filings.toolsItem 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
| Page | |||||
| Combined Management's Discussion and Analysis of Financial Condition and Results of Operations | |||||
| Overview | 101 | ||||
| Results of Operations | 106 | ||||
| Southern Company | 106 | ||||
| Alabama Power | 115 | ||||
| Georgia Power | 121 | ||||
| Mississippi Power | 127 | ||||
| Southern Power | 132 | ||||
| Southern Company Gas | 136 | ||||
| Future Earnings Potential | 142 | ||||
| Accounting Policies | 147 | ||||
| Financial Condition and Liquidity | 148 |
The following Management's Discussion and Analysis of Financial Condition and Results of Operations is a combined presentation; however, information contained herein relating to any individual Registrant is filed by such Registrant on its own behalf and each Registrant makes no representation as to information related to the other Registrants.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Southern Company is a holding company that owns all of the common stock of three traditional electric operating companies (Alabama Power, Georgia Power, and Mississippi Power), 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. Southern Company Gas' reportable segments are gas distribution operations, gas pipeline investments, and gas marketing services. See Note (L) to the Condensed Financial Statements herein for additional information on segment reporting. Alabama Power, Georgia Power, and Mississippi Power each operate with one reportable business segment, since substantially all of their business is providing electric service to customers. Southern Power also operates its business with one reportable business segment, the sale of electricity in the competitive wholesale market. For additional information on the Registrants' primary business activities, see BUSINESS – "The Southern Company System" in Item 1 of the Form 10-K.
The Registrants continue to focus on several key performance indicators. For the traditional electric operating companies and Southern Company Gas, these indicators include, but are not limited to, customer satisfaction, plant availability, electric and natural gas system reliability, and execution of major construction projects. For Southern Power, these indicators include, but are 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. In addition, Southern Company and the Subsidiary Registrants focus on earnings per share and net income, respectively, as a key performance indicator.
Recent Developments
Alabama Power
On March 24, 2023, Alabama Power filed Rate CNP New Plant with the Alabama PSC to recover costs associated with the acquisition of the Central Alabama Generating Station. The filing reflected an annual increase in retail revenues of $78 million effective with June 2023 billings. Through May 2023, Alabama Power recovered substantially all costs associated with the Central Alabama Generating Station through Rate RSE, offset by revenues from a power sales agreement. On May 24, 2023, the Central Alabama Generating Station was placed into retail service.
On June 14, 2023, the Alabama PSC issued an order approving modifications to Alabama Power's Renewable Generation Certificate. The modifications authorized Alabama Power to procure an additional 2,400 MWs of renewable capacity and energy by June 14, 2029 and to market the related energy and environmental attributes to customers and other third parties. The modifications also increased the size of allowable renewable projects from 80 MWs to 200 MWs and increased the annual approval limit from 160 MWs to 400 MWs.
On July 11, 2023, the Alabama PSC issued an order authorizing Alabama Power to expand the existing authority of its reliability reserve to include certain production-related expenses that are intended to maintain reliability in periods between scheduled generating unit outages.
On August 18, 2023, Alabama Power notified the Alabama PSC of its intent to use a portion of its $166 million reliability reserve balance during 2023. The ultimate outcome of this matter cannot be determined at this time.
On October 3, 2023, the Alabama PSC issued an order modifying its December 2022 order and authorizing Alabama Power to (i) flow back in 2023 approximately $24 million of certain federal excess accumulated deferred income taxes resulting from the Tax Cuts and Jobs Act of 2017 and (ii) make available any remaining balance of excess accumulated deferred income taxes at the end of 2023 for the benefit of customers in 2024 and/or 2025. The ultimate outcome of this matter cannot be determined at this time.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
On November 1, 2023, Alabama Power placed Plant Barry Unit 8 in service. At September 30, 2023, project expenditures associated with Plant Barry Unit 8 totaled approximately $583 million.
See Note (B) to the Condensed Financial Statements under "Alabama Power" herein for additional information.
Georgia Power
Plant Vogtle Units 3 and 4 Construction and Start-Up Status
Georgia Power placed Plant Vogtle Unit 3 in service on July 31, 2023 and continues construction on Plant Vogtle Unit 4 (each with electric generating capacity of approximately 1,100 MWs), in which it holds a 45.7% ownership interest. Georgia Power's share of the total project capital cost forecast to complete Plant Vogtle Units 3 and 4, including contingency, through July 2023 and March 2024, respectively, is $10.8 billion.
Hot functional testing for Unit 4 was completed on May 1, 2023. On July 20, 2023, Southern Nuclear announced that all Unit 4 ITAACs had been submitted to the NRC, and, on July 28, 2023, the NRC published its 103(g) finding that the accepted criteria in the combined license for Unit 4 had been met, which allowed nuclear fuel to be loaded and start-up testing to begin. Fuel load for Unit 4 was completed on August 19, 2023. On October 6, 2023, Georgia Power announced that during the start-up and pre-operational testing for Plant Vogtle Unit 4, Southern Nuclear identified a motor fault in one of four reactor coolant pumps (RCPs) and has started the process to replace this RCP with an on-site spare RCP from inventory. Considering this remediation and the remaining pre-operational testing, Unit 4 is projected to be placed in service during the first quarter 2024. The projected schedule for Unit 4 significantly depends on the pace and success of replacing the RCP, which involves removing and re-installing commodities around the RCP. In addition, any findings related to the root cause of the motor fault on the single Unit 4 RCP could require engineering changes or remediation related to the other seven Unit 3 and Unit 4 RCPs. Any further delays could result in a later in-service date and cost increases.
During the first nine months of 2023, established construction contingency totaling $43 million was assigned to the base capital cost forecast for costs primarily associated with the Unit 3 schedule extension and completion of start-up and pre-operational testing, including continued need of support resources for Unit 3 testing, as well as additional craft and support resources and subcontract work for Unit 4.
Georgia Power and the other Vogtle Owners did not agree on the starting dollar amount for the determination of cost increases subject to the cost-sharing and tender provisions of the Global Amendments (as defined in Note (B) to the Condensed Financial Statements under "Georgia Power – Nuclear Construction – Joint Owner Contracts" herein). The other Vogtle Owners notified Georgia Power that they believed the project capital cost forecast approved by the Vogtle Owners in February 2022 triggered the tender provisions.
In June 2022 and July 2022, OPC and Dalton, respectively, notified Georgia Power of their purported exercises of their tender options. Georgia Power did not accept these purported tender exercises. In June 2022, OPC and MEAG Power each filed a separate lawsuit against Georgia Power in the Superior Court of Fulton County, Georgia seeking a declaratory judgment that the starting dollar amount is $17.1 billion and that the cost-sharing and tender provisions had been triggered. In July 2022, Georgia Power filed its answers in the lawsuits filed by MEAG Power and OPC and included counterclaims seeking a declaratory judgment that the starting dollar amount is $18.38 billion and that costs related to force majeure events are excluded prior to calculating the cost-sharing and tender provisions and when calculating Georgia Power's related financial obligations. In September 2022, Dalton filed complaints in each of these lawsuits.
Also in September 2022, Georgia Power and MEAG Power reached an agreement to resolve their dispute regarding the proper interpretation of the cost-sharing and tender provisions of the Global Amendments. Under the terms of the agreement, among other items, (i) MEAG Power will not exercise its tender option and will retain its full ownership interest in Plant Vogtle Units 3 and 4; (ii) Georgia Power will reimburse a portion of MEAG Power's costs of construction for Plant Vogtle Units 3 and 4 as such costs are incurred and with no further adjustment for force majeure costs, which payments will total approximately $92 million based on the current project capital cost forecast; and (iii) Georgia Power will reimburse 20% of MEAG Power's costs of construction with respect to any
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
amounts over the current project capital cost forecast, with no further adjustment for force majeure costs. In October 2022, MEAG Power and Georgia Power filed a notice of settlement and voluntary dismissal of the pending litigation described above, including Georgia Power's counterclaim, and Dalton dismissed its related complaint.
