the COVID-19 pandemic results in continued economic uncertainty for a sustained period, demand for natural gas may decrease, resulting in further downward pressure on natural gas prices and lower volatility in the natural gas markets on a longer-term basis.
Earnings for both the electricity and natural gas businesses are subject to a variety of other factors. These factors include weather, competition, developing new and maintaining existing energy contracts and associated load requirements with wholesale customers, energy conservation practiced by customers, the use of alternative energy sources by customers, government incentives to reduce overall energy usage, the prices of electricity and natural gas, and the price elasticity of demand. Demand for electricity and natural gas in the Registrants' service territories is primarily driven by the pace of economic growth or decline that may be affected by changes in regional and global economic conditions, which may impact future earnings.
Mississippi Power provides service under long-term contracts with rural electric cooperative associations and a municipality located in southeastern Mississippi under full requirements cost-based electric tariffs which are subject to regulation by the FERC. The contracts with these wholesale customers represented 15.3% of Mississippi Power's total operating revenues in 2020 and are generally subject to 10-year rolling cancellation notices. Historically, these wholesale customers have acted as a group and any changes in contractual relationships for one customer are likely to be followed by the other wholesale customers.
As part of its ongoing effort to adapt to changing market conditions, Southern Company continues to evaluate and consider a wide array of potential business strategies. These strategies may include business combinations, partnerships, and acquisitions involving other utility or non-utility businesses or properties, disposition of certain assets or businesses, internal restructuring, or some combination thereof. Furthermore, Southern Company may engage in new business ventures that arise from competitive and regulatory changes in the utility industry. Pursuit of any of the above strategies, or any combination thereof, may significantly affect the business operations, risks, and financial condition of Southern Company. In addition, Southern Power and Southern 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.
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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, and other natural resources. The Southern Company system maintains comprehensive environmental compliance and GHG strategies to assess both current and upcoming requirements and compliance costs associated with these environmental laws and regulations. The costs required to comply with environmental laws and regulations and to achieve stated goals, including capital expenditures, operations and maintenance costs, and costs reflected in ARO liabilities, may impact future electric generating unit retirement and replacement decisions (which are subject to approval from the traditional electric operating companies' respective state PSCs), results of operations, cash flows, and/or financial condition. Related costs may result from the installation of additional environmental controls, closure and monitoring of CCR facilities, unit retirements, or changing fuel sources for certain existing units, as well as related upgrades to the Southern Company system's transmission and distribution (electric and natural gas) systems. A major portion of these costs is expected to be recovered through retail and wholesale rates, including existing ratemaking and billing provisions. The ultimate impact of environmental laws and regulations and the GHG goals discussed herein cannot be determined at this time and will depend on various factors, such as state adoption and implementation of requirements, the availability and cost of any deployed technology, fuel prices, and the outcome of pending and/or future legal challenges.
New or revised environmental laws and regulations could affect many areas of operations for the Subsidiary Registrants. The impact of any such changes cannot be determined at this time. Environmental compliance costs could affect earnings, cash flows, and/or financial condition if such costs cannot continue to be recovered on a timely basis in rates for the traditional electric operating companies and the natural gas distribution utilities or through long-term wholesale agreements for the traditional electric operating companies and Southern Power.
Alabama Power and Mississippi Power recover environmental compliance costs through separate mechanisms, Rate CNP Compliance and the ECO 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 of Southern Company Gas generally recover environmental remediation expenditures through rate mechanisms approved by their applicable state regulatory agencies. See Notes 2 and 3 to the financial statements for additional information.
Southern Power's PPAs generally contain provisions that permit charging the counterparty with some of the new costs incurred as a result of changes in environmental laws and regulations. Since Southern Power's units are generally newer natural gas and renewable generating facilities, costs associated with environmental compliance for these facilities have been less significant than for similarly situated coal or older natural gas generating facilities. Environmental, natural resource, and land use concerns, including the applicability of air quality limitations, the potential presence of wetlands or threatened and endangered species, the availability of water withdrawal rights, uncertainties regarding impacts such as increased light or noise, and concerns about potential adverse health impacts can, however, increase the cost of siting and operating any type of future electric generating facility. The impact of such laws, regulations, and other considerations on Southern Power and subsequent recovery through PPA provisions cannot be determined at this time.
Further, increased costs that are recovered through regulated rates could contribute to reduced demand for electricity and natural gas, which could negatively affect results of operations, cash flows, and/or financial condition. Additionally, many commercial and industrial customers may also be affected by existing and future environmental requirements, which for some may have the potential to affect their demand for electricity and natural gas.
Although the timing, requirements, and estimated costs could change as environmental laws and regulations are adopted or modified, as compliance plans are revised or updated, and as legal challenges to rules are initiated or completed, estimated capital expenditures through 2025 based on the current environmental compliance strategy for the Southern Company system and the traditional electric operating companies are as follows:
| 2021 | 2022 | 2023 | 2024 | 2025 | Total | |||||||||||||||
| (in millions) | ||||||||||||||||||||
| Southern Company | $ | 120 | $ | 145 | $ | 257 | $ | 255 | $ | 152 | $ | 929 | ||||||||
| Alabama Power | 67 | 78 | 78 | 99 | 70 | 392 | ||||||||||||||
| Georgia Power | 34 | 42 | 164 | 151 | 59 | 450 | ||||||||||||||
| Mississippi Power | 19 | 15 | 9 | 5 | 14 | 62 |
These estimates do not include any costs associated with potential regulation of GHG emissions. See "Global Climate Issues" herein for additional information. The Southern Company system also anticipates substantial expenditures associated with ash
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pond closure and ground water monitoring under the CCR Rule and related state rules, which are reflected in the applicable Registrants' ARO liabilities. See FINANCIAL CONDITION AND LIQUIDITY – "Cash Requirements" herein and Note 6 to the financial statements for additional information.
Environmental Laws and Regulations
Executive Orders
On January 20, 2021, President Biden issued a regulatory freeze that requires further reviews of certain regulatory actions authorized under the previous administration before they become effective. President Biden also signed executive orders related to federal regulations and subsequently signed additional orders to address climate change and other environmental issues.
Air Quality
The Southern Company system reduced SO2 and NOX air emissions by 99% and 91%, respectively, from 1990 to 2019. The Southern Company system reduced mercury air emissions by over 97% from 2005 to 2019.
The EPA finalized regional haze regulations in 2005 and 2017. These regulations require states, tribal governments, and various federal agencies to develop and implement plans to reduce pollutants that impair visibility and demonstrate reasonable progress toward the goal of restoring natural visibility conditions in certain areas, including national parks and wilderness areas. States are required to submit state implementation plans for the second 10-year planning period (2018 through 2028) by July 31, 2021. These plans could require further reductions in particulate matter, SO2, and/or NOX, which could result in increased compliance costs at affected electric generating units.
Water Quality
In 2014, the EPA finalized requirements under Section 316(b) of the Clean Water Act (CWA) to regulate cooling water intake structures (CWIS) to minimize their effects on fish and other aquatic life at existing power plants. The regulation requires plant-specific studies to determine applicable CWIS changes to protect organisms. The results of these plant-specific studies, which are ongoing within the Southern Company system, are being submitted with each plant's next National Pollutant Discharge Elimination System (NPDES) permit cycle. The Southern Company system anticipates applicable CWIS changes may include fish-friendly CWIS screens with fish return systems and minor additions of monitoring equipment at certain plants. The impact of this rule will depend on the outcome of these plant-specific studies, any additional protective measures required to be incorporated into each plant's NPDES permit based on site-specific factors, and the outcome of any legal challenges.
In 2015, the EPA finalized the steam electric effluent limitations guidelines (ELG) rule (2015 ELG Rule) that set national standards for wastewater discharges from new and existing steam electric generating units generating greater than 50 MWs, including substantially all of the coal-fired generating units in the Southern Company system. The 2015 ELG Rule prohibits effluent discharges of certain wastestreams and imposes stringent limits on flue gas desulfurization (FGD) wastewater discharges. On October 13, 2020, the EPA published the final ELG reconsideration rule, a reconsideration of the 2015 ELG Rule's limits on bottom ash transport water and FGD wastewater that extends the latest applicability date for both discharges to December 31, 2025. The ELG reconsideration rule also updates the voluntary incentive program and provides new subcategories for low utilization electric generating units and electric generating units that will permanently cease coal combustion by 2028. An initial notice of planned participation (NOPP) must be submitted to the applicable permitting authority no later than October 13, 2021 for units seeking to qualify for these subcategories. A subsequent NOPP must be submitted to transfer a unit to an alternative compliance option. The 2015 ELG Rule and the ELG reconsideration rule (ELG rules) are expected to require capital expenditures and increased operational costs for the traditional electric operating companies and SEGCO. For Georgia Power's Plant Wansley Units 1 and 2, which are currently challenged due to their operating profiles and positions within the economic dispatch, the anticipated cost of the controls necessary to comply with the ELG rules could accelerate a determination that continued operation is uneconomical. As a result, Georgia Power may request in its 2022 IRP filing to accelerate the retirement of these units, which had a net book value totaling approximately $665 million at December 31, 2020. However, the ultimate impact of the ELG rules will depend on the Southern Company system's final assessment of compliance options, the incorporation of these assessments into each of the traditional electric operating company's IRP processes, the incorporation of these new requirements into each generating unit's NPDES permit, and the outcome of legal challenges. The ELG reconsideration rule has been challenged by several environmental organizations and the cases have been consolidated in the U.S. Court of Appeals for the Fourth Circuit.
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Coal Combustion Residuals
In 2015, the EPA finalized non-hazardous solid waste regulations for the disposal of CCR, including coal ash and gypsum, in landfills and surface impoundments (ash ponds) at active electric generating power plants. The CCR Rule requires landfills and ash ponds to be evaluated against a set of performance criteria and potentially closed if certain criteria are not met. Closure of existing landfills and ash ponds requires installation of equipment and infrastructure to manage CCR in accordance with the CCR Rule. The EPA is in the process of amending portions of the CCR Rule.
In addition to the CCR Rule, the States of Alabama and Georgia finalized state regulations regarding the handling of CCR within their respective states. The State of Georgia received approval from the EPA on its partial permit program implementing the state CCR permit program in lieu of the federal self-implementing rule in accordance with the Water Infrastructure Improvements for the Nation Act. On February 15, 2021, revisions to align State of Alabama regulations with the federal CCR Rule became effective, as approved by the Alabama Environmental Management Commission. The State of Mississippi has not yet developed a state CCR permit program.
Based on requirements for closure and monitoring of landfills and ash ponds pursuant to the CCR Rule and applicable state rules, the traditional electric operating companies have periodically updated, and expect to continue periodically updating, their related cost estimates and ARO liabilities for each CCR unit as additional information related to ash pond closure methodologies, schedules, and/or costs becomes available. Some of these updates have been, and future updates may be, material. Additionally, the closure designs and plans in the States of Alabama and Georgia are subject to approval by environmental regulatory agencies. Absent continued recovery of ARO costs through regulated rates, results of operations, cash flows, and financial condition for Southern Company and the traditional electric operating companies could be materially impacted. See FINANCIAL CONDITION AND LIQUIDITY – "Cash Requirements," Note 2 to the financial statements under "Georgia Power – Rate Plans," and Note 6 to the financial statements for additional information.
Environmental 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 Southern 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 in Illinois and Georgia (which represent substantially all of Southern 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 and Southern 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 July 2019, the EPA published the final Affordable Clean Energy rule (ACE Rule) to repeal and replace the CPP. The ACE Rule requires states to develop unit-specific CO2 emission rate standards for existing coal-fired units based on heat-rate efficiency improvements. On January 19, 2021, the D.C. Circuit Court of Appeals vacated and remanded the ACE Rule back to the EPA. Once the decision becomes final, the ACE Rule will no longer be in effect.
On January 20, 2021, President Biden accepted the Paris Agreement on behalf of the United States, which will result in the United States officially becoming a party to the agreement on February 19, 2021. The Paris Agreement establishes a non-binding universal framework for addressing GHG emissions based on nationally determined emissions reduction contributions and sets in place a process for tracking progress towards the goals every five years.
Additional GHG policies, including legislation, may emerge in the future requiring the United States to transition to a lower GHG emitting economy; however, associated impacts are currently unknown. The Southern Company system has transitioned from an electric generating mix of 70% coal and 15% natural gas in 2007 to a mix of 18% coal and 53% natural gas in 2020, along with over 10,000 MWs of renewable resource capacity. This transition has been supported in part by the Southern Company system retiring over 5,600 MWs of coal- and oil-fired generating capacity since 2010 and converting over 3,400 MWs of generating capacity from coal to natural gas since 2015. In addition, Southern Company Gas has replaced over 6,000 miles of pipe material that was more prone to fugitive emissions (unprotected steel and cast-iron pipe), resulting in mitigation of more than 3.3 million metric tons of CO2 equivalents from its natural gas distribution system since 1998.
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The following table provides the Registrants' 2019 and preliminary 2020 GHG emissions based on equity share of facilities:
| 2019 | Preliminary 2020 | |||||||
| (in million metric tons of CO**2 equivalent) | ||||||||
| Southern Company(*) | 88 | 75 | ||||||
| Alabama Power | 33 | 28 | ||||||
| Georgia Power | 28 | 21 | ||||||
| Mississippi Power | 9 | 8 | ||||||
| Southern Power(*) | 13 | 12 | ||||||
| Southern Company Gas | 1 | 1 |
(*)Includes GHG emissions attributable to disposed assets through the date of the applicable disposition and to acquired assets beginning with the date of the applicable acquisition. See Note 15 to the financial statements for additional information.
With 2007 as a baseline, in 2018, Southern Company system management established an interim goal of a 50% reduction in carbon emissions by 2030 and a long-term goal of low- to no-carbon operations by 2050. In 2020, Southern Company system management updated the long-term GHG emissions reduction goal to net zero emissions by 2050. Based on the preliminary 2020 emissions, the Southern Company system achieved an estimated GHG emission reduction of 52% since 2007. In 2020, the combination of the COVID-19 pandemic and relatively mild weather significantly reduced demand. As these factors fluctuate, coal generation and GHG emissions may temporarily increase in future years. Southern Company system management expects to achieve sustained GHG emissions reductions of at least 50% as early as 2025. Southern Company system management, working with applicable regulators, plans to transition its generating fleet in a manner responsible to customers, communities, employees, and other stakeholders. Achievement of these goals is dependent on many factors, including natural gas prices and the pace and extent of development of low- to no-carbon energy technologies and negative carbon concepts. Southern Company system management will continue to pursue a diverse portfolio including low-carbon and carbon-free resources and energy efficiency resources; continue its research and development with a particular focus on technologies that lower GHG emissions, including methods of removing carbon from the atmosphere; and constructively engage with policymakers, regulators, investors, and customers to support outcomes leading to a net zero future.