On October 5, 2023 and October 17, 2023, Georgia Power reached agreements with OPC and Dalton, respectively, to resolve its respective dispute with each of OPC and Dalton regarding the proper interpretation of the cost-sharing and tender provisions of the joint ownership agreements relating to the Global Amendments. Under the terms of the agreements with OPC and Dalton, among other items, (i) each of OPC and Dalton retracted its exercise of the tender option and will retain its full ownership interest in Plant Vogtle Units 3 and 4, (ii) Georgia Power made payments immediately after execution of the agreements of $308 million and $17 million to OPC and Dalton, respectively, representing payment for a portion of each of OPC's and Dalton's costs of construction for Plant Vogtle Units 3 and 4 previously incurred, (iii) Georgia Power will pay a portion of each of OPC's and Dalton's further costs of construction for Plant Vogtle Units 3 and 4 as such costs are incurred and with no further adjustment for force majeure costs, which payments will be in an aggregate amount of approximately $105 million and $6 million for OPC and Dalton, respectively, based on the current project capital cost forecast, and (iv) Georgia Power will pay 66% of each of OPC's and Dalton's costs of construction with respect to any amounts above the current project capital cost forecast, with no further adjustment for force majeure costs. On October 23, 2023, OPC, Dalton, and Georgia Power filed a stipulation of dismissal with prejudice of their litigation described above, including Georgia Power's counterclaims.
Georgia Power recorded pre-tax charges to income through the fourth quarter 2022 of $407 million ($304 million after tax) associated with the cost-sharing provisions of the Global Amendments, including the settlement with MEAG Power. Based on the current project capital cost forecast and the settlements with OPC and Dalton described above, Georgia Power recorded a pre-tax charge to income of approximately $160 million ($120 million after tax) in the third quarter 2023. These charges are included in the total project capital cost forecast and will not be recovered from retail customers.
The ultimate impact of these matters on the construction schedule and project capital cost forecast and related cost recovery for Plant Vogtle Units 3 and 4 cannot be determined at this time. See Note (B) to the Condensed Financial Statements under "Georgia Power – Nuclear Construction" herein for additional information.
Plant Vogtle Unit 3 and Common Facilities Rate Proceeding
In compliance with a Georgia PSC order approved in November 2021, Georgia Power increased annual retail base rates by $318 million effective August 1, 2023 based on the in-service date of July 31, 2023 for Plant Vogtle Unit 3. See Note (B) to the Condensed Financial Statements under "Georgia Power – Nuclear Construction" herein for additional information on Plant Vogtle Units 3 and 4.
Plant Vogtle Units 3 and 4 Prudency Proceeding
On August 30, 2023, as provided for in the December 2017 Georgia PSC approval of the seventeenth VCM report, Georgia Power filed with the Georgia PSC an application to adjust rates to include reasonable and prudent Plant Vogtle Units 3 and 4 costs (Application). The Application provides the necessary support to justify the reasonableness, prudence, and recovery of $8.826 billion in total construction and capital costs, $1.07 billion in associated retail rate base items, and the operating costs related to the full operation and output of Plant Vogtle Units 3 and 4.
Also on August 30, 2023, the staff of the Georgia PSC filed a stipulated agreement (Prudency Stipulation) among Georgia Power, the staff of the Georgia PSC, and certain intervenors. If the Prudency Stipulation is approved, Georgia Power will recover $7.562 billion in total construction and capital costs and associated retail rate base items of $1.02 billion, which includes AFUDC financing costs above $4.418 billion (the Georgia PSC-certified amount) up to $7.562 billion.
The Prudency Stipulation also provides for the recovery of projected operations and maintenance expenses, depreciation expense, nuclear decommissioning accruals, and property taxes, net of projected production tax credits.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
After considering construction and capital costs already in retail base rates of $2.1 billion and $362 million of associated retail rate base items (approved by the Georgia PSC in November 2021), and upon achieving commercial operation of Unit 4, Georgia Power will include in retail rate base the remaining $5.462 billion of construction and capital costs as well as $656 million of associated retail rate base items.
If the Prudency Stipulation is approved by the Georgia PSC, annual retail base revenues will increase approximately $729 million and the average retail base rates will be adjusted by approximately 5% effective the first day of the month after Unit 4 achieves commercial operation.
Georgia Power expects the Georgia PSC to render a final decision on these matters on December 19, 2023. The ultimate outcome of these matters cannot be determined at this time. See Note (B) to the Condensed Financial Statements under "Georgia Power – Plant Vogtle Units 3 and 4 Prudency Proceeding" herein for additional information.
Rate Plans
In accordance with the terms of the 2022 ARP, on October 2, 2023, Georgia Power filed tariff adjustments to become effective January 1, 2024 that would result in a net increase in rates of $191 million pending approval by the Georgia PSC. The ultimate outcome of this matter cannot be determined at this time. See Note (B) to the Condensed Financial Statements under "Georgia Power – Rate Plans" herein for additional information.
Fuel Cost Recovery
On May 16, 2023, the Georgia PSC approved a stipulation agreement between Georgia Power and the staff of the Georgia PSC to increase annual fuel billings by 54%, or approximately $1.1 billion, effective June 1, 2023. The increase reflects a three-year recovery period for $2.2 billion of Georgia Power's under recovered fuel balance at May 31, 2023. Changes in fuel rates have no significant effect on Southern Company's or Georgia Power's net income but do impact the related operating cash flows. See Note (B) to the Condensed Financial Statements under "Georgia Power – Fuel Cost Recovery" herein for additional information.
Integrated Resource Plan
On October 27, 2023, Georgia Power filed an updated IRP (2023 IRP Update) with the Georgia PSC, which sets forth a plan to support the recent increase in the state of Georgia's projected energy needs since the 2022 IRP. The schedule for the Georgia PSC to consider the 2023 IRP Update has not been determined. Georgia Power has requested that the Georgia PSC evaluate the 2023 IRP Update by the end of April 2024. The ultimate outcome of this matter cannot be determined at this time. See Note (B) to the Condensed Financial Statements under "Georgia Power – Integrated Resource Plans" herein for additional information.
Mississippi Power
On October 27, 2023, the FERC approved a settlement agreement filed by Mississippi Power and Cooperative Energy on July 31, 2023 related to Mississippi Power's July 2022 request for a $23 million increase in annual wholesale base revenues under the MRA tariff. The settlement agreement provides for a $16 million increase in annual wholesale base revenues, effective September 14, 2022, and a refund to customers of approximately $6 million primarily related to the difference between the approved rates and interim rates.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Southern Power
On September 20, 2023, Southern Power acquired 100% of the membership interests in the 200-MW Millers Branch solar project located in Haskell County, Texas from EDF Renewables Development, Inc. and is continuing development and construction. The facility's output is contracted under a 20-year PPA and commercial operation is expected to occur in the fourth quarter 2025. The project includes an option to expand capacity up to an additional 300 MWs.
On September 22, 2023, Southern Power acquired 100% of the membership interests in the 150-MW South Cheyenne solar project located in Laramie County, Wyoming from Hanwha Q Cells USA Corp. and is continuing construction. The facility's output is contracted under a 20-year PPA and commercial operation is expected to occur in the first quarter 2024.
The ultimate outcome of these matters cannot be determined at this time. See Note (K) to the Condensed Financial Statements under "Southern Power" herein for additional information.
At September 30, 2023, Southern Power's average investment coverage ratio for its generating assets, including those owned with various partners, based on the ratio of investment under contract to total investment using the respective facilities' net book value (or expected in-service value for facilities under construction) as the investment amount was 97% through 2027 and 91% through 2032, with an average remaining contract duration of approximately 13 years.
Southern Company Gas
On July 14, 2023, Atlanta Gas Light filed its annual GRAM update with the Georgia PSC. The filing requests an annual base rate increase of $53 million based on the projected 12-month period beginning January 1, 2024. Resolution of the GRAM filing is expected by December 31, 2023, with new rates effective January 1, 2024.
On August 28, 2023, the Virginia Commission approved a stipulation agreement related to Virginia Natural Gas' August 2022 general base rate case filing. The approved agreement provides for a $48 million increase in annual base rate revenues, including the recovery of investments under the SAVE program, an ROE of 9.70%, and an equity ratio of 49.06%. Interim rates became effective January 1, 2023, subject to refund, based on Virginia Natural Gas' original requested increase of approximately $69 million. Refunds to customers related to the difference between the approved rates effective September 1, 2023 and the interim rates will be completed later in the fourth quarter 2023.
On June 15, 2023, the Illinois Commission concluded its review of the Qualifying Infrastructure Plant (QIP) capital investments by Nicor Gas for calendar year 2019 under the QIP Rider, also referred to as Investing in Illinois, program. The Illinois Commission disallowed $32 million of the $415 million of capital investments commissioned in 2019, together with the related return on investment. Nicor Gas recorded a pre-tax charge to income in the second quarter 2023 of $38 million ($28 million after tax) associated with the disallowance of capital investments. The disallowance is reflected on the statement of income as an $8 million reduction to revenues and a $30 million increase in operating expenses. On August 3, 2023, the Illinois Commission denied a rehearing request filed by Nicor Gas. On August 24, 2023, Nicor Gas filed a notice of appeal with the Illinois Appellate Court. Nicor Gas defends these investments in infrastructure as prudently incurred. The Illinois Commission has not yet conducted its review for calendar years 2020 through 2022 or the nine months ended September 30, 2023. Any further disallowance by the Illinois Commission could be material.
The ultimate outcome of these matters cannot be determined at this time. See Note (B) to the Condensed Financial Statements under "Southern Company Gas" herein for additional information.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
Southern Company
Net Income
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(50) | (3.4) | $(490) | (13.6) |
Consolidated net income attributable to Southern Company in the third quarter 2023 was $1.4 billion ($1.30 per share) compared to $1.5 billion ($1.36 per share) for the corresponding period in 2022. The decrease was primarily due to an increase of $172 million in after-tax charges related to the construction of Plant Vogtle Units 3 and 4, higher depreciation and amortization, and higher interest expense, partially offset by an increase in retail electric revenues associated with warmer weather and rates and pricing, lower non-fuel operations and maintenance costs, a decrease in income tax expense, and an increase in other revenues.
Consolidated net income attributable to Southern Company for year-to-date 2023 was $3.1 billion ($2.86 per share) compared to $3.6 billion ($3.38 per share) for the corresponding period in 2022. The decrease was primarily due to an increase of $133 million in after-tax charges related to the construction of Plant Vogtle Units 3 and 4, higher depreciation and amortization, higher interest expense, and a decrease in retail electric revenues associated with milder weather in the first and second quarters of 2023 compared to the corresponding periods in 2022, partially offset by lower non-fuel operations and maintenance costs, an increase in other revenues, an increase in natural gas revenues from rate increases and continued infrastructure replacement, and a decrease in income tax expense.
See Note 2 to the financial statements in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein under "Georgia Power" for additional information.
Retail Electric Revenues
In the third quarter 2023, retail electric revenues were $5.1 billion compared to $6.0 billion for the corresponding period in 2022. For year-to-date 2023, retail electric revenues were $12.6 billion compared to $14.4 billion for the corresponding period in 2022. Details of the changes in retail electric revenues were as follows:
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | ||||||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | ||||||||||||||||||||
| Rates and pricing | $ | 76 | 1.3 | % | $ | 63 | 0.4 | % | |||||||||||||||
| Sales decline | (28) | (0.5) | (48) | (0.3) | |||||||||||||||||||
| Weather | 132 | 2.2 | (194) | (1.4) | |||||||||||||||||||
| Fuel and other cost recovery | (1,002) | (16.8) | (1,587) | (11.0) | |||||||||||||||||||
| Retail electric revenues | $ | (822) | (13.8) | % | $ | (1,766) | (12.3) | % |
Revenues associated with changes in rates and pricing increased in the third quarter and year-to-date 2023 when compared to the corresponding periods in 2022 primarily due to base tariff increases in accordance with Georgia Power's 2022 ARP and an increase in Rate CNP Compliance revenues at Alabama Power, partially offset by lower contributions from commercial and industrial customers with variable demand-driven pricing and a decrease in the revenues recognized under the NCCR tariff, both at Georgia Power. In addition, in the third quarter and year-to-date 2023, revenues associated with Rate CNP Depreciation increased $94 million and $234 million, respectively, and were fully offset by customer bill credits related to the flowback of excess accumulated deferred income taxes at Alabama Power. See Note 2 to the financial statements under "Alabama Power" and "Georgia Power" in Item 8 of the Form 10-K for additional information.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Revenues attributable to changes in sales decreased in the third quarter and year-to-date 2023 when compared to the corresponding periods in 2022. Weather-adjusted residential KWH sales decreased 1.8% and 0.4% in the third quarter and year-to-date 2023, respectively, when compared to the corresponding periods in 2022 primarily due to decreased customer usage, partially offset by customer growth. Weather-adjusted commercial KWH sales increased 1.3% in both the third quarter and year-to-date 2023 when compared to the corresponding periods in 2022 primarily due to increased customer usage and customer growth. Industrial KWH sales decreased 2.3% and 2.1% in the third quarter and year-to-date 2023, respectively, when compared to the corresponding periods in 2022 primarily due to a decrease in the chemicals and forest products sectors. Also contributing to the year-to-date 2023 industrial KWH sales decrease was a decrease in the textiles sector.
Fuel and other cost recovery revenues decreased $1.0 billion and $1.6 billion in the third quarter and year-to-date 2023, respectively, compared to the corresponding periods in 2022 primarily due to lower fuel and purchased power costs. 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 in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein for additional information.
Wholesale Electric Revenues
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(470) | (39.3) | $(868) | (31.0) |
In the third quarter 2023, wholesale electric revenues were $0.7 billion compared to $1.2 billion for the corresponding period in 2022. The decrease was primarily due to a decrease of $452 million in energy revenues as a result of fuel and purchased power price decreases when compared to the corresponding period in 2022 and a net decrease in the volume of KWHs sold primarily associated with natural gas PPAs at Southern Power. In addition, a decrease in capacity revenues of $18 million primarily resulted from power sales agreements that ended in May 2023 at Alabama Power, partially offset by an increase related to new capacity contracts at Georgia Power.
For year-to-date 2023, wholesale electric revenues were $1.9 billion compared to $2.8 billion for the corresponding period in 2022. The decrease was primarily due to a decrease of $892 million in energy revenues as a result of fuel and purchased power price decreases when compared to the corresponding period in 2022 and a net decrease in the volume of KWHs sold primarily associated with natural gas PPAs at Southern Power. The decrease in energy revenues was partially offset by an increase in capacity revenues of $24 million primarily resulting from a net increase in capacity sales from natural gas PPAs at Southern Power and an increase related to new capacity contracts at Georgia Power.
Wholesale electric revenues consist of revenues from PPAs and short-term opportunity sales. Wholesale electric revenues from PPAs (other than solar and wind PPAs) have both capacity and energy components. Capacity revenues generally represent the greatest contribution to net income and are designed to provide recovery of fixed costs plus a return on investment. Energy revenues will vary depending on fuel prices, the market prices of wholesale energy compared to the Southern Company system's generation, demand for energy within the Southern Company system's electric service territory, and the availability of the Southern Company system's generation. Increases and decreases in energy revenues that are driven by fuel prices are 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.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Wholesale electric revenues at Mississippi Power include FERC-regulated municipal and rural association sales under cost-based tariffs as well as market-based sales. Short-term opportunity sales are made at market-based rates that generally provide a margin above the Southern Company system's variable cost to produce the energy.