Regulatory Matters
See OVERVIEW – "Recent Developments" herein and Note 2 to the financial statements for a discussion of regulatory matters related to Alabama Power, Georgia Power, Mississippi Power, and Southern Company Gas, including items that could impact the applicable registrants' future earnings, cash flows, and/or financial condition.
Construction Programs
The Subsidiary Registrants are engaged in continuous construction programs to accommodate existing and estimated future loads on their respective systems. The Southern Company system intends to continue its strategy of developing and constructing new electric generating facilities, expanding and improving the electric transmission and electric and natural gas distribution systems, and undertaking projects to comply with environmental laws and regulations.
For the traditional electric operating companies, major generation construction projects are subject to state PSC approval in order to be included in retail rates. The largest construction project currently underway in the Southern Company system is Plant Vogtle Units 3 and 4. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information. Also see Note 2 to the financial statements under "Alabama Power – Petition for Certificate of Convenience and Necessity" for information regarding Alabama Power's construction of Plant Barry Unit 8.
See Note 15 to the financial statements under "Southern Power" for information about costs relating to Southern Power's acquisitions that involve construction of renewable energy facilities.
Southern Company Gas is engaged in various infrastructure improvement programs designed to update or expand the natural gas distribution systems of the natural gas distribution utilities to improve reliability and meet operational flexibility and growth. The natural gas distribution utilities recover their investment and a return associated with these infrastructure programs through their regulated rates. See Notes 2 and 3 to the financial statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects" and "Other Matters – Southern Company Gas – PennEast Pipeline Project," respectively, for additional information on Southern Company Gas' construction program.
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See FINANCIAL CONDITION AND LIQUIDITY – "Cash Requirements" herein for additional information regarding the Registrants' capital requirements for their construction programs, including estimated totals for each of the next five years.
Southern Power's Power Sales Agreements
General
Southern Power has PPAs with some of the traditional electric operating companies, other investor-owned utilities, IPPs, municipalities, and other load-serving entities, as well as commercial and industrial customers. The PPAs are expected to provide Southern Power with a stable source of revenue during their respective terms.
Many of Southern Power's PPAs have provisions that require Southern Power or the counterparty to post collateral or an acceptable substitute guarantee if (i) S&P or Moody's downgrades the credit ratings of the respective company to an unacceptable credit rating, (ii) the counterparty is not rated, or (iii) the counterparty fails to maintain a minimum coverage ratio.
Southern Power is working to maintain and expand its share of the wholesale markets. During 2020, Southern Power continued to be successful in remarketing 350 MWs to 1,130 MWs of annual natural gas generation capacity to load-serving entities through several PPAs extending over the next 17 years. Market demand is being driven by load-serving entities replacing expired purchase contracts and/or retired generation, as well as planning for future growth. However, generation capacity market forecasts indicate an oversupply, especially in the Southeast, and the highly competitive remarketing environment is expected to continue in the near term.
Natural Gas
Southern Power's electricity sales from natural gas facilities are primarily through long-term PPAs that consist of two types of agreements. The first type, referred to as a unit or block sale, is a customer purchase from a dedicated generating unit where all or a portion of the generation from that unit is reserved for that customer. Southern Power typically has the ability to serve the unit or block sale customer from an alternate resource. The second type, referred to as requirements service, provides that Southern Power serve the customer's capacity and energy requirements from a combination of the customer's own generating units and from Southern Power resources not dedicated to serve unit or block sales. Southern Power has rights to purchase power provided by the requirements customers' resources when economically viable.
As a general matter, substantially all of the PPAs provide that the purchasers are responsible for either procuring the fuel (tolling agreements) or reimbursing Southern Power for substantially all of the cost of fuel or purchased power relating to the energy delivered under such PPAs. To the extent a particular generating facility does not meet the operational requirements contemplated in the PPAs, Southern Power may be responsible for excess fuel costs. With respect to fuel transportation risk, most of Southern Power's PPAs provide that the counterparties are responsible for the availability of fuel transportation to the particular generating facility.
Capacity charges that form part of the PPA payments are designed to recover fixed and variable operation and maintenance costs based on dollars-per-kilowatt year. In general, to reduce Southern Power's exposure to certain operation and maintenance costs, Southern Power has LTSAs. See Note 1 to the financial statements under "Long-Term Service Agreements" for additional information.
Solar and Wind
Southern Power's electricity sales from solar and wind (renewable) generating facilities are also primarily through long-term PPAs; however, these solar and wind PPAs do not have a capacity charge and customers either purchase the energy output of a dedicated renewable facility through an energy charge or provide Southern Power a certain fixed price for the electricity sold to the grid. As a result, Southern Power's ability to recover fixed and variable operations and maintenance expenses is dependent upon the level of energy generated from these facilities, which can be impacted by weather conditions, equipment performance, transmission constraints, and other factors. Generally, under the renewable generation PPAs, the purchasing party retains the right to keep or resell the renewable energy credits.
Southern Company Gas' Affiliate Asset Management Agreements
With the exception of Nicor Gas, the natural gas distribution utilities use asset management agreements with an affiliate, Sequent, for the primary purpose of reducing utility customers' gas cost recovery rates through payments to the utilities by Sequent. For Atlanta Gas Light, these payments are set by the Georgia PSC and are utilized for infrastructure improvements and to fund heating assistance programs, rather than as a reduction to gas cost recovery rates. Under these asset management agreements, Sequent supplies natural gas to the utility and markets available pipeline and storage capacity to improve the overall cost of supplying gas to the utility customers. Currently, the natural gas distribution utilities primarily purchase their gas from
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Sequent. The purchase agreements require Sequent to provide firm gas to the natural gas distribution utilities, but the natural gas distribution utilities maintain the right and ability to make their own long-term supply arrangements if they believe it is in the best interest of their customers.
Each agreement provides for Sequent to make payments to the natural gas distribution utility through an annual minimum guarantee within a profit sharing structure, a profit sharing structure without an annual minimum guarantee, or a fixed fee.
Income Tax Matters
Consolidated Income Taxes
The impact of certain tax events at Southern Company and/or its other subsidiaries can, and does, affect each Registrant's ability to utilize certain tax credits. See "Tax Credits" and ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates – Accounting for Income Taxes" herein and Note 10 to the financial statements for additional information.
Tax Credits
The Tax Reform Legislation, as modified by the 2021 Consolidated Appropriations Act signed into law in December 2020, retained solar energy incentives of 30% ITC for projects that commenced construction by December 31, 2019; 26% ITC for projects that commence construction in 2020 through 2022; 22% ITC for projects that commence construction in 2023; and a permanent 10% ITC for projects that commence construction on or after January 1, 2024, or projects which are placed in service after December 31, 2025 regardless of when construction began. In addition, the Tax Reform Legislation retained wind energy incentives for projects that commenced construction in 2016, 2017, 2018, and 2019 of 100% PTC, 80% PTC, 60% PTC, and 40% PTC, respectively. As a result of a tax extenders bill passed in December 2019 and the 2021 Consolidated Appropriations Act, projects that begin construction in 2020 or 2021 are entitled to 60% PTC. Projects commencing construction after 2021 will not be entitled to any PTCs. Southern Company has received ITCs and PTCs in connection with investments in solar, wind, fuel cell, and biomass facilities primarily at Southern Power and Georgia Power.
Southern Power's ITCs relate to its investment in new solar facilities acquired or constructed and its PTCs relate to the first 10 years of energy production from its wind facilities, which have had, and may continue to have, a material impact on Southern Power's cash flows and net income. At December 31, 2020, Southern Company and Southern Power had approximately $1.4 billion and $1.1 billion, respectively, of unutilized ITCs and PTCs, which are currently expected to be fully utilized by 2024, but could be further delayed. Since 2018, Southern Power has been utilizing tax equity partnerships for wind and solar projects, where the tax partner takes significantly all of the respective federal tax benefits. These tax equity partnerships are consolidated in Southern Company's and Southern Power's financial statements using the HLBV methodology to allocate partnership gains and losses. See Note 1 to the financial statements under "General" for additional information on the HLBV methodology and Note 1 to the financial statements under "Income Taxes" and Note 10 to the financial statements under "Deferred Tax Assets and Liabilities – Tax Credit Carryforwards" and "Effective Tax Rate" for additional information regarding utilization and amortization of credits and the tax benefit related to associated basis differences.
Alabama State Tax Reform Legislation
On February 12, 2021, the State of Alabama enacted tax legislation that changes the apportionment methodology effective for the 2021 tax year. This legislation is expected to reduce the amount of Southern Power's future earnings apportioned to the State of Alabama and, thus, reduce Southern Power's existing state accumulated deferred tax liabilities, which would have a favorable impact on Southern Power's net income. The ultimate outcome of this matter cannot be determined at this time.
General Litigation and Other Matters
The Registrants are involved in various matters being litigated and/or regulatory and other matters that could affect future earnings, cash flows, and/or financial condition. The ultimate outcome of such pending or potential litigation against each Registrant and any subsidiaries or regulatory and other matters cannot be determined at this time; however, for current proceedings and/or matters not specifically reported herein or in Notes 2 and 3 to the financial statements, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings and/or matters would have a material effect on such Registrant's financial statements. See Notes 2 and 3 to the financial statements for a discussion of various contingencies, including matters being litigated, regulatory matters, and other matters which may affect future earnings potential.
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ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
The Registrants prepare their financial statements in accordance with GAAP. Significant accounting policies are described in the notes to the financial statements. In the application of these policies, certain estimates are made that may have a material impact on the results of operations and related disclosures of the applicable Registrants (as indicated in the section descriptions herein). Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. Senior management has reviewed and discussed the following critical accounting policies and estimates with the Audit Committee of Southern Company's Board of Directors.
Utility Regulation (Southern Company, Alabama Power, Georgia Power, Mississippi Power, and Southern Company Gas)
The traditional electric operating companies and the natural gas distribution utilities are subject to retail regulation by their respective state PSCs or other applicable state regulatory agencies and wholesale regulation by the FERC. These regulatory agencies set the rates the traditional electric operating companies and the natural gas distribution utilities are permitted to charge customers based on allowable costs, including a reasonable ROE. As a result, the traditional electric operating companies and the natural gas distribution utilities apply accounting standards which require the financial statements to reflect the effects of rate regulation. Through the ratemaking process, the regulators may require the inclusion of costs or revenues in periods different than when they would be recognized by a non-regulated company. This treatment may result in the deferral of expenses and the recording of related regulatory assets based on anticipated future recovery through rates or the deferral of gains or creation of liabilities and the recording of related regulatory liabilities. The application of the accounting standards for rate regulated entities also impacts their financial statements as a result of the estimates of allowable costs used in the ratemaking process. These estimates may differ from those actually incurred by the traditional electric operating companies and the natural gas distribution utilities; therefore, the accounting estimates inherent in specific costs such as depreciation, AROs, and pension and other postretirement benefits have less of a direct impact on the results of operations and financial condition of the applicable Registrants than they would on a non-regulated company.
Revenues related to regulated utility operations as a percentage of total operating revenues in 2020 for the applicable Registrants were as follows: 89% for Southern Company, 99% for Alabama Power, 96% for Georgia Power, 99% for Mississippi Power, and 86% for Southern Company Gas.
As reflected in Note 2 to the financial statements, significant regulatory assets and liabilities have been recorded. Management reviews the ultimate recoverability of these regulatory assets and any requirement to refund these regulatory liabilities based on applicable regulatory guidelines and GAAP. However, adverse legislative, judicial, or regulatory actions could materially impact the amounts of such regulatory assets and liabilities and could adversely impact the financial statements of the applicable Registrants.
Estimated Cost, Schedule, and Rate Recovery for the Construction of Plant Vogtle Units 3 and 4
(Southern Company and Georgia Power)
In 2016, the Georgia PSC approved the Vogtle Cost Settlement Agreement, which resolved certain prudency matters in connection with Georgia Power's fifteenth VCM report. In 2017, the Georgia PSC approved Georgia Power's seventeenth VCM report, which included a recommendation to continue construction of Plant Vogtle Units 3 and 4, with Southern Nuclear serving as project manager and Bechtel serving as the primary construction contractor, as well as a modification of the Vogtle Cost Settlement Agreement. The Georgia PSC's related order stated that under the modified Vogtle Cost Settlement Agreement, (i) none of the $3.3 billion of costs incurred through December 31, 2015 should be disallowed as imprudent; (ii) the Contractor Settlement Agreement was reasonable and prudent and none of the $0.3 billion paid pursuant to the Contractor Settlement Agreement should be disallowed from rate base on the basis of imprudence; (iii) capital costs incurred up to $5.68 billion would be presumed to be reasonable and prudent with the burden of proof on any party challenging such costs; (iv) Georgia Power would have the burden of proof to show that any capital costs above $5.68 billion were prudent; (v) Georgia Power's total project capital cost forecast of $7.3 billion (net of $1.7 billion received under the Guarantee Settlement Agreement and approximately $188 million in related customer refunds) was found reasonable and did not represent a cost cap; and (vi) prudence decisions would be made subsequent to achieving fuel load for Unit 4.
In its order, the Georgia PSC also stated if other conditions change and assumptions upon which Georgia Power's seventeenth VCM report are based do not materialize, the Georgia PSC reserved the right to reconsider the decision to continue construction.
As of December 31, 2020, Georgia Power revised its total project capital cost forecast to $8.7 billion (net of $1.7 billion received under the Guarantee Settlement Agreement and approximately $188 million in related customer refunds). This forecast includes
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construction contingency of $171 million and is based on the regulatory-approved in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4. Since 2018, construction contingency totaling $0.5 billion has been assigned to the base capital cost forecast. Although Georgia Power believes these incremental costs are reasonable and necessary to complete the project and the Georgia PSC's order in the seventeenth VCM proceeding specifically states that the construction of Plant Vogtle Units 3 and 4 is not subject to a cost cap, Georgia Power did not seek rate recovery for a $0.7 billion increase in the base capital cost forecast in 2018 and has not sought rate recovery for the construction contingency costs. After considering the significant level of uncertainty that exists regarding the future recoverability of these costs since the ultimate outcome of these matters is subject to the outcome of future assessments by management, as well as Georgia PSC decisions in these future regulatory proceedings, Georgia Power recorded total pre-tax charges to income of $1.1 billion ($0.8 billion after tax) in the second quarter 2018 and $149 million ($111 million after tax) and $176 million ($131 million after tax) as of June 30, 2020 and December 31, 2020, respectively.
As part of its ongoing processes, Southern Nuclear continues to evaluate cost and schedule forecasts on a regular basis to incorporate current information available, particularly in the areas of engineering support, commodity installation, system turnovers and related test results, and workforce statistics. The project continues to face challenges including, but not limited to, higher than expected absenteeism; overall construction and subcontractor labor productivity; system turnover and testing activities; and electrical equipment and commodity installation. In addition, Georgia Power estimates the productivity impacts of the COVID-19 pandemic have consumed approximately three to four months of embedded schedule margin. With minimal schedule margin remaining, the Unit 3 schedule is challenged, and any further extension of the hot functional testing or fuel load milestones, or other delays from the challenges described below, could impact the ability to achieve the November 2021 in-service date.
As construction, including subcontract work, continues and testing and system turnover activities increase, challenges with management of contractors and vendors; subcontractor performance; supervision of craft labor and related productivity, particularly in the installation of electrical, mechanical, and instrumentation and controls commodities, ability to attract and retain craft labor, and/or related cost escalation; procurement, fabrication, delivery, assembly, installation, system turnover, and the initial testing and start-up, including any required engineering changes or any remediation related thereto, of plant systems, structures, or components (some of which are based on new technology that only within the last few years began initial operation in the global nuclear industry at this scale), any of which may require additional labor and/or materials; or other issues could arise and change the projected schedule and estimated cost. In addition, the continuing effects of the COVID-19 pandemic could further disrupt or delay construction and testing activities at Plant Vogtle Units 3 and 4.
There have been technical and procedural challenges to the construction and licensing of Plant Vogtle Units 3 and 4 at the federal and state level and additional challenges may arise. Processes are in place that are designed to assure compliance with the requirements specified in the Westinghouse Design Control Document and the combined construction and operating licenses, including inspections by Southern Nuclear and the NRC that occur throughout construction. Findings resulting from such inspections could require additional remediation and/or further NRC oversight. In addition, certain license amendment requests have been filed and approved or are pending before the NRC. Various design and other licensing-based compliance matters, including the timely submittal by Southern Nuclear of the ITAAC documentation for each unit and the related reviews and approvals by the NRC necessary to support NRC authorization to load fuel, may arise, which may result in additional license amendments or require other resolution. If any license amendment requests or other licensing-based compliance issues, including inspections and ITAACs, are not resolved in a timely manner, there may be delays in the project schedule that could result in increased costs.
The ultimate outcome of these matters cannot be determined at this time. However, any schedule extension beyond the regulatory-approved in-service dates is currently estimated to result in additional base capital costs for Georgia Power of approximately $25 million per month for Unit 3 and approximately $15 million per month for Unit 4, as well as the related AFUDC. While Georgia Power is not precluded from seeking recovery of any future capital cost forecast increase, management will ultimately determine whether or not to seek recovery. Any further changes to the capital cost forecast that are not expected to be recoverable through regulated rates will be required to be charged to income and such charges could be material.
Given the significant complexity involved in estimating the future costs to complete construction and start-up of Plant Vogtle Units 3 and 4 and the significant management judgment necessary to assess the related uncertainties surrounding future rate recovery of any projected cost increases, as well as the potential impact on results of operations and cash flows, Southern Company and Georgia Power consider these items to be critical accounting estimates. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information.
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Accounting for Income Taxes (Southern Company, Mississippi Power, Southern Power, and Southern Company Gas)
The consolidated income tax provision and deferred income tax assets and liabilities, as well as any unrecognized tax benefits and valuation allowances, require significant judgment and estimates. These estimates are supported by historical tax return data, reasonable projections of taxable income, the ability and intent to implement tax planning strategies if necessary, and interpretations of applicable tax laws and regulations across multiple taxing jurisdictions. The effective tax rate reflects the statutory tax rates and calculated apportionments for the various states in which the Southern Company system operates.
Southern Company files a consolidated federal income tax return and the Registrants file various state income tax returns, some of which are combined or unitary. Under a joint consolidated income tax allocation agreement, each Southern Company subsidiary's current and deferred tax expense is computed on a stand-alone basis and each subsidiary is allocated an amount of tax similar to that which would be paid if it filed a separate income tax return. In accordance with IRS regulations, each company is jointly and severally liable for the federal tax liability. Certain deductions and credits can be limited or utilized at the consolidated or combined level resulting in tax credit and/or state NOL carryforwards that would not otherwise result on a stand-alone basis. Utilization of these carryforwards and the assessment of valuation allowances are based on significant judgment and extensive analysis of Southern Company's and its subsidiaries' current financial position and results of operations, including currently available information about future years, to estimate when future taxable income will be realized.
Current and deferred state income tax liabilities and assets are estimated based on laws of multiple states that determine the income to be apportioned to their jurisdictions. States have various filing methodologies and utilize specific formulas to calculate the apportionment of taxable income. The calculation of deferred state taxes considers apportionment factors and filing methodologies that are expected to apply in future years. The apportionments and methodologies which are ultimately finalized in a manner inconsistent with expectations could have a material effect on the financial statements of the applicable Registrants.
Given the significant judgment involved in estimating tax credit and/or state NOL carryforwards and multi-state apportionments for all subsidiaries, the applicable Registrants consider deferred income tax liabilities and assets to be critical accounting estimates.
Asset Retirement Obligations (Southern Company, Alabama Power, Georgia Power, Mississippi Power, and Southern Company Gas)
AROs are computed as the present value of the estimated costs for an asset's future retirement and are recorded in the period in which the liability is incurred. The estimated costs are capitalized as part of the related long-lived asset and depreciated over the asset's useful life. In the absence of quoted market prices, AROs are estimated using present value techniques in which estimates of future cash outlays associated with the asset retirements are discounted using a credit-adjusted risk-free rate. Estimates of the timing and amounts of future cash outlays are based on projections of when and how the assets will be retired and the cost of future removal activities.
The ARO liabilities for the traditional electric operating companies primarily relate to facilities that are subject to the CCR Rule and the related state rules, principally ash ponds. In addition, Alabama Power and Georgia Power have retirement obligations related to the decommissioning of nuclear facilities (Alabama Power's Plant Farley and Georgia Power's ownership interests in Plant Hatch and Plant Vogtle Units 1 and 2). Other significant AROs include various landfill sites and asbestos removal for Alabama Power, Georgia Power, and Mississippi Power and gypsum cells and mine reclamation for Mississippi Power.
The traditional electric operating companies and Southern Company Gas also have identified other retirement obligations, such as obligations related to certain electric transmission and distribution facilities, certain asbestos-containing material within long-term assets not subject to ongoing repair and maintenance activities, certain wireless communication towers, the disposal of polychlorinated biphenyls in certain transformers, leasehold improvements, equipment on customer property, and property associated with the Southern Company system's rail lines and natural gas pipelines. However, liabilities for the removal of these assets have not been recorded because the settlement timing for certain retirement obligations related to these assets is indeterminable and, therefore, the fair value of the retirement obligations cannot be reasonably estimated. A liability for these retirement obligations will be recognized when sufficient information becomes available to support a reasonable estimation of the ARO.
The cost estimates for AROs related to the disposal of CCR are based on information using various assumptions related to closure and post-closure costs, timing of future cash outlays, inflation and discount rates, and the potential methods for complying with the CCR Rule and the related state rules. The traditional electric operating companies have periodically updated, and expect to continue periodically updating, their related cost estimates and ARO liabilities for each CCR unit as additional information related to these assumptions becomes available. Some of these updates have been, and future updates may be, material. See Note 6 to the financial statements for additional information, including increases to AROs related to ash ponds recorded during 2020 by certain Registrants.
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Given the significant judgment involved in estimating AROs, the applicable Registrants consider the liabilities for AROs to be critical accounting estimates.
Pension and Other Postretirement Benefits (Southern Company, Alabama Power, Georgia Power, Mississippi Power, and Southern Company Gas)
The applicable Registrants' calculations of pension and other postretirement benefits expense are dependent on a number of assumptions. These assumptions include discount rates, healthcare cost trend rates, expected long-term rate of return (LRR) on plan assets, mortality rates, expected salary and wage increases, and other factors. Components of pension and other postretirement benefits expense include interest and service cost on the pension and other postretirement benefit plans, expected return on plan assets, and amortization of certain unrecognized costs and obligations. Actual results that differ from the assumptions utilized are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation in future periods. While the applicable Registrants believe the assumptions used are appropriate, differences in actual experience or significant changes in assumptions would affect their pension and other postretirement benefit costs and obligations.
Key elements in determining the applicable Registrants' pension and other postretirement benefit expense are the LRR and the discount rate used to measure the benefit plan obligations and the periodic benefit plan expense for future periods. For purposes of determining the applicable Registrants' liabilities related to the pension and other postretirement benefit plans, Southern Company discounts the future related cash flows using a single-point discount rate for each plan developed from the weighted average of market-observed yields for high quality fixed income securities with maturities that correspond to expected benefit payments. The discount rate assumption impacts both the service cost and non-service costs components of net periodic benefit costs as well as the projected benefit obligations.
The LRR on pension and other postretirement benefit plan assets is based on Southern Company's investment strategy, historical experience, and expectations that consider external actuarial advice, and represents the average rate of earnings expected over the long term on the assets invested to provide for anticipated future benefit payments. Southern Company determines the amount of the expected return on plan assets component of non-service costs by applying the LRR of various asset classes to Southern Company's target asset allocation. The LRR only impacts the non-service costs component of net periodic benefit costs for the following year and is set annually at the beginning of the year.
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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 | |||||||||||||||||
| 25 Basis Point Change in: | Total Benefit Expense for 2021 | Projected Obligation for Pension Plan at December 31, 2020 | Projected Obligation for Other Postretirement Benefit Plans at December 31, 2020 | ||||||||||||||
| (in millions) | |||||||||||||||||
| Discount rate: | |||||||||||||||||
| Southern Company | $42/$(40) | $628/$(592) | $57/$(54) | ||||||||||||||
| Alabama Power | $11/$(10) | $151/$(142) | $14/$(14) | ||||||||||||||
| Georgia Power | $12/$(11) | $187/$(177) | $20/$(19) | ||||||||||||||
| Mississippi Power | $2/$(2) | $28/$(27) | $2/$(2) | ||||||||||||||
| Southern Company Gas | $–/$– | $43/$(40) | $6/$(6) | ||||||||||||||
| Salaries: | |||||||||||||||||
| Southern Company | $25/$(24) | $136/$(132) | $–/$– | ||||||||||||||
| Alabama Power | $7/$(7) | $38/$(37) | $–/$– | ||||||||||||||
| Georgia Power | $7/$(7) | $39/$(38) | $–/$– | ||||||||||||||
| Mississippi Power | $1/$(1) | $6/$(6) | $–/$– | ||||||||||||||
| Southern Company Gas | $1/$(1) | $3/$(3) | $–/$– | ||||||||||||||
| Long-term return on plan assets: | |||||||||||||||||
| Southern Company | $38/$(38) | N/A | N/A | ||||||||||||||
| Alabama Power | $10/$(10) | N/A | N/A | ||||||||||||||
| Georgia Power | $12/$(12) | N/A | N/A | ||||||||||||||
| Mississippi Power | $2/$(2) | N/A | N/A | ||||||||||||||
| Southern Company Gas | $3/$(3) | N/A | N/A |
See Note 11 to the financial statements for additional information regarding pension and other postretirement benefits.
Asset Impairment (Southern Company, Southern Power, and Southern Company Gas)
Goodwill (Southern Company and Southern Company Gas)
The acquisition method of accounting requires the assets acquired and liabilities assumed to be recorded at the date of acquisition at their respective estimated fair values. The applicable Registrants have recognized goodwill as of the date of their acquisitions, as a residual over the fair values of the identifiable net assets acquired. Goodwill is tested for impairment at the reporting unit level on an annual basis in the fourth quarter of the year as well as on an interim basis as events and changes in circumstances occur, including, but not limited to, a significant change in operating performance, the business climate, legal or regulatory factors, or a planned sale or disposition of a significant portion of the business. A reporting unit is the operating segment, or a business one level below the operating segment (a component), if discrete financial information is prepared and regularly reviewed by management. Components are aggregated if they have similar economic characteristics.
As part of the impairment tests, the applicable Registrant may perform an initial qualitative assessment to determine whether it is more likely than not that the fair value of each reporting unit is less than its carrying amount before applying the quantitative goodwill impairment test. If the applicable Registrant elects to perform the qualitative assessment, it evaluates relevant events and circumstances, including but not limited to, macroeconomic conditions, industry and market conditions, cost factors, financial performance, entity specific events, and events specific to each reporting unit. If the applicable Registrant determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or it elects not to perform a qualitative assessment, it compares the fair value of the reporting unit to its carrying value to determine if the fair value is greater than its carrying value.
Goodwill for Southern Company and Southern Company Gas was $5.3 billion and $5.0 billion, respectively, at December 31, 2020. For its annual impairment tests, Southern Company Gas performed the qualitative assessment and determined that it was
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more likely than not that the fair value of all of its reporting units with goodwill exceeded their carrying amounts, and therefore no quantitative analysis was required. For its annual impairment tests for PowerSecure, Southern Company performed the quantitative assessment, which resulted in the fair value of goodwill at PowerSecure exceeding its carrying value in all years presented. However, Southern Company recorded goodwill impairment charges totaling $34 million in 2019 as a result of its decision to sell certain PowerSecure business units. See Note 15 to the financial statements under "Southern Company" for additional information. The continued COVID-19 pandemic and related responses continue to disrupt supply chains, reduce labor availability and productivity, and reduce economic activity. These effects could have a variety of adverse impacts on Southern Company and its subsidiaries, including the $263 million of goodwill recorded at PowerSecure. If the impact of the COVID-19 pandemic becomes significant to the operating results of PowerSecure and its businesses, a portion of the associated goodwill may become impaired. The ultimate outcome of this matter cannot be determined at this time.
The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can significantly impact the applicable Registrant's results of operations. Fair values and useful lives are determined based on, among other factors, the expected future period of benefit of the asset, the various characteristics of the asset, and projected cash flows. As the determination of an asset's fair value and useful life involves management making certain estimates and because these estimates form the basis for the determination of whether or not an impairment charge should be recorded, the applicable Registrants consider these estimates to be critical accounting estimates.
See Note 1 to the financial statements under "Goodwill and Other Intangible Assets and Liabilities" for additional information regarding the applicable Registrants' goodwill.