Other Electric Revenues
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $18 | 9.7 | $48 | 8.7 |
In the third quarter 2023, other electric revenues were $203 million compared to $185 million for the corresponding period in 2022. The increase was primarily due to increases of $10 million resulting from receipts of liquidated damages associated with generation facility production guarantees and an arbitration interim award at Southern Power, $10 million in retail solar program fees at Georgia Power, and $9 million in transmission revenues primarily associated with open access transmission tariff sales, partially offset by a decrease of $11 million in cogeneration steam revenue primarily associated with lower natural gas prices at Alabama Power.
For year-to-date 2023, other electric revenues were $602 million compared to $554 million for the corresponding period in 2022. The increase was primarily due to increases of $19 million resulting from receipts of liquidated damages associated with generation facility production guarantees and an arbitration interim award at Southern Power, $18 million in transmission revenues primarily associated with open access transmission tariff sales, $18 million in realized gains associated with price stability products for retail customers on variable demand-driven pricing tariffs at Georgia Power, and $18 million in outdoor lighting sales at Georgia Power, partially offset by a decrease of $23 million in cogeneration steam revenue primarily associated with lower natural gas prices at Alabama Power.
See Note (C) to the Condensed Financial Statements under "General Litigation Matters – Southern Power" herein for additional information.
Natural Gas Revenues
In the third quarter 2023, natural gas revenues were $0.7 billion compared to $0.9 billion for the corresponding period in 2022. For year-to-date 2023, natural gas revenues were $3.4 billion compared to $4.0 billion for the corresponding period in 2022. Details of the changes in natural gas revenues were as follows:
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | ||||||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | ||||||||||||||||||||
| Infrastructure replacement programs and rate changes | $ | 9 | 1.1 | % | $ | 97 | 2.4 | % | |||||||||||||||
| Gas costs and other cost recovery | (181) | (21.1) | (645) | (16.1) | |||||||||||||||||||
| Gas marketing services | (22) | (2.6) | (44) | (1.1) | |||||||||||||||||||
| Other | 26 | 3.0 | 11 | 0.3 | |||||||||||||||||||
| Natural gas revenues | $ | (168) | (19.6) | % | $ | (581) | (14.5) | % |
Revenues from infrastructure replacement programs and rate changes at the natural gas distribution utilities increased in the third quarter and year-to-date 2023 compared to the corresponding periods in 2022 primarily due to rate increases at the natural gas distribution utilities and continued investment in infrastructure replacement. The year-to-date 2023 increase was partially offset by a regulatory disallowance at Nicor Gas. See Note 2 to the financial statements under "Southern Company Gas – Rate Proceedings" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects" herein for additional information.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Revenues from gas costs and other cost recovery decreased in the third quarter and year-to-date 2023 compared to the corresponding periods in 2022 primarily due to lower natural gas cost recovery associated with lower natural gas prices, the timing of natural gas purchases, and the recovery of those costs from customers. Natural gas distribution rates include provisions to adjust billings for fluctuations in natural gas costs. Therefore, gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas and do not affect net income from the natural gas distribution utilities.
Revenues from gas marketing services decreased in the third quarter and year-to-date 2023 compared to the corresponding periods in 2022 primarily due to lower natural gas prices and lower variable price spreads.
Other Revenues
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $44 | 24.7 | $143 | 27.6 |
In the third quarter 2023, other revenues were $222 million compared to $178 million for the corresponding period in 2022. For year-to-date 2023, other revenues were $662 million compared to $519 million for the corresponding period in 2022. The increases in the third quarter and year-to-date 2023 were primarily due to increases of $9 million and $41 million, respectively, in power delivery construction and maintenance projects at Georgia Power, $12 million and $40 million, respectively, related to distributed infrastructure projects at PowerSecure, $9 million and $26 million, respectively, primarily related to sales associated with commercial customers at Southern Linc, $4 million and $20 million, respectively, in unregulated sales of products and services at Alabama Power, and $11 million and $16 million, respectively, associated with energy conservation projects at Georgia Power.
Fuel and Purchased Power Expenses
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | ||||||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | ||||||||||||||||||||
| Fuel | $ | (1,056) | (43.6) | $ | (1,873) | (35.7) | |||||||||||||||||
| Purchased power | (438) | (67.9) | (605) | (47.1) | |||||||||||||||||||
| Total fuel and purchased power expenses | $ | (1,494) | $ | (2,478) |
In the third quarter 2023, total fuel and purchased power expenses were $1.6 billion compared to $3.1 billion for the corresponding period in 2022. The decrease was due to a $1.2 billion decrease in the average cost of fuel and purchased power and a $262 million net decrease in the volume of KWHs generated and purchased.
For year-to-date 2023, total fuel and purchased power expenses were $4.1 billion compared to $6.5 billion for the corresponding period in 2022. The decrease was due to a $2.1 billion decrease in the average cost of fuel and purchased power and a $349 million net decrease in the volume of KWHs generated and purchased.
Fuel and purchased power energy transactions at the traditional electric operating companies are generally offset by fuel revenues and do not have a significant impact on net income. See Note 2 to the financial statements in Item 8 of the Form 10-K 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.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Details of the Southern Company system's generation and purchased power were as follows:
| Third Quarter 2023 | Third Quarter 2022 | Year-To-Date 2023 | Year-To-Date 2022 | |||||||||||
| Total generation (in billions of KWHs)(a)(b) | 53 | 50 | 141 | 141 | ||||||||||
| Total purchased power (in billions of KWHs) | 5 | 9 | 14 | 20 | ||||||||||
| Sources of generation (percent)(a) — | ||||||||||||||
| Gas | 54 | 54 | 54 | 50 | ||||||||||
| Coal | 21 | 21 | 18 | 22 | ||||||||||
| Nuclear(b) | 16 | 16 | 17 | 16 | ||||||||||
| Hydro | 2 | 2 | 3 | 4 | ||||||||||
| Wind, Solar, and Other | 7 | 7 | 8 | 8 | ||||||||||
| Cost of fuel, generated (in cents per net KWH)— | ||||||||||||||
| Gas(a) | 2.80 | 6.75 | 2.78 | 5.42 | ||||||||||
| Coal | 4.52 | 4.12 | 4.40 | 3.58 | ||||||||||
| Nuclear(b) | 0.79 | 0.71 | 0.74 | 0.72 | ||||||||||
| Average cost of fuel, generated (in cents per net KWH)(a)(b) | 2.84 | 5.05 | 2.71 | 4.07 | ||||||||||
| Average cost of purchased power (in cents per net KWH)(c) | 4.80 | 8.94 | 5.08 | 7.84 |
(a)Excludes Central Alabama Generating Station KWHs and associated cost of fuel through July 12, 2022 as its fuel was previously provided by the purchaser under a power sales agreement. See Note 15 to the financial statements under "Alabama Power" in Item 8 of the Form 10-K for additional information.
(b)Excludes KWHs generated from test period energy at Plant Vogtle Unit 3 prior to its in-service date. The related fuel costs are charged to CWIP in accordance with FERC guidance. See Note (B) to the Condensed Financial Statements under "Georgia Power – Nuclear Construction" herein for additional information on Plant Vogtle Units 3 and 4.
(c)Average cost of purchased power includes fuel purchased by the Southern Company system for tolling agreements where power is generated by the provider.
Fuel
In the third quarter 2023, fuel expense was $1.4 billion compared to $2.4 billion for the corresponding period in 2022. The decrease was primarily due to a 58.5% decrease in the average cost of natural gas per KWH generated, partially offset by a 10.0% increase in the volume of KWHs generated by nuclear, a 9.7% increase in the average cost of coal per KWH generated, a 6.4% increase in the volume of KWHs generated by coal, and a 6.0% increase in the volume of KWHs generated by natural gas.
For year-to-date 2023, fuel expense was $3.4 billion compared to $5.2 billion for the corresponding period in 2022. The decrease was primarily due to a 48.7% decrease in the average cost of natural gas per KWH generated and a 20.4% decrease in the volume of KWHs generated by coal, partially offset by a 22.9% increase in the average cost of coal per KWH generated, an 11.0% decrease in the volume of KWHs generated by hydro, and a 9.0% increase in the volume of KWHs generated by natural gas.