Long-Lived Assets (Southern Company, Southern Power, and Southern Company Gas)
Impairments of long-lived assets of the traditional electric utilities and natural gas distribution utilities are generally related to specific regulatory disallowances. The applicable Registrants assess their other long-lived assets for impairment whenever events or changes in circumstances indicate that an asset's carrying amount may not be recoverable. If an indicator exists, the asset is tested for recoverability by comparing the asset carrying value to the sum of the undiscounted expected future cash flows directly attributable to the asset's use and eventual disposition. If the estimate of undiscounted future cash flows is less than the carrying value of the asset, the fair value of the asset is determined and a loss is recorded equal to the difference between the carrying value and the fair value of the asset. In addition, when assets are identified as held for sale, an impairment loss is recognized to the extent the carrying value of the assets or asset group exceeds their fair value less cost to sell. A high degree of judgment is required in developing estimates related to these evaluations, which are based on projections of various factors, some of which have been quite volatile in recent years.
Southern Power's investments in long-lived assets are primarily generation assets. Excluding the natural gas distribution utilities, Southern Company Gas' investments in long-lived assets are primarily natural gas transportation and storage facility assets, whether in service or under construction. In addition, exclusive of the traditional electric operating companies and natural gas distribution utilities, Southern Company's investments in long-lived assets also include investments in leveraged leases. During 2020, Southern Company recorded impairment charges totaling $206 million ($105 million after tax) related to two of its leveraged lease investments.
For Southern Power, examples of impairment indicators could include significant changes in construction schedules, current period losses combined with a history of losses or a projection of continuing losses, a significant decrease in market prices, the inability to remarket generating capacity for an extended period, or the unplanned termination of a customer contract or the inability of a customer to perform under the terms of the contract. For Southern Company Gas, examples of impairment indicators could include, but are not limited to, significant changes in the U.S. natural gas storage market, construction schedules, current period losses combined with a history of losses or a projection of continuing losses, a significant decrease in market prices, the inability to renew or extend customer contracts or the inability of a customer to perform under the terms of the contract, attrition rates, or the inability to deploy a development project. For Southern Company's investments in leveraged leases, impairment indicators include changes in estimates of future rental payments to be received under the lease as well as the residual value of the leased asset at the end of the lease.
As the determination of the expected future cash flows generated from an asset, an asset's fair value, and useful life involves management making certain estimates and because these estimates form the basis for the determination of whether or not an impairment charge should be recorded, the applicable Registrants consider these estimates to be critical accounting estimates.
See Note 3 to the financial statements under "Other Matters" and Note 15 to the financial statements for additional information on certain assets recently evaluated for impairment, including Southern Company's leveraged lease investments.
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Derivatives and Hedging Activities (Southern Company and Southern Company Gas)
Determining whether a contract meets the definition of a derivative instrument, contains an embedded derivative requiring bifurcation, or qualifies for hedge accounting treatment is complex. The treatment of a single contract may vary from period to period depending upon accounting elections, changes in the applicable Registrant's assessment of the likelihood of future hedged transactions, or new interpretations of accounting guidance. As a result, judgment is required in determining the appropriate accounting treatment. In addition, the estimated fair value of derivative instruments may change significantly from period to period depending upon market conditions, and changes in hedge effectiveness may impact the accounting treatment.
Derivative instruments (including certain derivative instruments embedded in other contracts) are recorded on the balance sheets as either assets or liabilities measured at their fair value. If the transaction qualifies for, and is designated as, a normal purchase or normal sale, it is exempt from fair value accounting treatment and is, instead, subject to traditional accrual accounting. The applicable Registrant utilizes market data or assumptions that market participants would use in pricing the derivative asset or liability, including assumptions about risk and the risks inherent in the inputs of the valuation technique.
Changes in the derivatives' fair value are recognized concurrently in earnings unless specific hedge accounting criteria are met. If the derivatives meet those criteria, derivative gains and losses offset related results of the hedged item in the income statement in the case of a fair value hedge, or gains and losses are deferred in OCI on the balance sheets until the hedged transaction affects earnings in the case of a cash flow hedge. Additionally, a company is required to formally designate a derivative as a hedge as well as document and assess the effectiveness of derivatives associated with transactions that receive hedge accounting treatment.
Southern Company Gas uses derivative instruments primarily to reduce the impact to its results of operations due to the risk of changes in the price of natural gas and, to a lesser extent, Southern Company Gas hedges against warmer-than-normal weather and interest rates. The majority of these contracts are over-the-counter wholesale contracts for the purchase or sale of natural gas or consist of contracts which do not include asset management agreements, financial optionality, or potential embedded derivatives. The fair value of natural gas derivative instruments used to manage exposure to changing natural gas prices reflects the estimated amounts that Southern Company Gas would receive or pay to terminate or close the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts. For derivatives utilized at gas marketing services and wholesale gas services that are not designated as accounting hedges, changes in fair value are reported as gains or losses in results of operations in the period of change. Gas marketing services records derivative gains or losses arising from cash flow hedges in OCI and reclassifies them into earnings in the same period that the underlying hedged item is recognized in earnings.
Derivative assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy. The determination of the fair value of the derivative instruments incorporates various required factors. These factors include:
-
the creditworthiness of the counterparties involved and the impact of credit enhancements (such as cash deposits and letters of credit);
-
events specific to a given counterparty; and
-
the impact of nonperformance risk on liabilities.
A significant change in the underlying market prices or pricing assumptions used in pricing derivative assets or liabilities may result in a significant financial statement impact.
Given the assumptions used in pricing the derivative asset or liability, Southern Company and Southern Company Gas consider the valuation of derivative assets and liabilities a critical accounting estimate. See FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" herein and Note 14 to the financial statements for more information.
Revenue Recognition (Southern Power)
Southern Power's power sale transactions, which include PPAs, are classified in one of four general categories: leases, non-derivatives or normal sale derivatives, derivatives designated as cash flow hedges, and derivatives not designated as hedges. The two categories with the most judgment required for Southern Power are described further below. Southern Power's revenues are dependent upon significant judgments used to determine the appropriate transaction classification, which must be documented upon the inception of each contract.
Lease Transactions
Southern Power considers the terms of a sales contract to determine whether it should be accounted for as a lease. A contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. If the contract meets the criteria for a lease, Southern Power performs further analysis to determine
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whether the lease is classified as operating, financing, or sales-type. Generally, all of Southern Power's power sales contracts that are determined to be leases are accounted for as operating leases and the capacity revenue is recognized on a straight-line basis over the term of the contract and is included in Southern Power's operating revenues. Energy revenues and other contingent revenues are recognized in the period the energy is delivered or the service is rendered. See Note 9 to the financial statements for additional information.
Non-Derivative and Normal Sale Derivative Transactions
If the power sales contract is not classified as a lease, Southern Power further considers whether the contract meets the definition of a derivative. If the contract does meet the definition of a derivative, Southern Power will assess whether it can be designated as a normal sale contract. The determination of whether a contract can be designated as a normal sale contract requires judgment, including whether the sale of electricity involves physical delivery in quantities within Southern Power's available generating capacity and that the purchaser will take quantities expected to be used or sold in the normal course of business.
Contracts that do not meet the definition of a derivative or are designated as normal sales are accounted for as executory contracts. For contracts that have a capacity charge, the revenue is generally recognized in the period that it becomes billable. Revenues related to energy and ancillary services are recognized in the period the energy is delivered or the service is rendered. See Note 4 to the financial statements for additional information.
Acquisition Accounting (Southern Power)
Southern Power may acquire generation assets as part of its overall growth strategy. At the time of an acquisition, Southern Power will assess if these assets and activities meet the definition of a business. For acquisitions that meet the definition of a business, the purchase price, including any contingent consideration, is allocated based on the fair value of the identifiable assets acquired and liabilities assumed (including any intangible assets, primarily related to acquired PPAs). Assets acquired that do not meet the definition of a business are accounted for as an asset acquisition. The purchase price of each asset acquisition is allocated based on the relative fair value of assets acquired.
Determining the fair value of assets acquired and liabilities assumed requires management judgment and Southern Power may engage independent valuation experts to assist in this process. Fair values are determined by using market participant assumptions, and typically include the timing and amounts of future cash flows, incurred construction costs, the nature of acquired contracts, discount rates, power market prices, and expected asset lives. Any due diligence or transition costs incurred by Southern Power for potential or successful acquisitions are expensed as incurred.
See Note 13 to the financial statements for additional fair value information and Note 15 to the financial statements for additional information on recent acquisitions.
Variable Interest Entities (Southern Power)
Southern Power enters into partnerships with varying ownership structures. Upon entering into these arrangements, membership interests and other variable interests are evaluated to determine if the legal entity is a VIE. If the legal entity is a VIE, Southern Power will assess if it has both the power to direct the activities of the VIE that most significantly impact the VIE's economic performance and the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE, making it the primary beneficiary. Making this determination may require significant management judgment.
If Southern Power is the primary beneficiary and is considered to have a controlling ownership, the assets, liabilities, and results of operations of the entity are consolidated. If Southern Power is not the primary beneficiary, the legal entity is generally accounted for under the equity method of accounting. Southern Power reconsiders its conclusions as to whether the legal entity is a VIE and whether it is the primary beneficiary for events that impact the rights of variable interests, such as ownership changes in membership interests.
Southern Power has controlling ownership in certain legal entities for which the contractual provisions represent profit-sharing arrangements because the allocations of cash distributions and tax benefits are not based on fixed ownership percentages. For these arrangements, the noncontrolling interest is accounted for under a balance sheet approach utilizing the HLBV method. The HLBV method calculates each partner's share of income based on the change in net equity the partner can legally claim in a HLBV at the end of the period compared to the beginning of the period.
Contingent Obligations (All Registrants)
The Registrants are subject to a number of federal and state laws and regulations, as well as other factors and conditions that subject them to environmental, litigation, and other risks. See FUTURE EARNINGS POTENTIAL herein and Notes 2 and 3 to the financial statements for more information regarding certain of these contingencies. The Registrants periodically evaluate their
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exposure to such risks and record reserves for those matters where a non-tax-related loss is considered probable and reasonably estimable. The adequacy of reserves can be significantly affected by external events or conditions that can be unpredictable; thus, the ultimate outcome of such matters could materially affect the results of operations, cash flows, or financial condition of the Registrants.
Recently Issued Accounting Standards
See Note 1 to the financial statements under "Recently Adopted Accounting Standards" for additional information.
On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04) providing temporary guidance to ease the potential burden in accounting for reference rate reform primarily resulting from the discontinuation of LIBOR, which is currently expected to begin phasing out on December 31, 2021. The amendments in ASU 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The new guidance provides the following optional expedients: (i) simplifies accounting analyses under current GAAP for contract modifications; (ii) simplifies the assessment of hedge effectiveness and allows hedging relationships affected by reference rate reform to continue; and (iii) allows a one-time election to sell or transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform. An entity may elect to apply the amendments prospectively from March 12, 2020 through December 31, 2022 by accounting topic.
The Registrants currently reference LIBOR for certain debt and hedging arrangements. Contract language has been, or is expected to be, incorporated into each of these agreements to address the transition to an alternative rate for agreements that will be in place at the transition date. While existing effective hedging relationships are expected to continue, the Registrants will continue to evaluate the provisions of ASU 2020–04 and the impacts of transitioning to an alternative rate. The ultimate outcome of the transition cannot be determined at this time, but is not expected to have a material impact on the Registrants' financial statements. See FINANCIAL CONDITION AND LIQUIDITY – "Financing Activities" herein and Note 14 to the financial statements under "Interest Rate Derivatives" herein for additional information.
FINANCIAL CONDITION AND LIQUIDITY
Overview
The financial condition of each Registrant remained stable at December 31, 2020. The Registrants maintained adequate access to capital throughout 2020, including through a period of volatility in the short-term financial markets during the first quarter 2020 primarily related to the COVID-19 pandemic. As a precautionary measure, in the first quarter 2020, Southern Company, Georgia Power, Mississippi Power, and Southern Company Gas increased their outstanding short-term debt and cash and cash equivalents by entering into new bank term loans, entering into and funding new committed and uncommitted credit facilities, and funding existing uncommitted credit facilities. During the second half of 2020, most of these additional borrowings were repaid. No material changes occurred in the terms of the applicable Registrants' bank credit arrangements or their interest expense on short-term debt as a result of these actions. The Registrants experienced no material counterparty credit losses during 2020 as a result of the volatility in the financial markets during the first half of 2020.
The Registrants' cash requirements primarily consist of funding ongoing operations, including unconsolidated subsidiaries, as well as common stock dividends, capital expenditures, and debt maturities. Southern Power's cash requirements also include distributions to noncontrolling interests. Capital expenditures and other investing activities for the traditional electric operating companies include investments to meet projected long-term demand requirements, including to build new generation facilities, to maintain existing generation facilities, to comply with environmental regulations including adding environmental modifications to certain existing generating units and closures of ash ponds, to expand and improve transmission and distribution facilities, and for restoration following major storms. Southern Power's capital expenditures and other investing activities may include acquisitions or new construction associated with its overall growth strategy and to maintain its existing generation fleet's performance. Southern Company Gas' capital expenditures and other investing activities include investments to meet projected long-term demand requirements, to maintain existing natural gas distribution systems as well as to update and expand these systems, and to comply with environmental regulations. See "Cash Requirements" herein for additional information.
Operating cash flows provide a substantial portion of the Registrants' cash needs. During 2020, Southern Power utilized tax credits, which provided $340 million in operating cash flows. For the three-year period from 2021 through 2023, each Registrant's projected stock dividends, capital expenditures, and debt maturities, as well as distributions to noncontrolling interests for Southern Power, are expected to exceed its operating cash flows. Southern Company plans to finance future cash needs in excess of its operating cash flows primarily by accessing borrowings from financial institutions and issuing debt and hybrid securities in the capital markets. Each Subsidiary Registrant plans to finance its future cash needs in excess of its operating cash flows
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primarily through external securities issuances, borrowings from financial institutions, and equity contributions from Southern Company. In addition, Georgia Power plans to utilize borrowings through the FFB and Southern Power plans to utilize tax equity partnership contributions. The Registrants plan to use commercial paper to manage seasonal variations in operating cash flows and for other working capital needs and continue to monitor their access to short-term and long-term capital markets as well as their bank credit arrangements to meet future capital and liquidity needs. See "Sources of Capital" and "Financing Activities" herein for additional information.
The Registrants' investments in their qualified pension plans and Alabama Power's and Georgia Power's investments in their nuclear decommissioning trust funds increased in value at December 31, 2020 as compared to December 31, 2019. No contributions to the qualified pension plan were made during 2020 and no mandatory contributions to the qualified pension plans are anticipated during 2021. See Notes 6 and 11 to the financial statements under "Nuclear Decommissioning" and "Pension Plans," respectively, for additional information.
At the end of 2020, the market price of Southern Company's common stock was $61.43 per share (based on the closing price as reported on the NYSE) and the book value was $26.48 per share, representing a market-to-book value ratio of 232%, compared to $63.70, $26.11, and 244%, respectively, at the end of 2019.
Cash Requirements
Capital Expenditures
Total estimated capital expenditures, including LTSA and nuclear fuel commitments, for the Registrants through 2025 based on their current construction programs are as follows:
| 2021 | 2022 | 2023 | 2024 | 2025 | |||||||||||||
| (in billions) | |||||||||||||||||
| Southern Company(a)(b)(c) | $ | 8.2 | $ | 7.0 | $ | 7.0 | $ | 6.8 | $ | 6.7 | |||||||
| Alabama Power(a) | 1.9 | 1.8 | 1.7 | 1.6 | 1.6 | ||||||||||||
| Georgia Power(b) | 3.8 | 3.0 | 3.1 | 3.1 | 3.1 | ||||||||||||
| Mississippi Power | 0.3 | 0.2 | 0.3 | 0.3 | 0.3 | ||||||||||||
| Southern Power(c) | 0.7 | 0.2 | 0.2 | 0.1 | 0.1 | ||||||||||||
| Southern Company Gas | 1.5 | 1.7 | 1.7 | 1.7 | 1.6 |
(a)Includes amounts related to Plant Barry Unit 8. See Note 2 to the financial statements under "Alabama Power" for additional information.
(b)Includes expenditures of approximately $1.3 billion and $0.4 billion for the construction of Plant Vogtle Units 3 and 4 in 2021 and 2022, respectively.
(c)Excludes approximately $0.5 billion per year for 2021 through 2025 for Southern Power's planned acquisitions and placeholder growth, which may vary materially due to market opportunities and Southern Power's ability to execute its growth strategy.
These capital expenditures include estimates to comply with environmental laws and regulations, but do not include any potential compliance costs associated with any future regulation of CO2 emissions from fossil fuel-fired electric generating units. See FUTURE EARNINGS POTENTIAL – "Environmental Matters" herein for additional information. At December 31, 2020, significant purchase commitments were outstanding in connection with the Registrants' construction programs.
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The traditional electric operating companies also anticipate expenditures associated with closure and monitoring of ash ponds and landfills in accordance with the CCR Rule and the related state rules, which are reflected in the applicable Registrants' ARO liabilities. Alabama Power's cost estimates are based on closure-in-place for all of its ash ponds. The cost estimates for Georgia Power and Mississippi Power are based on a combination of closure-in-place for some ash ponds and closure by removal for others. These anticipated costs are likely to change, and could change materially, as assumptions and details pertaining to closure are refined and compliance activities continue. Current estimates of these costs through 2025 are provided in the table below. Material expenditures in future years for ARO settlements will also be required for ash ponds, nuclear decommissioning (for Alabama Power and Georgia Power), and other liabilities reflected in the applicable Registrants' AROs, as discussed further in Note 6 to the financial statements. Also see FUTURE EARNINGS POTENTIAL – "Environmental Matters – Environmental Laws and Regulations – Coal Combustion Residuals" herein.
| 2021 | 2022 | 2023 | 2024 | 2025 | |||||||||||||
| (in millions) | |||||||||||||||||
| Southern Company | $ | 585 | $ | 759 | $ | 957 | $ | 903 | $ | 931 | |||||||
| Alabama Power | 254 | 338 | 412 | 354 | 299 | ||||||||||||
| Georgia Power | 287 | 354 | 467 | 498 | 601 | ||||||||||||
| Mississippi Power | 28 | 23 | 23 | 20 | 14 |
The construction programs are subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in load projections; changes in environmental laws and regulations; the outcome of any legal challenges to environmental rules; changes in electric generating plants, including unit retirements and replacements and adding or changing fuel sources at existing electric generating units, to meet regulatory requirements; changes in FERC rules and regulations; state regulatory agency approvals; changes in the expected environmental compliance program; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; abnormal weather; delays in construction due to judicial or regulatory action; storm impacts; and the cost of capital. The continued COVID-19 pandemic could also impair the ability to develop, construct, and operate facilities, as discussed further in Item 1A herein. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered. Additionally, expenditures associated with Southern Power's planned acquisitions may vary due to market opportunities and the execution of its growth strategy. See Note 15 to the financial statements under "Southern Power" for additional information regarding Southern Power's plant acquisitions and construction projects.
The construction program of Georgia Power includes Plant Vogtle Units 3 and 4, which includes components based on new technology that only within the last few years began initial operation in the global nuclear industry at this scale and which may be subject to additional revised cost estimates during construction. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for information regarding Plant Vogtle Units 3 and 4 and additional factors that may impact construction expenditures.
See FUTURE EARNINGS POTENTIAL – "Construction Programs" herein for additional information.
Other Significant Cash Requirements
Long-term debt maturities and the interest payable on long-term debt each represent a significant cash requirement for the Registrants. See Note 8 to the financial statements for information regarding the Registrants' long-term debt at December 31, 2020, the weighted average interest rate applicable to each long-term debt category, and a schedule of long-term debt maturities over the next five years. The Registrants plan to continue, when economically feasible, to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.
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Fuel and purchased power costs represent a significant component of funding ongoing operations for the traditional electric operating companies and Southern Power. See Note 3 to the financial statements under "Commitments" for information on Southern Company Gas' commitments for pipeline charges, storage capacity, and gas supply. Total estimated costs for fuel and purchased power commitments at December 31, 2020 for the applicable Registrants are provided in the table below. Fuel costs include purchases of coal (for the traditional electric operating companies) and natural gas (for the traditional electric operating companies and Southern Power), as well as the related transportation and storage. In most cases, these contracts contain provisions for price escalation, minimum purchase levels, and other financial commitments. Natural gas purchase commitments are based on various indices at the time of delivery; the amounts reflected below have been estimated based on the NYMEX future prices at December 31, 2020. As discussed under "Capital Expenditures" herein, estimated expenditures for nuclear fuel are included in the applicable Registrants' construction programs for the years 2021 through 2025. Nuclear fuel commitments at December 31, 2020 that extend beyond 2025 are included in the table below. Purchased power costs represent estimated minimum obligations for various PPAs for the purchase of capacity and energy, except for those accounted for as leases, which are discussed in Note 9 to the financial statements.
| 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | |||||||||||||||
| (in millions) | ||||||||||||||||||||
| Southern Company(*) | $ | 2,818 | $ | 1,831 | $ | 883 | $ | 705 | $ | 659 | $ | 5,607 | ||||||||
| Alabama Power | 888 | 643 | 289 | 183 | 171 | 1,205 | ||||||||||||||
| Georgia Power(*) | 1,037 | 656 | 339 | 302 | 299 | 3,894 | ||||||||||||||
| Mississippi Power | 342 | 210 | 115 | 102 | 82 | 502 | ||||||||||||||
| Southern Power | 551 | 322 | 140 | 118 | 107 | 5 |
(*)Excludes capacity payments related to Plant Vogtle Units 1 and 2, which are discussed in Note 3 to the financial statements under "Commitments."
The traditional electric operating companies and Southern Power have entered into LTSAs for the purpose of securing maintenance support for certain of their generating facilities. See Note 1 to the financial statements under "Long-term Service Agreements" for additional information. As discussed under "Capital Expenditures" herein, estimated expenditures related to LTSAs are included in the applicable Registrants' construction programs for the years 2021 through 2025. Total estimated payments for LTSA commitments at December 31, 2020 that extend beyond 2025 are provided in the following table and include price escalation based on inflation indices:
| Southern Company | Alabama Power | Georgia Power | Mississippi Power | Southern Power | |||||||||||||
| (in millions) | |||||||||||||||||
| LTSA commitments (after 2025) | $ | 1,871 | $ | 206 | $ | 191 | $ | 178 | $ | 1,296 | |||||||
In addition, Southern Power has certain other operations and maintenance agreements. Total estimated costs for these commitments at December 31, 2020 are provided in the table below.
| 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | |||||||||||||||
| (in millions) | ||||||||||||||||||||
| Southern Power's operations and maintenance agreements | $ | 65 | $ | 48 | $ | 41 | $ | 36 | $ | 25 | $ | 194 |
See Note 9 to the financial statements for information on the Registrants' operating lease obligations, including a maturity analysis of the lease liabilities over the next five years and thereafter.
Sources of Capital
Southern Company intends to meet its future capital needs through operating cash flows, borrowings from financial institutions, and debt and equity issuances in the capital markets. Equity capital can be provided from any combination of Southern Company's stock plans, private placements, or public offerings. Southern Company does not expect to issue any equity in the capital markets through 2025. See Note 8 to the financial statements under "Equity Units" for information on stock purchase contracts associated with Southern Company's equity units.
The Subsidiary Registrants plan to obtain the funds to meet their future capital needs from sources similar to those they used in the past, which were primarily from operating cash flows, external securities issuances, borrowings from financial institutions, and equity contributions from Southern Company. In addition, Georgia Power plans to utilize borrowings from the FFB (as
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discussed further in Note 8 to the financial statements under "Long-term Debt – DOE Loan Guarantee Borrowings") and Southern Power plans to utilize tax equity partnership contributions (as discussed further herein).
At certain periods during 2020, the traditional electric operating companies and the natural gas distribution utilities experienced a reduction in operating cash flows as a result of the temporary suspension of disconnections for non-payment by customers resulting from the COVID-19 pandemic and the related overall economic contraction. To date, this reduction of operating cash flows has not had a material impact on the liquidity of any of the Registrants, and, during the third quarter 2020, most of the temporary measures in place expired. The ultimate extent of the negative impact on the Registrants' liquidity depends on the duration of the COVID-19 pandemic and any federal, state, or local response and cannot be determined at this time. See Note 2 to the financial statements for information regarding suspended disconnections for non-payment by the traditional electric operating companies and the natural gas distribution utilities.
The amount, type, and timing of any financings in 2021, as well as in subsequent years, will be contingent on investment opportunities and the Registrants' capital requirements and will depend upon prevailing market conditions, regulatory approvals (for certain of the Subsidiary Registrants), and other factors. See "Cash Requirements" herein for additional information.
Southern Power utilizes tax equity partnerships as one of its financing sources, where the tax partner takes significantly all of the federal tax benefits. These tax equity partnerships are consolidated in Southern Power's financial statements and are accounted for using HLBV methodology to allocate partnership gains and losses. During 2020, Southern Power obtained tax equity funding for the Reading and Skookumchuck wind projects and received proceeds totaling $277 million. In addition, Southern Power received tax equity funding totaling $16 million from existing partnerships. See Notes 1 and 15 to the financial statements under "General" and "Southern Power," respectively, for additional information.
The issuance of securities by the traditional electric operating companies and Nicor Gas is generally subject to the approval of the applicable state PSC or other applicable state regulatory agency. The issuance of all securities by Mississippi Power and short-term securities by Georgia Power is generally subject to regulatory approval by the FERC. 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, and Southern Company Gas (excluding its other subsidiaries) file registration statements with the SEC 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 in the Southern Company system, except in the case of Southern Company Gas, as described below.
The traditional electric operating companies and SEGCO may utilize a Southern 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 for Southern 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 other Southern Company Gas subsidiaries benefit from Southern Company Gas Capital's commercial paper program.
By regulation, Nicor Gas is restricted, to the extent of its retained earnings balance, in the amount it can dividend or loan to affiliates and is not permitted to make money pool loans to affiliates. At December 31, 2020, the amount of subsidiary retained earnings restricted to dividend totaled $1.1 billion. This restriction did not impact Southern Company Gas' ability to meet its cash obligations, nor does management expect such restriction to materially impact Southern Company Gas' ability to meet its currently anticipated cash obligations.
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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, 2020. The following table shows the amount by which current liabilities exceeded current assets at December 31, 2020 for the applicable Registrants:
| At December 31, 2020 | Southern Company | Georgia Power | Mississippi Power | Southern Power | Southern Company Gas | |||||||||||||||
| (in millions) | ||||||||||||||||||||
| Current liabilities in excess of current assets | $ | 3,462 | $ | 1,343 | $ | 572 | $ | 250 | $ | 303 | ||||||||||
The Registrants believe the need for working capital can be adequately met by utilizing operating cash flows, as well as commercial paper, lines of credit, and short-term bank notes, as market conditions permit. In addition, under certain circumstances, the Subsidiary Registrants may utilize equity contributions and/or loans from Southern Company.
Bank Credit Arrangements
At December 31, 2020, the Registrants' unused committed credit arrangements with banks were as follows:
| At December 31, 2020 | Southern Company parent | Alabama Power | Georgia Power | Mississippi Power | Southern Power**(a)** | Southern Company Gas**(b)** | SEGCO | Southern Company | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| Unused committed credit | $ | 1,999 | $ | 1,328 | $ | 1,728 | $ | 250 | $ | 591 | $ | 1,745 | $ | 30 | $ | 7,671 |
(a)At December 31, 2020, Southern Power also had two continuing letters of credit facilities for standby letters of credit, of which $16 million was unused. Southern Power's subsidiaries are not parties to its bank credit arrangements or letter of credit facilities.
(b)Includes $1.245 billion and $500 million at Southern Company Gas Capital and Nicor Gas, respectively.
Subject to applicable market conditions, the Registrants, Nicor Gas, and SEGCO expect to renew or replace their bank credit arrangements as needed, prior to expiration. In connection therewith, the Registrants, Nicor Gas, and SEGCO may extend the maturity dates and/or increase or decrease the lending commitments thereunder. A portion of the unused credit with banks is allocated to provide liquidity support to the revenue bonds of the traditional electric operating companies and the commercial paper programs of the Registrants, Nicor Gas, and SEGCO. The amount of variable rate revenue bonds of the traditional electric operating companies outstanding requiring liquidity support at December 31, 2020 was approximately $1.4 billion (comprised of approximately $854 million at Alabama Power, $550 million at Georgia Power, and $34 million at Mississippi Power). In addition, at December 31, 2020, Georgia Power and Mississippi Power had approximately $174 million and $50 million, respectively, of fixed rate revenue bonds outstanding that are required to be remarketed within the next 12 months. See Note 8 to the financial statements under "Bank Credit Arrangements" for additional information.