Purchased Power
In the third quarter 2023, purchased power expense was $207 million compared to $645 million for the corresponding period in 2022. For year-to-date 2023, purchased power expense was $0.7 billion compared to $1.3 billion for the corresponding period in 2022. The decreases for the third quarter and year-to-date 2023 were primarily due to decreases of 46.3% and 35.2%, respectively, in the average cost per KWH purchased primarily due to a decrease in natural gas prices and decreases of 48.1% and 29.0%, respectively, in the volume of KWHs purchased.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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.
Cost of Natural Gas
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(192) | (65.3) | $(641) | (34.8) |
Excluding Atlanta Gas Light, which does not sell natural gas to end-use customers, natural gas distribution rates include provisions to adjust billings for fluctuations in natural gas costs. Therefore, gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas and do not affect net income from the natural gas distribution utilities. Cost of natural gas at the natural gas distribution utilities represented 76% and 84% of the total cost of natural gas in the third quarter and year-to-date 2023, respectively.
In the third quarter 2023, cost of natural gas was $102 million compared to $294 million for the corresponding period in 2022. For year-to-date 2023, cost of natural gas was $1.2 billion compared to $1.8 billion for the corresponding period in 2022. The decreases reflect lower gas cost recovery as a result of decreases of 69% and 60% in natural gas prices in the third quarter and year-to-date 2023, respectively, compared to the corresponding periods in 2022.
Cost of Other Sales
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $34 | 37.0 | $106 | 38.5 |
In the third quarter 2023, cost of other sales was $126 million compared to $92 million for the corresponding period in 2022. The increase was primarily due to increases of $12 million from unregulated power delivery construction and maintenance projects at Georgia Power, $7 million at Southern Linc primarily related to sales associated with commercial customers, $6 million related to distributed infrastructure projects at PowerSecure, and $5 million related to energy service contracts at Southern Company Gas.
For year-to-date 2023, cost of other sales was $381 million compared to $275 million for the corresponding period in 2022. The increase was primarily due to increases of $35 million from unregulated power delivery construction and maintenance projects at Georgia Power, $23 million at Southern Linc primarily related to sales associated with commercial customers, $21 million related to distributed infrastructure projects at PowerSecure, $20 million related to energy service contracts at Southern Company Gas, and $10 million in expenses related to unregulated products and services at Alabama Power.
Other Operations and Maintenance Expenses
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(103) | (6.7) | $(216) | (4.7) |
In the third quarter 2023, other operations and maintenance expenses were $1.4 billion compared to $1.5 billion for the corresponding period in 2022. The decrease was primarily due to decreases of $88 million in transmission and distribution expenses primarily related to line maintenance, $45 million in storm damage recovery as authorized in Georgia Power's 2022 ARP, $22 million in technology infrastructure and application production costs, and $14 million in generation non-outage maintenance expenses and planned outages, partially offset by a $23 million
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
increase in generation environmental projects primarily at Georgia Power and a $14 million gain recorded in the third quarter 2022 as a result of the early termination of the transition services agreement related to the 2019 sale of Gulf Power.
For year-to-date 2023, other operations and maintenance expenses were $4.4 billion compared to $4.6 billion for the corresponding period in 2022. The decrease was primarily due to decreases of $147 million in transmission and distribution expenses primarily related to line maintenance, $136 million in storm damage recovery as authorized in Georgia Power's 2022 ARP, $91 million in generation non-outage maintenance expenses and planned outages, and $32 million in expenses passed through to customers primarily related to bad debt and energy efficiency programs at Southern Company Gas, partially offset by a $47 million increase in technology infrastructure and application production costs, a $43 million increase in generation environmental projects primarily at Georgia Power, $30 million related to a regulatory disallowance at Nicor Gas, a $25 million decrease in nuclear property insurance refunds at Georgia Power and Alabama Power, a $16 million increase in employee compensation and benefits, and a $14 million gain recorded in the third quarter 2022 as a result of the early termination of the transition services agreement related to the 2019 sale of Gulf Power.
See Note (B) to the Condensed Financial Statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects" herein for additional information on the regulatory disallowance at Nicor Gas and Note 2 to the financial statements under "Georgia Power – Storm Damage Recovery" in Item 8 of the Form 10-K for additional information.
Depreciation and Amortization
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $221 | 24.0 | $637 | 23.4 |
In the third quarter 2023, depreciation and amortization was $1.1 billion compared to $0.9 billion for the corresponding period in 2022. For year-to-date 2023, depreciation and amortization was $3.4 billion compared to $2.7 billion for the corresponding period in 2022. The increases in the third quarter and year-to-date 2023 were primarily due to increases of $181 million and $544 million, respectively, resulting from higher depreciation rates at Alabama Power and Georgia Power and increases of $28 million and $74 million, respectively, from additional plant in service. See Notes 2 and 5 to the financial statements under "Alabama Power" and "Depreciation and Amortization," respectively, in Item 8 of the Form 10-K for additional information.
Taxes Other Than Income Taxes
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(11) | (3.1) | $3 | 0.3 |
In the third quarter 2023, taxes other than income taxes were $341 million compared to $352 million for the corresponding period in 2022. The decrease was primarily due to decreases of $15 million in municipal franchise fees resulting from lower retail revenues at Georgia Power, partially offset by an increase of $4 million in property taxes primarily at Georgia Power resulting from an increase in the assessed value of property.
For year-to-date 2023, taxes other than income taxes were $1.08 billion compared to $1.07 billion for the corresponding period in 2022. The increase was primarily due to increases of $26 million in property taxes primarily at Georgia Power resulting from an increase in the assessed value of property, $18 million in utility license taxes at Alabama Power, and $8 million in payroll taxes primarily at Southern Company Gas, largely offset by decreases of $33 million in municipal franchise fees resulting from lower retail revenues at Georgia Power and $15 million in revenue tax expenses at Southern Company Gas.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Estimated Loss on Plant Vogtle Units 3 and 4
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $230 | N/M | $178 | N/M |
Georgia Power recorded pre-tax charges (credits) to income for the estimated probable loss on Plant Vogtle Units 3 and 4 totaling $160 million and $(70) million in the third quarter 2023 and 2022, respectively, and $160 million and $(18) million for year-to-date 2023 and 2022, respectively. The charges (credits) reflected revisions to the total project capital cost forecast to complete construction and start-up of Plant Vogtle Units 3 and 4. See Note (B) to the Condensed Financial Statements herein and Note 2 to the financial statements in Item 8 of the Form 10-K under "Georgia Power – Nuclear Construction" for additional information.
Allowance for Equity Funds Used During Construction
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $7 | 11.9 | $37 | 22.7 |
In the third quarter 2023, allowance for equity funds used during construction was $66 million compared to $59 million for the corresponding period in 2022. For year-to-date 2023, allowance for equity funds used during construction was $200 million compared to $163 million for the corresponding period in 2022. The increases were primarily associated with an increase in capital expenditures related to Plant Barry Unit 8 construction, as well as an increase in capital expenditures related to hydro production, both at Alabama Power. Also contributing to the increase for year-to-date 2023 was an increase in capital expenditures subject to AFUDC at Georgia Power. See Note 2 to the financial statements in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein under "Alabama Power – Certificates of Convenience and Necessity" for additional information.