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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 Outstanding | Weighted Average Interest Rate | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Southern Company | $ | 609 | $ | 2,055 | $ | 2,915 | 0.3 | % | 2.1 | % | 3.1 | % | |||||||||||
| Georgia Power | 60 | 365 | 294 | 0.3 | 2.2 | 3.1 | |||||||||||||||||
| Mississippi Power | 25 | — | — | 0.4 | — | — | |||||||||||||||||
| Southern Power | 175 | 549 | 100 | 0.3 | 2.2 | 3.1 | |||||||||||||||||
| Southern Company Gas: | |||||||||||||||||||||||
| Southern Company Gas Capital | $ | 220 | $ | 372 | $ | 403 | 0.3 | % | 2.1 | % | 3.1 | % | |||||||||||
| Nicor Gas | 104 | 278 | 247 | 0.2 | 1.8 | 3.0 | |||||||||||||||||
| Southern Company Gas Total | $ | 324 | $ | 650 | $ | 650 | 0.2 | % | 2.0 | % | 3.0 | % |
| Short-term Debt During the Period**(*)** | |||||||||||||||||||||||||||||||||||
| Average Amount Outstanding | Weighted Average Interest Rate | Maximum Amount Outstanding | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| (in millions) | (in millions) | ||||||||||||||||||||||||||||||||||
| Southern Company | $ | 1,017 | $ | 1,240 | $ | 3,377 | 1.6 | % | 2.6 | % | 2.6 | % | $ | 2,113 | $ | 2,914 | $ | 5,447 | |||||||||||||||||
| Alabama Power | 20 | 17 | 27 | 1.1 | 2.6 | 2.3 | 155 | 190 | 258 | ||||||||||||||||||||||||||
| Georgia Power | 264 | 371 | 139 | 1.7 | 2.7 | 2.5 | 478 | 935 | 710 | ||||||||||||||||||||||||||
| Mississippi Power | 9 | — | 68 | 1.6 | — | 2.0 | 40 | — | 300 | ||||||||||||||||||||||||||
| Southern Power | 64 | 76 | 188 | 1.5 | 2.7 | 2.5 | 550 | 578 | 385 | ||||||||||||||||||||||||||
| Southern Company Gas: | |||||||||||||||||||||||||||||||||||
| Southern Company Gas Capital | $ | 316 | $ | 302 | $ | 520 | 1.4 | % | 2.6 | % | 2.3 | % | $ | 641 | $ | 490 | $ | 1,361 | |||||||||||||||||
| Nicor Gas | 49 | 91 | 123 | 1.4 | 2.3 | 2.2 | 278 | 278 | 275 | ||||||||||||||||||||||||||
| Southern Company Gas Total | $ | 365 | $ | 393 | $ | 643 | 1.4 | % | 2.5 | % | 2.3 | % |
(*) Average and maximum amounts are based upon daily balances during the 12-month periods ended December 31, 2020, 2019, and 2018.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
Analysis of Cash Flows
Net cash flows provided from (used for) operating, investing, and financing activities in 2020 and 2019 are presented in the following table:
| Net cash provided from (used for): | Southern Company | Alabama Power | Georgia Power | Mississippi Power | Southern Power | Southern Company Gas | ||||||||||||||
| (in millions) | ||||||||||||||||||||
| 2020 | ||||||||||||||||||||
| Operating activities | $ | 6,696 | $ | 1,742 | $ | 2,784 | $ | 298 | $ | 901 | $ | 1,207 | ||||||||
| Investing activities | (7,030) | (2,122) | (3,503) | (323) | 374 | (1,417) | ||||||||||||||
| Financing activities | (576) | 16 | 676 | (222) | (1,372) | 180 | ||||||||||||||
| 2019 | ||||||||||||||||||||
| Operating activities | $ | 5,781 | $ | 1,779 | $ | 2,907 | $ | 339 | $ | 1,385 | $ | 1,067 | ||||||||
| Investing activities | (3,392) | (1,963) | (3,885) | (263) | (167) | (1,386) | ||||||||||||||
| Financing activities | (1,930) | 765 | 918 | (83) | (1,120) | 298 | ||||||||||||||
Fluctuations in cash flows from financing activities vary from year to year based on capital needs and the maturity or redemption of securities.
Southern Company
Net cash provided from operating activities increased $0.9 billion in 2020 as compared to 2019 primarily due to a $1.1 billion voluntary contribution to the qualified pension plan in 2019 and the timing of vendor payments, partially offset by the timing of receivable collections and customer bill credits issued in 2020 by Alabama Power and Georgia Power. See Note 2 to the financial statements under "Alabama Power" and "Georgia Power" and Note 11 to the financial statements for additional information.
The net cash used for investing activities in 2020 and 2019 was primarily related to the Subsidiary Registrants' construction programs, partially offset by proceeds from the sale transactions described in Note 15 to the financial statements, which totaled $1.0 billion and $5.1 billion in 2020 and 2019, respectively.
The net cash used for financing activities in 2020 and 2019 was primarily related to common stock dividend payments and net repayments of short-term bank debt and commercial paper, partially offset by net issuances of long-term debt and issuances of common stock.
Alabama Power
Net cash provided from operating activities decreased $37 million in 2020 as compared to 2019 primarily due to approximately $136 million in customer refunds, payments related to ARO settlements, timing of Rate CNP Compliance cost recovery, and purchases of materials and supplies, partially offset by a $362 million voluntary contribution to the qualified pension plan in 2019. See Note 2 to the financial statements under "Alabama Power – Rate RSE" and " – Rate ECR" and Notes 6 and 11 to the financial statements for additional information.
The net cash used for investing activities in 2020 and 2019 was primarily related to gross property additions.
The net cash provided from financing activities in 2020 and 2019 was primarily related to capital contributions from Southern Company and net long-term debt issuances, partially offset by common stock dividend payments.
Georgia Power
Net cash provided from operating activities decreased $123 million in 2020 as compared to 2019 primarily due to approximately $220 million in customer bill credits issued in 2020 associated with the Georgia Power Tax Reform Settlement Agreement and 2018 and 2019 earnings in excess of the allowed retail ROE range, lower retail revenues, and higher income tax payments, partially offset by a $200 million voluntary contribution to the qualified pension plan in 2019, higher recovery of storm damage costs, and the timing of vendor payments. See Note 2 to the financial statements under "Georgia Power" and Note 11 to the financial statements for additional information.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
The net cash used for investing activities in 2020 and 2019 was primarily related to gross property additions, including a total of $2.7 billion related to the construction of Plant Vogtle Units 3 and 4. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information on construction of Plant Vogtle Units 3 and 4.
The net cash provided from financing activities in 2020 and 2019 was primarily related to capital contributions from Southern Company, borrowings from the FFB for construction of Plant Vogtle Units 3 and 4, and net issuances and reofferings of other debt, partially offset by common stock dividend payments.
Mississippi Power
Net cash provided from operating activities decreased $41 million in 2020 as compared to 2019 primarily due to the closeout of the DOE contract related to the Kemper County energy facility, $13 million of storm damage costs primarily associated with Hurricane Zeta, $11 million primarily related to decreased fuel cost recovery, and higher income tax payments, partially offset by a $54 million voluntary contribution to the qualified pension plan in 2019. See Note 3 to the financial statements under "Mississippi Power" and Note 11 to the financial statements for additional information.
The net cash used for investing activities in 2020 and 2019 was primarily related to gross property additions.
The net cash used for financing activities in 2020 was primarily related to the repayment of senior notes at maturity, a return of capital and common stock dividends paid to Southern Company, redemption of pollution control revenue bonds, and repayment of short-term borrowings, partially offset by debt issuances and capital contributions from Southern Company. The net cash used for financing activities in 2019 was primarily related to a return of capital to Southern Company and the redemption of senior notes, partially offset by capital contributions from Southern Company and pollution control revenue bonds reoffered to the public.
Southern Power
Net cash provided from operating activities decreased $484 million in 2020 as compared to 2019 primarily due to a reduction in the utilization of tax credits in 2020. See FUTURE EARNINGS POTENTIAL – "Income Tax Matters – Tax Credits" herein and Note 10 to the financial statements for additional information.
The net cash provided from investing activities in 2020 was primarily related to proceeds from the disposition of Plant Mankato, partially offset by ongoing construction activities and the acquisition of the Beech Ridge II wind facility. The net cash used for investing activities in 2019 was primarily related to Southern Power's investment in DSGP and ongoing construction activities, largely offset by proceeds from the sales of Plant Nacogdoches and certain wind turbine equipment. See Note 15 to the financial statements under "Southern Power" for additional information.
The net cash used for financing activities in 2020 was primarily related to the repayment of senior notes at maturity, common stock dividend payments, and net repayments of short-term bank debt and commercial paper, partially offset by net contributions from noncontrolling interests. The net cash used for financing activities in 2019 was primarily related to returns of capital and common stock dividends paid to Southern Company, the repayment at maturity of senior notes, and distributions to noncontrolling interests, partially offset by proceeds from net issuances of commercial paper.
Southern Company Gas
Net cash provided from operating activities increased $140 million in 2020 as compared to 2019 primarily due to a $145 million voluntary contribution to the qualified pension plan in 2019, as well as the timing of vendor payments, energy marketing payables, and income tax payments, partially offset by the timing of customer receivable collections and energy marketing receivables. The timing of energy marketing payables and receivables was due to increased volumes of natural gas purchased and sold and higher natural gas prices. See Note 11 to the financial statements for additional information.
The net cash used for investing activities in 2020 was primarily related to construction of transportation and distribution assets recovered through base rates and infrastructure investments recovered through replacement programs at gas distribution operations and capital contributed to equity method investments, partially offset by proceeds from the sales of Jefferson Island and interests in Pivotal LNG and Atlantic Coast Pipeline. The net cash used for investing activities in 2019 was primarily related to gross property additions related to utility capital expenditures and infrastructure investments recovered through replacement programs at gas distribution operations and capital contributed to equity method pipeline investments, partially offset by proceeds from the sale of Triton and capital distributions in excess of earnings from equity method pipeline investments. See Notes 7 and 15 to the financial statements for additional information.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
The net cash provided from financing activities in 2020 was primarily related to proceeds from issuances of senior notes and first mortgage bonds, as well as capital contributions from Southern Company, partially offset by common stock dividend payments and net repayments of short-term borrowings. The net cash provided from financing activities in 2019 was primarily related to capital contributions from Southern Company and net proceeds from the issuance of long-term debt, partially offset by payments of common stock dividends.
Significant Balance Sheet Changes
Southern Company
Significant balance sheet changes in 2020 for Southern Company included:
-
an increase of $4.6 billion in total property, plant, and equipment primarily related to the Subsidiary Registrants' construction programs;
-
an increase of $3.8 billion in long-term debt (including amounts due within one year) related to new issuances;
-
a decrease of $1.4 billion in notes payable related to net repayments of short-term bank debt and commercial paper;
-
increases of $0.9 billion and $0.8 billion in AROs and regulatory assets associated with AROs, respectively, primarily related to cost estimate updates at Alabama Power and Georgia Power for ash pond facilities;
-
a decrease of $0.9 billion in cash and cash equivalents, as discussed further under "Analysis of Cash Flows – Southern Company" herein;
-
a decrease of $0.7 billion in assets held for sale related to the completion of Southern Power's sale of Plant Mankato and Southern Company Gas' sale of its interests in Pivotal LNG and Atlantic Coast Pipeline; and
-
an increase of $0.5 billion in total common stockholders' equity related to net income, partially offset by common stock dividend payments.
See "Financing Activities" herein and Notes 5, 6, 8, and 15 to the financial statements for additional information.
Alabama Power
Significant balance sheet changes in 2020 for Alabama Power included:
-
an increase of $1.3 billion in total property, plant, and equipment primarily related to the acquisition of the Central Alabama Generating Station, construction of distribution and transmission facilities, and the installation of equipment to comply with environmental standards;
-
an increase of $855 million in total common stockholder's equity primarily due to capital contributions from Southern Company;
-
increases of $422 million and $375 million in regulatory assets associated with AROs and ARO deferred liabilities, respectively, primarily related to cost estimate updates for certain ash pond facilities;
-
a decrease of $364 million in cash and cash equivalents primarily due to the acquisition of the Central Alabama Generation Station; and
-
an increase of $348 million in long-term debt (including securities due within one year) primarily due to an increase in outstanding senior notes.
See "Financing Activities – Alabama Power" herein and Notes 5, 6, and 15 to the financial statements for additional information.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
Georgia Power
Significant balance sheet changes in 2020 for Georgia Power included:
-
an increase of $2.2 billion in total property, plant, and equipment primarily related to the construction of generation, transmission, and distribution facilities, including $1.1 billion for Plant Vogtle Units 3 and 4 (net of pre-tax charges totaling $325 million for estimated probable losses);
-
an increase of $1.4 billion in common stockholder's equity primarily due to capital contributions from Southern Company;
-
an increase of $1.2 billion in long-term debt (including securities due within one year) primarily due to a net increase in outstanding senior notes and borrowings from the FFB for construction of Plant Vogtle Units 3 and 4, partially offset by pollution control revenue bond repurchases; and
-
increases of $0.5 billion and $0.3 billion in AROs and regulatory assets associated with AROs, respectively, primarily due to cost estimate updates for ash pond closures.
See "Financing Activities – Georgia Power" herein and Notes 2, 5, 6, and 8 to the financial statements for additional information.
Mississippi Power
Significant balance sheet changes in 2020 for Mississippi Power included:
-
a decrease of $247 million in cash and cash equivalents and a decrease of $170 million in outstanding long-term debt (including amounts due within one year) primarily related to the repayment of senior notes at maturity;
-
an increase of $92 million in total property, plant, and equipment primarily related to the installation of equipment to comply with environmental standards and the construction of transmission and distribution facilities;
-
an increase of $90 million in common stockholder's equity primarily from net income and capital contributions from Southern Company, partially offset by dividends paid and a return of capital to Southern Company;
-
a decrease of $65 million in deferred credits related to income taxes due to amortization and reclassification of certain amounts to other regulatory liabilities, current for the expected flowback of excess deferred income taxes; and
-
a decrease of $61 million in other regulatory liabilities, deferred primarily due to a reduction in the property damage reserve primarily associated with Hurricane Zeta.
See "Financing Activities – Mississippi Power" herein and Notes 2 and 10 to the financial statements for additional information.
Southern Power
Significant balance sheet changes in 2020 for Southern Power included:
-
an increase of $634 million in property, plant, and equipment in service and a decrease of $388 million in CWIP primarily due to the Skookumchuck and Reading wind facilities being placed in service and the acquisition of the Beech Ridge II wind facility;
-
a decrease of $618 million in assets held for sale (of which $17 million related to current assets) due to completion of the sale of Plant Mankato;
-
a decrease of $525 million in securities due within one year primarily related to the maturity of senior notes;
-
a decrease of $374 million in notes payable due to net repayments of short-term bank debt and commercial paper; and
-
a decrease of $289 million in accumulated deferred income tax assets primarily related to the utilization of tax credits in 2020.