Interest Expense, Net of Amounts Capitalized
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $109 | 21.3 | $351 | 24.0 |
In the third quarter 2023, interest expense, net of amounts capitalized was $620 million compared to $511 million for the corresponding period in 2022. For year-to-date 2023, interest expense, net of amounts capitalized was $1.8 billion compared to $1.5 billion for the corresponding period in 2022. The increases in the third quarter and year-to-date 2023 primarily reflect approximately $63 million and $222 million, respectively, related to higher interest rates and $48 million and $134 million, respectively, related to higher average outstanding borrowings. See FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" and "Financing Activities" herein for additional information on borrowings.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Other Income (Expense), Net
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $9 | 6.8 | $14 | 3.4 |
For year-to-date 2023, other income (expense), net was $428 million compared to $414 million for the corresponding period in 2022. The increase was primarily due to a $29 million increase in interest income, a $13 million decrease in non-operating benefit-related expenses at Alabama Power, an $8 million gain on investments at Southern Holdings, and a $6 million decrease in non-operating marketing expenses at Georgia Power, partially offset by decreases of $30 million in non-service cost-related retirement benefits income and $13 million in customer charges related to contributions in aid of construction at Georgia Power. See Note (H) to the Condensed Financial Statements herein for additional information.
Income Taxes
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(117) | (28.3) | $(399) | (44.8) |
In the third quarter 2023, income taxes were $297 million compared to $414 million for the corresponding period in 2022. For year-to-date 2023, income taxes were $492 million compared to $891 million for the corresponding period in 2022. The decreases were primarily due to lower pre-tax earnings, an increase in the flowback of certain excess deferred income taxes at Alabama Power, and a decrease in a valuation allowance on certain state tax credit carryforwards at Georgia Power in 2023, partially offset by a decrease in the flowback of certain excess deferred income taxes at Georgia Power that ended in 2022. Also contributing to the year-to-date 2023 decrease was an adjustment in the second quarter 2022 related to a prior year state tax credit carryforward at Georgia Power. See Note (G) to the Condensed Financial Statements herein for additional information.
Net Income (Loss) Attributable to Noncontrolling Interests
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(2) | (16.7) | $(13) | (23.6) |
Substantially all noncontrolling interests relate to renewable projects at Southern Power. In the third quarter 2023, net income attributable to noncontrolling interests was $10 million compared to $12 million for the corresponding period in 2022. The decrease was primarily due to $7 million in higher HLBV loss allocations to Southern Power's wind tax equity partners, largely offset by an allocation of $6 million to Southern Power's equity partners related to an arbitration interim award.
For year-to-date 2023, net loss attributable to noncontrolling interests was $68 million compared to $55 million for the corresponding period in 2022. The increase was primarily due to $16 million in higher HLBV loss allocations to Southern Power's wind tax equity partners and $12 million in lower income allocations to Southern Power's equity partners, partially offset by $15 million in lower loss allocations to Southern Power's battery energy storage partners.
See Note (C) to the Condensed Financial Statements under "General Litigation Matters – Southern Power" herein for additional information.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Alabama Power
Net Income
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $40 | 7.6 | $(124) | (9.9) |
Alabama Power's net income after dividends on preferred stock in the third quarter 2023 was $565 million compared to $525 million for the corresponding period in 2022. The increase was primarily due to a decrease in income tax expense and an increase in retail revenues associated with Rate CNP Compliance and warmer weather in Alabama Power's service territory in the third quarter 2023 compared to the corresponding period in 2022. These increases to income were partially offset by an increase in depreciation and amortization associated with a change in depreciation rates effective January 2023.
Alabama Power's net income after dividends on preferred stock for year-to-date 2023 was $1.13 billion compared to $1.26 billion for the corresponding period in 2022. The decrease was primarily due to an increase in depreciation rates effective January 2023, a decrease in retail revenues associated with milder weather in Alabama Power's service territory in the first and second quarters of 2023 compared to the corresponding periods in 2022, and an increase in capacity-related expenses. These decreases to income were partially offset by a decrease in income tax expense and an increase in Rate CNP Compliance revenues.
See Note 2 to the financial statements in Item 8 of the Form 10-K under "Alabama Power" for additional information.
Retail Revenues
In the third quarter 2023, retail revenues were $1.86 billion compared to $2.01 billion for the corresponding period in 2022. For year-to-date 2023, retail revenues were $4.71 billion compared to $5.02 billion for the corresponding period in 2022. Details of the changes in retail revenues were as follows:
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | ||||||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | ||||||||||||||||||||
| Rates and pricing | $ | 62 | 3.1 | % | $ | 178 | 3.5 | % | |||||||||||||||
| Sales decline | (2) | (0.1) | (36) | (0.7) | |||||||||||||||||||
| Weather | 35 | 1.7 | (84) | (1.7) | |||||||||||||||||||
| Fuel and other cost recovery | (243) | (12.1) | (365) | (7.3) | |||||||||||||||||||
| Retail revenues | $ | (148) | (7.4) | % | $ | (307) | (6.2) | % |
Revenues associated with changes in rates and pricing increased in the third quarter and year-to-date 2023 when compared to the corresponding periods in 2022 primarily due to an increase in Rate CNP Compliance revenues. In addition, in the third quarter and year-to-date 2023, revenues associated with Rate CNP Depreciation increased $94 million and $234 million, respectively, and were fully offset by customer bill credits related to the flowback of excess accumulated deferred income taxes. See Note 2 to the financial statements under "Alabama Power" in Item 8 of the Form 10-K for additional information.
Revenues attributable to changes in sales decreased in the third quarter and year-to-date 2023 when compared to the corresponding periods in 2022. Weather-adjusted residential KWH sales decreased 0.8% in the third quarter 2023 compared to the corresponding period in 2022 primarily due to decreased customer usage and remained flat for year-to-date 2023 when compared to the corresponding period in 2022. Weather-adjusted commercial KWH sales increased 1.1% and 0.8% in the third quarter and year-to-date 2023, respectively, when compared to the corresponding periods in 2022 primarily due to increases in customer usage and customer growth. Industrial KWH sales decreased 4.8% and 3.9% in the third quarter and year-to-date 2023, respectively, primarily due to decreases in
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
the chemicals and forest products sectors. Also contributing to the industrial KWH sales decrease in the third quarter 2023 was a decrease in the primary metals sector.
Fuel and other cost recovery revenues decreased in the third quarter and year-to-date 2023 when compared to the corresponding periods in 2022 primarily as a result of lower fuel and purchased power costs.
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" in Item 8 of the Form 10-K for additional information.
Wholesale Revenues – Non-Affiliates
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(144) | (57.6) | $(164) | (31.4) |
In the third quarter 2023, wholesale revenues from sales to non-affiliates were $106 million compared to $250 million for the corresponding period in 2022. The decrease was primarily due to a 47.0% decrease in the volume of KWHs sold as a result of power sales agreements that ended in May 2023 and a 19.8% decrease in the price of energy primarily as a result of lower natural gas prices in the third quarter 2023 compared to the corresponding period in 2022.
For year-to-date 2023, wholesale revenues from sales to non-affiliates were $358 million compared to $522 million for the corresponding period in 2022. The decrease was primarily due to a 20.4% decrease in the price of energy primarily as a result of lower natural gas prices and a 13.8% decrease in the volume of KWHs sold due to lower customer demand as a result of milder weather in 2023 compared to the corresponding period in 2022.
Wholesale revenues from sales to non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared to the cost of Alabama Power's and the Southern Company system's generation, demand for energy within the Southern Company system's electric service territory, and the availability of the Southern Company system's generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not affect net income. Short-term opportunity energy sales are also included in wholesale energy sales to non-affiliates. These opportunity sales are made at market-based rates that generally provide a margin above Alabama Power's variable cost to produce the energy.
Wholesale Revenues – Affiliates
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(56) | (80.0) | $(127) | (74.7) |
In the third quarter 2023, wholesale revenues from sales to affiliates were $14 million compared to $70 million for the corresponding period in 2022. For year-to-date 2023, wholesale revenues from sales to affiliates were $43 million compared to $170 million for the corresponding period in 2022. The decreases for the third quarter and year-to-date 2023 were primarily due to decreases of 60.6% and 45.6%, respectively, in the price of energy due to lower natural gas prices and 51.2% and 53.5%, respectively, in the volume of KWH sales due to lower customer demand as a result of milder weather in 2023 compared to the corresponding periods in 2022.
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. Energy revenues related to 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Other Revenues
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(13) | (11.2) | $(5) | (1.6) |
In the third quarter 2023, other revenues were $103 million compared to $116 million for the corresponding period in 2022. For year-to-date 2023, other revenues were $311 million compared to $316 million for the corresponding period in 2022. The decreases for the third quarter and year-to-date 2023 were primarily due to decreases of $11 million and $23 million, respectively, in cogeneration steam revenue primarily associated with lower natural gas prices. The decrease for year-to-date 2023 was largely offset by a $20 million increase in unregulated sales of products and services.
Fuel and Purchased Power Expenses
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | ||||||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | ||||||||||||||||||||
| Fuel | $ | (264) | (39.6) | $ | (386) | (27.6) | |||||||||||||||||
| Purchased power – non-affiliates | (143) | (77.3) | (150) | (43.2) | |||||||||||||||||||
| Purchased power – affiliates | (33) | (29.2) | (67) | (25.8) | |||||||||||||||||||
| Total fuel and purchased power expenses | $ | (440) | $ | (603) |
In the third quarter 2023, total fuel and purchased power expenses were $524 million compared to $964 million for the corresponding period in 2022. For year-to-date 2023, total fuel and purchased power expenses were $1.40 billion compared to $2.01 billion for the corresponding period in 2022. The decreases for the third quarter and year-to-date 2023 were due to decreases of $301 million and $540 million, respectively, in the average cost of fuel and purchased power and decreases of $139 million and $63 million, respectively, related to the volume of KWHs generated and purchased.
Fuel and purchased power energy transactions do not have a significant impact on earnings, since energy expenses are generally offset by energy revenues through Alabama Power's energy cost recovery clause. See Note 2 to the financial statements under "Alabama Power – Rate ECR" in Item 8 of the Form 10-K for additional information.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Details of Alabama Power's generation and purchased power were as follows:
| Third Quarter 2023 | Third Quarter 2022 | Year-To-Date 2023 | Year-To-Date 2022 | ||||||||||||||||||||
| Total generation (in billions of KWHs)(a) | 15 | 16 | 43 | 45 | |||||||||||||||||||
| Total purchased power (in billions of KWHs) | 3 | 4 | 8 | 9 | |||||||||||||||||||
| Sources of generation (percent)(a) — | |||||||||||||||||||||||
| Coal | 40 | 47 | 35 | 45 | |||||||||||||||||||
| Gas | 31 | 28 | 30 | 23 | |||||||||||||||||||
| Nuclear | 26 | 22 | 27 | 24 | |||||||||||||||||||
| Hydro | 3 | 3 | 8 | 8 | |||||||||||||||||||
| Cost of fuel, generated (in cents per net KWH) — | |||||||||||||||||||||||
| Coal | 3.57 | 3.89 | 3.48 | 3.40 | |||||||||||||||||||
| Gas(a) | 3.07 | 6.55 | 3.05 | 5.20 | |||||||||||||||||||
| Nuclear | 0.68 | 0.67 | 0.68 | 0.67 | |||||||||||||||||||
| Average cost of fuel, generated (in cents per net KWH)(a) | 2.64 | 3.91 | 2.51 | 3.13 | |||||||||||||||||||
| Average cost of purchased power (in cents per net KWH)(b) | 4.57 | 8.55 | 4.97 | 8.33 |
(a)Excludes Central Alabama Generating Station KWHs and associated cost of fuel through July 12, 2022 as its fuel was previously provided by the purchaser under a power sales agreement. See Note 15 to the financial statements under "Alabama Power" in Item 8 of the Form 10-K for additional information.
(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
In the third quarter 2023, fuel expense was $402 million compared to $666 million for the corresponding period in 2022. The decrease was primarily due to a 53.1% decrease in the average cost of natural gas per KWH generated, which excludes tolling agreements, and an 18.9% decrease in the volume of KWHs generated by coal.
For year-to-date 2023, fuel expense was $1.01 billion compared to $1.40 billion for the corresponding period in 2022. The decrease was primarily due to a 41.3% decrease in the average cost of natural gas per KWH generated, which excludes tolling agreements, and a 25.3% decrease in the volume of KWHs generated by coal, partially offset by a 23.4% increase in the volume of KWHs generated by natural gas and a 10.6% decrease in the volume of KWHs generated by hydro facilities as a result of less rainfall for year-to-date 2023 compared to the corresponding period in 2022.
Purchased Power – Non-Affiliates
In the third quarter 2023, purchased power expense from non-affiliates was $42 million compared to $185 million for the corresponding period in 2022. For year-to-date 2023, purchased power expense from non-affiliates was $197 million compared to $347 million for the corresponding period in 2022. The decreases for the third quarter and year-to-date 2023 were primarily due to decreases of 41.0% and 37.6%, respectively, in the average cost per KWH purchased due to lower purchase prices as a result of lower natural gas prices and decreases of 64.2% and 21.8%, respectively, in the volume of KWHs purchased due to a new PPA that began in July 2022 and ended in May 2023.
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
In the third quarter 2023, purchased power expense from affiliates was $80 million compared to $113 million for the corresponding period in 2022. For year-to-date 2023, purchased power expense from affiliates was $193 million
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
compared to $260 million for the corresponding period in 2022. The decreases for the third quarter and year-to-date 2023 were primarily due to decreases of 65.8% and 51.3%, respectively, in the average cost per KWH purchased due to lower purchase prices as a result of lower natural gas prices, partially offset by increases of 107.6% and 52.6%, respectively, in the volume of KWHs purchased due to the availability of lower cost gas generation in the Southern Company system.
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.
Other Operations and Maintenance Expenses
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(7) | (1.7) | $5 | 0.4 |
In the third quarter 2023, other operations and maintenance expenses were $411 million compared to $418 million for the corresponding period in 2022. The decrease was primarily due to decreases of $15 million in transmission and distribution expenses related to line maintenance, $9 million in technology infrastructure and application production costs, and $9 million in certain employee compensation and benefit expenses. The decreases were largely offset by an increase of $26 million in planned outages and generation non-outage maintenance expenses.
For year-to-date 2023, other operations and maintenance expenses were $1.28 billion compared to $1.27 billion for the corresponding period in 2022. The increase was primarily due to a $14 million decrease in nuclear property insurance refunds and increases of $19 million in expenses related to unregulated products and services, $9 million in technology infrastructure and application production costs, and $9 million in customer accounts expenses primarily associated with bad debt expense. The increases were largely offset by decreases of $21 million in generation expenses primarily associated with planned outages and generation non-outage maintenance expenses, $15 million in certain employee compensation and benefit expenses, and $10 million in transmission and distribution related to line maintenance.
Depreciation and Amortization
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $131 | 59.5 | $393 | 60.3 |
In the third quarter 2023, depreciation and amortization was $351 million compared to $220 million for the corresponding period in 2022. For year-to-date 2023, depreciation and amortization was $1.05 billion compared to $652 million for the corresponding period in 2022. The increases were primarily due to an increase in depreciation rates effective in 2023. See Notes 2 and 5 to the financial statements under "Alabama Power" and "Depreciation and Amortization," respectively, in Item 8 of the Form 10-K for additional information.
Taxes Other Than Income Taxes
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $4 | 3.8 | $24 | 7.8 |
In the third quarter 2023, taxes other than income taxes were $110 million compared to $106 million for the corresponding period in 2022. For year-to-date 2023, taxes other than income taxes were $333 million compared to $309 million for the corresponding period in 2022. The increases were primarily due to an increase in utility license taxes.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Allowance for Equity Funds Used During Construction
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $5 | 27.8 | $14 | 27.5 |
In the third quarter 2023, allowance for equity funds used during construction was $23 million compared to $18 million for the corresponding period in 2022. For year-to-date 2023, allowance for equity funds used during construction was $65 million compared to $51 million for the corresponding period in 2022. The increases were primarily due to an increase in capital expenditures related to Plant Barry Unit 8 construction, as well as an increase in capital expenditures related to hydro production. See Note (B) to the Condensed Financial Statements under "Alabama Power – Certificates of Convenience and Necessity" herein for additional information.