See "Financing Activities – Southern Power" herein and Notes 5, 10, and 15 to the financial statements for additional information.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
Southern Company Gas
Significant balance sheet changes in 2020 for Southern Company Gas included:
-
an increase of $1.1 billion in total property, plant, and equipment primarily related to the construction of transportation and distribution assets recovered through base rates and infrastructure investments recovered through replacement programs;
-
an increase of $781 million in long-term debt (including securities due within one year) due to the issuance of senior notes and mortgage bonds;
-
a decrease of $326 million in notes payable due to net repayments of short-term borrowings;
-
an increase of $261 million in common stockholder's equity primarily from net income and capital contributions from Southern Company, partially offset by dividends paid to Southern Company;
-
a decrease of $171 million in assets held for sale due to the completed sale of interests in Pivotal LNG and Atlantic Coast Pipeline; and
-
increases of $88 million and $52 million in energy marketing receivables and payables, respectively, due to increased volumes of natural gas purchased and sold and higher natural gas prices.
See "Financing Activities – Southern Company Gas" herein and Notes 5 and 15 to the financial statements for additional information.
Financing Activities
The following table outlines the Registrants' long-term debt financing activities for the year ended December 31, 2020:
| Company | Senior Note Issuances | Senior Note Maturities, Redemptions, and Repurchases | Revenue Bond Issuances and Reofferings of Purchased Bonds | Revenue Bond Maturities, Redemptions, and Repurchases | Other Long-Term Debt Issuances | Other Long-Term Debt Redemptions and Maturities**(a)** | |||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Southern Company parent | $ | 1,000 | $ | 600 | $ | — | $ | — | $ | 3,000 | $ | 1,000 | |||||||||||||||||||||||
| Alabama Power | 600 | 250 | 87 | 87 | — | — | |||||||||||||||||||||||||||||
| Georgia Power | 1,500 | 950 | 53 | 336 | 848 | 84 | |||||||||||||||||||||||||||||
| Mississippi Power | — | 275 | 34 | 41 | 100 | — | |||||||||||||||||||||||||||||
| Southern Power | — | 825 | — | — | — | — | |||||||||||||||||||||||||||||
| Southern Company Gas | 500 | — | — | — | 325 | — | |||||||||||||||||||||||||||||
| Other | — | — | — | — | — | 16 | |||||||||||||||||||||||||||||
| Elimination(b) | — | — | — | — | — | (6) | |||||||||||||||||||||||||||||
| Southern Company | $ | 3,600 | $ | 2,900 | $ | 174 | $ | 464 | $ | 4,273 | $ | 1,094 |
(a)Includes reductions in finance lease obligations resulting from cash payments under finance leases and, for Georgia Power, principal amortization payments for FFB borrowings.
(b)Represents reductions in affiliate finance lease obligations at Georgia Power, which are eliminated in Southern Company's consolidated financial statements.
Except as otherwise described herein, the Registrants used the proceeds of debt issuances for their redemptions and maturities shown in the table above, to repay short-term indebtedness, and for general corporate purposes, including working capital. The Subsidiary Registrants also used the proceeds for their construction programs.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, the Registrants plan to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.
Southern Company
During 2020, Southern Company issued approximately 3.3 million shares of common stock through employee equity compensation plans and received proceeds of approximately $74 million.
In January 2020, Southern Company issued $1.0 billion aggregate principal amount of Series 2020A 4.95% Junior Subordinated Notes due January 30, 2080.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
In March 2020, Southern Company borrowed $250 million pursuant to a short-term uncommitted bank credit arrangement. In April 2020 and September 2020, Southern Company repaid $50 million and $200 million, respectively.
Also in March 2020, Southern Company entered into a $75 million short-term floating rate bank loan bearing interest based on one-month LIBOR, which it repaid in September 2020.
In April 2020, Southern Company issued $1.0 billion aggregate principal amount of Series 2020A 3.70% Senior Notes due April 30, 2030.
In May 2020, Southern Company redeemed all $600 million aggregate principal amount of its Series 2015A 2.750% Senior Notes due June 15, 2020.
In September 2020, Southern Company issued $1.25 billion aggregate principal amount of Series 2020B 4.00% Fixed-to-Fixed Reset Rate Junior Subordinated Notes due January 15, 2051 and $750 million aggregate principal amount of Series 2020C 4.20% Junior Subordinated Notes due October 15, 2060.
In October 2020, Southern Company redeemed all of its $1.0 billion aggregate principal amount outstanding of Series 2015A 6.25% Junior Subordinated Notes due October 15, 2075.
Subsequent to December 31, 2020, Southern Company borrowed $25 million pursuant to a short-term uncommitted bank credit arrangement, bearing interest at a rate agreed upon by Southern Company and the bank from time to time.
Alabama Power
In March 2020, Alabama Power purchased and held approximately $87 million aggregate principal amount of The Industrial Development Board of the City of Mobile, Alabama Pollution Control Revenue Bonds (Alabama Power Company Plant Barry Project), Series 2007-A, which were remarketed to the public in June 2020.
In August 2020, Alabama Power issued $600 million aggregate principal amount of Series 2020A 1.45% Senior Notes due September 15, 2030.
In October 2020, Alabama Power repaid at maturity $250 million aggregate principal amount of its Series 2010A 3.375% Senior Notes.
Subsequent to December 31, 2020, Alabama Power received a capital contribution totaling $600 million from Southern Company.
Georgia Power
In January 2020, Georgia Power issued $700 million aggregate principal amount of Series 2020A 2.10% Senior Notes due July 30, 2023, $500 million aggregate principal amount of Series 2020B 3.70% Senior Notes due January 30, 2050, and an additional $300 million aggregate principal amount of Series 2019B 2.65% Senior Notes due September 15, 2029.
In February 2020, Georgia Power redeemed all $500 million aggregate principal amount of its Series 2017C 2.00% Senior Notes due September 8, 2020.
Also in February 2020, Georgia Power purchased and held approximately $28 million, $49 million, and $18 million aggregate principal amounts of Development Authority of Monroe County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Scherer Project), Second Series 2006, First Series 2012, and First Series 2013, respectively, which may be remarketed to the public at a later date.
In March 2020, Georgia Power repaid at maturity $450 million aggregate principal amount of its Series 2017A 2.00% Senior Notes.
Also in March 2020, Georgia Power purchased and subsequently remarketed to the public approximately $53 million of pollution control revenue bonds.
Also in March 2020, Georgia Power borrowed $200 million pursuant to a $250 million short-term uncommitted bank credit arrangement. In April 2020, Georgia Power borrowed the remaining $50 million pursuant to this bank credit arrangement. In September 2020, Georgia Power repaid the full $250 million.
Also in March 2020, Georgia Power extended one of its $125 million short-term floating rate bank loans to a long-term term loan, which matures in June 2021.
In June 2020, Georgia Power extended its other $125 million short-term floating rate bank loan to mature in December 2020. In September 2020, Georgia Power repaid this $125 million bank loan.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
In June and December 2020, Georgia Power made additional borrowings under the FFB Credit Facilities in an aggregate principal amount of $519 million and $329 million, respectively, at an interest rate of 1.652% and 1.737%, respectively, through the final maturity date of February 20, 2044. The proceeds were used to reimburse Georgia Power for Eligible Project Costs relating to the construction of Plant Vogtle Units 3 and 4. During 2020, Georgia Power made principal amortization payments of $73 million under the FFB Credit Facilities. See Note 8 to the financial statements under "Long-term Debt – DOE Loan Guarantee Borrowings" for additional information.
In December 2020, Georgia Power purchased and held approximately $89 million aggregate principal amount of Development Authority of Monroe County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Scherer Project), Second Series 2009, $53 million aggregate principal amount of Development Authority of Floyd County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Hammond Project), First Series 2010, and $46 million aggregate principal amounts of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), First Series 1996, which may be remarketed to the public at a later date.
Subsequent to December 31, 2020, Georgia Power received a capital contribution totaling $330 million from Southern Company and called for redemption all $325 million aggregate principal amount of its Series 2016B 2.40% Senior Notes due April 1, 2021.
Mississippi Power
In February 2020, Mississippi Power entered into $60 million and $15 million floating rate bank term loans, which mature in December 2021 and January 2022, respectively, each bearing interest based on one-month LIBOR.
In March 2020, Mississippi Power entered into a $125 million revolving credit arrangement that matures in March 2023 and borrowed $40 million (short term) and $25 million (long term) pursuant to the arrangement, each bearing interest based on one-month LIBOR. In May 2020, Mississippi Power repaid the $40 million short-term portion.
In March 2020, Mississippi Power repaid at maturity the remaining $275 million aggregate principal amount of its Series 2018A Floating Rate Senior Notes.
In April 2020, Mississippi Power purchased and held approximately $11 million, $14 million, and $9 million aggregate principal amount of Mississippi Business Finance Corporation Solid Waste Disposal Facilities Revenue Bonds, Series 1995 (Mississippi Power Company Project), Solid Waste Disposal Facilities Revenue Refunding Bonds, Series 1998 (Mississippi Power Company Project), and Revenue Bonds, Series 1999 (Mississippi Power Company Project), respectively, which were remarketed to the public in May 2020.
Also in April 2020, Mississippi Power redeemed approximately $7 million aggregate principal amount of The Industrial Development Board of the City of Eutaw, Alabama Pollution Control Revenue Refunding Bonds, Series 1992 (Mississippi Power Greene County Plant Project) due December 1, 2020.
Subsequent to December 31, 2020, Mississippi Power received capital contributions totaling $100 million from Southern Company.
Southern Power
In February 2020, Southern Power repaid its $100 million short-term floating rate bank loan entered into in December 2019.
In June 2020, Southern Power repaid at maturity $300 million aggregate principal amount of its Series 2015B 2.375% Senior Notes.
In December 2020, Southern Power repaid at maturity $525 million aggregate principal amount of its Series 2017A Floating Rate Senior Notes.
Subsequent to December 31, 2020, Southern Power issued $400 million aggregate principal amount of Series 2021A 0.90% Senior Notes due January 15, 2026. An amount equal to the net proceeds of the senior notes is being allocated to finance or refinance, in whole or in part, one or more renewable energy projects.
Also subsequent to December 31, 2020, Southern Power made a return of capital to Southern Company totaling $271 million.
Southern Company Gas
In March 2020, Southern Company Gas Capital, as borrower, and Southern Company Gas, as guarantor, entered into a $150 million short-term floating rate bank loan bearing interest based on one-month LIBOR. In December 2020, Southern Company Gas Capital repaid the outstanding balance.
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Southern Company and Subsidiary Companies 2020 Annual Report
Also in March 2020, Southern Company Gas Capital borrowed approximately $95 million pursuant to a short-term uncommitted bank credit arrangement, guaranteed by Southern Company Gas. In August 2020, Southern Company Gas Capital repaid the outstanding balance.
In August 2020, Southern Company Gas Capital, as borrower, and Southern Company Gas, as guarantor, issued $500 million aggregate principal amount of Series 2020A 1.75% Senior Notes due January 15, 2031.
In August 2020 and November 2020, Nicor Gas issued $150 million and $175 million, respectively, aggregate principal amount of first mortgage bonds in a private placement.
Subsequent to December 31, 2020, Atlanta Gas Light repaid at maturity $30 million aggregate principal amount of 9.1% medium-term notes.
Credit Rating Risk
At December 31, 2020, the Registrants did not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.
There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change of certain Registrants to BBB and/or Baa2 or below. These contracts are primarily for physical electricity and natural gas purchases and sales, fuel purchases, fuel transportation and storage, energy price risk management, transmission, interest rate management, and, for Georgia Power, construction of new generation at Plant Vogtle Units 3 and 4.
The maximum potential collateral requirements under these contracts at December 31, 2020 were as follows:
| Credit Ratings | Southern Company**(*)** | Alabama Power | Georgia Power | Mississippi Power | Southern Power**(*)** | Southern Company Gas | ||||||||||||||
| (in millions) | ||||||||||||||||||||
| At BBB and/or Baa2 | $ | 36 | $ | 1 | $ | — | $ | — | $ | 35 | $ | — | ||||||||
| At BBB- and/or Baa3 | 416 | 2 | 61 | 1 | 355 | — | ||||||||||||||
| At BB+ and/or Ba1 or below | 1,929 | 366 | 958 | 313 | 1,201 | 12 |
(*)Southern Power has PPAs that could require collateral, but not accelerated payment, in the event of a downgrade of Southern Power's credit. The PPAs require credit assurances without stating a specific credit rating. The amount of collateral required would depend upon actual losses resulting from a credit downgrade. Southern Power had $105 million of cash collateral posted related to PPA requirements at December 31, 2020.
The amounts in the previous table for the traditional electric operating companies and Southern Power include certain agreements that could require collateral if either Alabama Power or Georgia Power has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, a credit rating downgrade could impact the ability of the Registrants to access capital markets and would be likely to impact the cost at which they do so.
Mississippi Power and its largest retail customer, Chevron, have agreements under which Mississippi Power continues to provide retail service to the Chevron refinery in Pascagoula, Mississippi through 2038. The agreements grant Chevron a security interest in the co-generation assets owned by Mississippi Power located at the refinery that is exercisable upon the occurrence of (i) certain bankruptcy events or (ii) other events of default coupled with specific reductions in steam output at the facility and a downgrade of Mississippi Power's credit rating to below investment grade by two of the three rating agencies.
On August 27, 2020, Moody's upgraded Mississippi Power's senior unsecured long-term debt rating to Baa1 from Baa2 and revised its rating outlook to stable from positive.
On September 25, 2020, Fitch upgraded Mississippi Power's senior unsecured long-term debt rating to A- from BBB+ and revised its rating outlook to stable from positive.
Also on September 25, 2020, Fitch revised the ratings outlook of Southern Company and its subsidiaries (excluding Georgia Power and Mississippi Power) to stable from negative.
Market Price Risk
The Registrants had no material change in market risk exposure for the year ended December 31, 2020 when compared to the year ended December 31, 2019. See Note 14 to the financial statements for an in-depth discussion of the Registrants' derivatives, as well as Note 1 to the financial statements under "Financial Instruments" for additional information.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
Due to cost-based rate regulation and other various cost recovery mechanisms, the traditional electric operating companies and the natural gas distribution utilities that sell natural gas directly to end-use customers continue to have limited exposure to market volatility in interest rates, foreign currency exchange rates, commodity fuel prices, and prices of electricity. The traditional electric operating companies and certain of the natural gas distribution utilities manage fuel-hedging programs implemented per the guidelines of their respective state PSCs or other applicable state regulatory agencies to hedge the impact of market fluctuations in natural gas prices for customers. Mississippi Power also manages wholesale fuel-hedging programs under agreements with its wholesale customers. Because energy from Southern Power's facilities is primarily sold under long-term PPAs with tolling agreements and provisions shifting substantially all of the responsibility for fuel cost to the counterparties, Southern Power's exposure to market volatility in commodity fuel prices and prices of electricity is generally limited. However, Southern Power has been and may continue to be exposed to market volatility in energy-related commodity prices as a result of uncontracted generating capacity. To mitigate residual risks relative to movements in electricity prices, the traditional electric operating companies and Southern Power may enter into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, financial hedge contracts for natural gas purchases; however, a significant portion of contracts are priced at market.
Certain of Southern Company Gas' non-regulated operations routinely utilize various types of derivative instruments to economically hedge certain commodity price and weather risks inherent in the natural gas industry. These instruments include a variety of exchange-traded and OTC energy contracts, such as forward contracts, futures contracts, options contracts, and swap agreements. Southern Company Gas' gas marketing services and wholesale gas services businesses also actively manage storage positions through a variety of hedging transactions for the purpose of managing exposures arising from changing natural gas prices. These hedging instruments are used to substantially protect economic margins (as spreads between wholesale and retail natural gas prices widen between periods) and thereby minimize exposure to declining operating margins. Some of these economic hedge activities may not qualify, or may not be designated, for hedge accounting treatment.
The following table provides information related to variable interest rate exposure on long-term debt (including amounts due within one year) at December 31, 2020 for the applicable Registrants:
| At December 31, 2020 | Southern Company**(*)** | Alabama Power | Georgia Power | Mississippi Power | ||||||||||||||||
| (in millions, except percentages) | ||||||||||||||||||||
| Long-term variable interest rate exposure | $ | 3,428 | $ | 1,079 | $ | 675 | $ | 74 | ||||||||||||
| Weighted average interest rate on long-term variable interest rate exposure | 0.77 | % | 0.76 | % | 0.23 | % | 0.70 | % | ||||||||||||
| Impact on annualized interest expense of 100 basis point change in interest rates | $ | 34 | $ | 11 | $ | 7 | $ | 1 |
(*)Includes $1.5 billion of long-term variable interest rate exposure at the Southern Company parent entity.
The Registrants may enter into interest rate derivatives designated as hedges, which are intended to mitigate interest rate volatility related to forecasted debt financings and existing fixed and floating rate obligations. See Note 14 to the financial statements under "Interest Rate Derivatives" for additional information.
Southern Power had foreign currency denominated debt of €1.1 billion at December 31, 2020. Southern Power has mitigated its exposure to foreign currency exchange rate risk through the use of foreign currency swaps converting all interest and principal payments to fixed-rate U.S. dollars. See Note 14 to the financial statements under "Foreign Currency Derivatives" for additional information.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
Changes in fair value of energy-related derivative contracts for Southern Company and Southern Company Gas for the years ended December 31, 2020 and 2019 are provided in the table below. The fair value of energy-related derivative contracts was not material for the other Registrants. At December 31, 2020 and 2019, substantially all of the traditional electric operating companies' and certain of the natural gas distribution utilities' energy-related derivative contracts were designated as regulatory hedges and were related to the applicable company's fuel-hedging program.
| Southern Company**(a)** | Southern Company Gas**(a)** | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Contracts outstanding at December 31, 2018, assets (liabilities), net | $ | (201) | $ | (167) | ||||||||||||||||
| Contracts realized or settled | 69 | 26 | ||||||||||||||||||
| Current period changes(b) | 105 | 213 | ||||||||||||||||||
| Disposition | 6 | — | ||||||||||||||||||
| Contracts outstanding at December 31, 2019, assets (liabilities), net | $ | (21) | $ | 72 | ||||||||||||||||
| Contracts realized or settled | (14) | (98) | ||||||||||||||||||
| Current period changes(b) | 142 | 127 | ||||||||||||||||||
| Contracts outstanding at December 31, 2020, assets (liabilities), net | $ | 107 | $ | 101 |
(a)Excludes cash collateral held on deposit in broker margin accounts of $28 million, $99 million, and $277 million at December 31, 2020, 2019, and 2018, respectively, and premium and intrinsic value associated with weather derivatives of $6 million, $4 million, and $8 million at December 31, 2020, 2019, and 2018, respectively.
(b)The changes in fair value of energy-related derivative contracts are substantially attributable to both the volume and the price of natural gas. Current period changes also include the changes in fair value of new contracts entered into during the period, if any.
The net hedge volumes of energy-related derivative contracts for natural gas purchased (sold) at December 31, 2020 and 2019 for Southern Company and Southern Company Gas were as follows:
| Southern Company | Southern Company Gas | |||||||||||||||||||
| mmBtu Volume (in millions) | ||||||||||||||||||||
| At December 31, 2020: | ||||||||||||||||||||
| Commodity – Natural gas swaps | 262 | — | ||||||||||||||||||
| Commodity – Natural gas options | 574 | 523 | ||||||||||||||||||
| Total hedge volume | 836 | 523 | ||||||||||||||||||
| At December 31, 2019: | ||||||||||||||||||||
| Commodity – Natural gas swaps | 327 | — | ||||||||||||||||||
| Commodity – Natural gas options | 262 | 218 | ||||||||||||||||||
| Total hedge volume | 589 | 218 |
Southern Company Gas' derivative contracts are comprised of both long and short natural gas positions. A long position is a contract to purchase natural gas, and a short position is a contract to sell natural gas. The volumes presented above for Southern Company Gas represent the net of long natural gas positions of 4.42 billion mmBtu and short natural gas positions of 3.90 billion mmBtu at December 31, 2020 and the net of long natural gas positions of 4.10 billion mmBtu and short natural gas positions of 3.88 billion mmBtu at December 31, 2019.
For the Southern Company system, the weighted average swap contract cost per mmBtu was equal to market prices at December 31, 2020 and was approximately $0.28 per mmBtu above market prices at December 31, 2019. The change in option fair value is primarily attributable to the volatility of the market and the underlying change in the natural gas price. Substantially all of the traditional electric operating companies' natural gas hedge gains and losses are recovered through their respective fuel cost recovery clauses.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
The Registrants use over-the-counter contracts that are not exchange traded but are fair valued using prices which are market observable, and thus fall into Level 2 of the fair value hierarchy. In addition, Southern Company Gas uses exchange-traded market-observable contracts, which are categorized as Level 1, and contracts that include a combination of observable and unobservable components, which are categorized as Level 3. See Note 13 to the financial statements for further discussion of fair value measurements. The maturities of the energy-related derivative contracts for Southern Company and Southern Company Gas at December 31, 2020 were as follows:
| Fair Value Measurements of Contracts at | |||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Total Fair Value | Maturity | ||||||||||||||||||||||
| 2021 | 2022 – 2023 | 2024 – 2025 | |||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Southern Company | |||||||||||||||||||||||
| Level 1(a) | $ | 13 | $ | 10 | $ | (11) | $ | 14 | |||||||||||||||
| Level 2(b) | 66 | 49 | 5 | 12 | |||||||||||||||||||
| Level 3 | 28 | 9 | 8 | 11 | |||||||||||||||||||
| Southern Company total(c) | $ | 107 | $ | 68 | $ | 2 | $ | 37 | |||||||||||||||
| Southern Company Gas | |||||||||||||||||||||||
| Level 1(a) | $ | 13 | $ | 10 | $ | (11) | $ | 14 | |||||||||||||||
| Level 2(b) | 60 | 43 | 5 | 12 | |||||||||||||||||||
| Level 3 | 28 | 9 | 8 | 11 | |||||||||||||||||||
| Southern Company Gas total(c) | $ | 101 | $ | 62 | $ | 2 | $ | 37 |
(a)Valued using NYMEX futures prices.
(b)Level 2 amounts for Southern Company Gas are valued using basis transactions that represent the cost to transport natural gas from a NYMEX delivery point to the contract delivery point. These transactions are based on quotes obtained either through electronic trading platforms or directly from brokers.
(c)Excludes cash collateral of $28 million as well as premium and associated intrinsic value associated with weather derivatives of $6 million at December 31, 2020.
The Registrants are exposed to risk in the event of nonperformance by counterparties to energy-related and interest rate derivative contracts, as applicable. The Registrants only enter into agreements and material transactions with counterparties that have investment grade credit ratings 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.
Southern Company performs periodic reviews of its leveraged lease transactions, both domestic and international, and the creditworthiness of the lessees, including a review of the value of the underlying leased assets and the credit ratings of the lessees. Southern Company's domestic lease transactions generally do not have any credit enhancement mechanisms; however, the lessees in its international lease transactions have pledged various deposits as additional security to secure the obligations. The lessees in Southern Company's international lease transactions are also required to provide additional collateral in the event of a credit downgrade below a certain level. See Notes 1 and 3 to the financial statements under "Leveraged Leases" and "Other Matters – Southern Company," respectively, for additional information, including recent impairment charges related to certain leveraged lease investments.
Southern Company Gas Value at Risk (VaR)
VaR is the maximum potential loss in portfolio value over a specified time period that is not expected to be exceeded within a given degree of probability. Southern Company Gas' VaR may not be comparable to that of other companies due to differences in the factors used to calculate VaR. Southern Company Gas' VaR is determined on a 95% confidence interval and a one-day holding period, which means that 95% of the time, the risk of loss in a day from a portfolio of positions is expected to be less than or equal to the amount of VaR calculated. The open exposure of Southern Company Gas is managed in accordance with established policies that limit market risk and require daily reporting of potential financial exposure to senior management. Because Southern Company Gas generally manages physical gas assets and economically protects its positions by hedging in the
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
futures markets, Southern Company Gas' open exposure is generally mitigated. Southern Company Gas employs daily risk testing, using both VaR and stress testing, to evaluate the risk of its positions.
Southern Company Gas actively monitors open commodity positions and the resulting VaR and maintains a relatively small risk exposure as total buy volume is close to sell volume, with minimal open natural gas price risk. Based on a 95% confidence interval and employing a one-day holding period, SouthStar's portfolio of positions for all periods presented was immaterial.
Southern Company Gas' wholesale gas services segment had the following VaRs at December 31:
| 2020 | 2019 | 2018 | |||||||||
| (in millions) | |||||||||||
| Period end(*) | $ | 1.3 | $ | 2.6 | $ | 6.4 | |||||
| Average | 2.5 | 3.4 | 3.7 | ||||||||
| High(*) | 4.6 | 7.0 | 11.7 | ||||||||
| Low | 1.2 | 2.1 | 1.2 |
(*)The VaR at December 31, 2018 reflects significant natural gas price increases in Sequent's key markets driven by an industry-wide lower-than-normal natural gas storage inventory position and colder-than-normal weather in the middle of fourth quarter 2018. As weather and natural gas prices moderated subsequent to December 31, 2018, VaR declined.
Credit 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 at Atlanta Gas Light for amounts billed for services and other costs to its customers, which consist of the 16 Marketers in Georgia. The credit risk exposure to the Marketers varies seasonally, with the lowest exposure in the non-peak summer months and the highest exposure in the peak winter months. Marketers are responsible for the retail sale of natural gas to end-use customers in Georgia. The 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. For 2020, the four largest Marketers based on customer count, which includes SouthStar, accounted for 21% of Southern Company Gas' adjusted operating margin and 25% of adjusted operating margin for Southern Company Gas' gas distribution operations segment.
Several factors are designed to mitigate Southern 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 on Atlanta Gas Light's credit risk exposure to Marketers.
Atlanta Gas Light also faces potential credit risk in connection with assignments of interstate pipeline transportation and storage capacity to Marketers. Although Atlanta 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 from Atlanta Gas Light.
Wholesale Gas Services
Southern Company Gas has established credit policies to determine and monitor the creditworthiness of counterparties, including requirements to post collateral or other credit security, as well as the quality of pledged collateral. Southern Company Gas also utilizes netting agreements whenever possible to mitigate exposure to counterparty credit risk. When more than one derivative transaction with the same counterparty is outstanding and a legally enforceable netting agreement exists with that counterparty, the "net" mark-to-market exposure represents a reasonable measure of Southern Company Gas' credit risk with that counterparty. Netting agreements also 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.
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COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2020 Annual Report
Southern Company Gas may require counterparties to pledge additional collateral when deemed necessary. Collateral or credit security is most often in the form of cash or letters of credit from an investment-grade financial institution but may also include cash or U.S. government securities held by a trustee. Southern Company Gas conducts credit evaluations and obtains appropriate internal approvals for a counterparty's line of credit before any transaction with the counterparty is executed. In most cases, the counterparty must have an investment grade rating, which includes a minimum long-term debt rating of Baa3 from Moody's and BBB- from S&P. Generally, Southern Company Gas requires credit enhancements by way of a guaranty, cash deposit, or letter of credit for transaction counterparties that do not have investment grade ratings.
Certain of Southern Company Gas' derivative instruments contain credit-risk-related or other contingent features that could increase the payments for collateral it posts in the normal course of business when its financial instruments are in net liability positions. At December 31, 2020, for agreements with such features, Southern Company Gas' derivative instruments with liability fair values were immaterial and Southern Company Gas had no collateral posted with derivatives counterparties to satisfy these arrangements.
Southern Company Gas has a concentration of credit risk as measured by its 30-day receivable exposure plus forward exposure. At December 31, 2020, the top 20 counterparties of Southern Company Gas' wholesale gas services segment represented approximately 58%, or $234 million, of its total counterparty exposure and had a weighted average S&P equivalent credit rating of A-, all of which is consistent with the prior year. The S&P equivalent credit rating is determined by a process of converting the lower of the S&P or Moody's ratings to an internal rating ranging from 9 to 1, with 9 being equivalent to AAA/Aaa by S&P and Moody's, respectively, and 1 being D / Default by S&P and Moody's, respectively. A counterparty that does not have an external rating is assigned an internal rating based on the strength of the financial ratios of that counterparty. To arrive at the weighted average credit rating, each counterparty is assigned an internal ratio, which is multiplied by their credit exposure and summed for all counterparties. The sum is divided by the aggregate total counterparties' exposures, and this numeric value is then converted to a S&P equivalent.
The following table provides credit risk information related to Southern Company Gas' third-party natural gas contracts receivable and payable positions at December 31:
| Gross Receivables | Gross Payables | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (in millions) | (in millions) | ||||||||||||||||||||||
| Netting agreements in place: | |||||||||||||||||||||||
| Counterparty is investment grade | $ | 265 | $ | 238 | $ | 104 | $ | 127 | |||||||||||||||
| Counterparty is non-investment grade | 3 | 1 | 46 | 43 | |||||||||||||||||||
| Counterparty has no external rating | 235 | 175 | 342 | 272 | |||||||||||||||||||
| No netting agreements in place: | |||||||||||||||||||||||
| Counterparty is investment grade | 13 | 14 | 2 | — | |||||||||||||||||||
| Amount recorded in balance sheets | $ | 516 | $ | 428 | $ | 494 | $ | 442 |
Gas Marketing 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 exceed Southern 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.
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