Interest Expense, Net of Amounts Capitalized
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $6 | 6.1 | $33 | 11.9 |
In the third quarter 2023, interest expense, net of amounts capitalized was $104 million compared to $98 million for the corresponding period in 2022. For year-to-date 2023, interest expense, net of amounts capitalized was $311 million compared to $278 million for the corresponding period in 2022. The increases for the third quarter and year-to-date 2023 were primarily associated with increases of approximately $5 million and $25 million, respectively, related to higher average outstanding borrowings and $4 million and $15 million, respectively, related to higher interest rates. See FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" herein for additional information on borrowings.
Other Income (Expense), Net
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $— | — | $16 | 15.8 |
For year-to-date 2023, other income (expense), net was $117 million compared to $101 million for the corresponding period in 2022. The increase was primarily due to a decrease in non-operating benefit-related expenses and an increase in interest income, partially offset by a decrease in non-service cost-related retirement benefits income. See Note (H) to the Condensed Financial Statements herein for additional information.
Income Taxes
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(87) | (52.4) | $(291) | (73.9) |
In the third quarter 2023, income taxes were $79 million compared to $166 million for the corresponding period in 2022. For year-to-date 2023, income taxes were $103 million compared to $394 million for the corresponding period in 2022. The decreases were primarily due to an increase in the flowback of certain excess deferred income taxes and lower pre-tax earnings. See Note 2 to the financial statements under "Alabama Power – Excess Accumulated Deferred Income Tax Accounting Order" in Item 8 of the Form 10-K and Note (G) to the Condensed Financial Statements herein for additional information.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Georgia Power
Net Income
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(78) | (9.1) | $(304) | (16.4) |
Georgia Power's net income in the third quarter 2023 was $780 million compared to $858 million for the corresponding period in 2022. The decrease was primarily due to an increase of $172 million in after-tax charges related to the construction of Plant Vogtle Units 3 and 4, as well as higher interest expense, partially offset by an increase in retail revenues associated with warmer weather in the third quarter 2023 compared to the corresponding period in 2022 and lower non-fuel operations and maintenance costs. Also partially offsetting the net income reductions were the impacts of the 2022 ARP effective January 1, 2023, including increased retail rates, largely offset by higher depreciation and amortization.
For year-to-date 2023, net income was $1.55 billion compared to $1.85 billion for the corresponding period in 2022. The decrease was primarily due to a decrease in retail revenues associated with lower contributions from variable demand-driven pricing and milder weather in the first and second quarters of 2023 compared to the corresponding periods in 2022, an increase of $133 million in after-tax charges related to the construction of Plant Vogtle Units 3 and 4, and higher interest expense, partially offset by lower non-fuel operations and maintenance costs. Also partially offsetting the net income reductions were the impacts of the 2022 ARP effective January 1, 2023, including increased retail rates, largely offset by higher depreciation and amortization.
See Note 2 to the financial statements in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein under "Georgia Power" for additional information.
Retail Revenues
In the third quarter 2023, retail revenues were $3.00 billion compared to $3.70 billion for the corresponding period in 2022. For year-to-date 2023, retail revenues were $7.14 billion compared to $8.63 billion for the corresponding period in 2022. Details of the changes in retail revenues were as follows:
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | ||||||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | ||||||||||||||||||||
| Rates and pricing | $ | 17 | 0.4 | % | $ | (115) | (1.3) | % | |||||||||||||||
| Sales decline | (31) | (0.8) | (17) | (0.2) | |||||||||||||||||||
| Weather | 88 | 2.4 | (109) | (1.3) | |||||||||||||||||||
| Fuel cost recovery | (781) | (21.1) | (1,246) | (14.4) | |||||||||||||||||||
| Retail revenues | $ | (707) | (19.1) | % | $ | (1,487) | (17.2) | % |
Revenues associated with changes in rates and pricing increased in the third quarter 2023 when compared to the corresponding period in 2022 primarily due to base tariff increases in accordance with the 2022 ARP, partially offset by lower contributions from commercial and industrial customers with variable demand-driven pricing and a decrease in revenues recognized under the NCCR tariff. Revenues associated with changes in rates and pricing decreased for year-to-date 2023 when compared to the corresponding period in 2022 primarily due to lower contributions from commercial and industrial customers with variable demand-driven pricing and a decrease in revenues recognized under the NCCR tariff, partially offset by base tariff increases in accordance with the 2022 ARP. See Note 2 to the financial statements under "Georgia Power – Rate Plans" and " – Nuclear Construction" in Item 8 of the Form 10-K for additional information.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Revenues attributable to changes in sales decreased in the third quarter and year-to-date 2023 when compared to the corresponding periods in 2022. Weather-adjusted residential KWH sales decreased 2.6% and 0.7% in the third quarter and year-to-date 2023, respectively, when compared to the corresponding periods in 2022 primarily due to decreased customer usage, partially offset by customer growth. Weather-adjusted commercial KWH sales increased 0.4% and 1.1% in the third quarter and year-to-date 2023, respectively, when compared to the corresponding periods in 2022 primarily due to customer growth. The increase in weather-adjusted commercial KWH sales in the third quarter 2023 was partially offset by decreased customer usage. Weather-adjusted industrial KWH sales decreased 1.3% in the third quarter 2023 when compared to the corresponding period in 2022 primarily due to decreases in the pipeline and chemicals sectors, partially offset by an increase in the paper sector. Weather-adjusted industrial KWH sales decreased 1.0% for year-to-date 2023 when compared to the corresponding period in 2022 primarily due to decreases in the textile and mining sectors, partially offset by increases in the paper and electronics sectors.
Fuel revenues and costs are allocated between retail and wholesale jurisdictions. Retail fuel cost recovery revenues decreased in the third quarter and year-to-date 2023 when compared to the corresponding periods in 2022 due to lower fuel and purchased power costs. 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 (B) to the Condensed Financial Statements herein and Note 2 to the financial statements in Item 8 of the Form 10-K under "Georgia Power – Fuel Cost Recovery" for additional information.
Wholesale Revenues
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $13 | 23.2 | $(39) | (21.0) |
In the third quarter 2023, wholesale revenues were $69 million compared to $56 million for the corresponding period in 2022. The increase was primarily due to a $22 million increase related to the volume of KWH sales associated with higher market demand and a $17 million increase related to new capacity contracts, partially offset by a $26 million decrease related to the average cost per KWH sold due to lower Southern Company system fuel and purchased power costs.
For year-to-date 2023, wholesale revenues were $147 million compared to $186 million for the corresponding period in 2022. The decrease was primarily due to a $41 million decrease related to the average cost per KWH sold due to lower Southern Company system fuel and purchased power costs and a $13 million decrease related to the volume of KWH sales associated with lower market demand, partially offset by a $19 million increase related to new capacity contracts.
Wholesale revenues from sales to non-affiliates consist of PPAs and short-term opportunity sales. Wholesale revenues from PPAs have both capacity and energy components. Wholesale capacity revenues from PPAs are recognized in amounts billable under the contract terms and provide for recovery of fixed costs and a return on investment. Wholesale revenues from sales to non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared to the cost of Georgia Power's and the Southern Company system's generation, demand for energy within the Southern Company system's electric service territory, and the availability of the Southern Company system's generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a significant impact on net income. Short-term opportunity sales are made at market-based rates that generally provide a margin above Georgia Power's variable cost of energy.
Wholesale revenues from sales to affiliated companies will vary depending on demand and the availability and cost of generating resources at each company. These affiliate sales are made in accordance with the IIC, as approved by
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
the FERC. Energy revenues related to these transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost.
Other Revenues
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $42 | 32.3 | $113 | 28.0 |
In the third quarter 2023, other revenues were $172 million compared to $130 million for the corresponding period in 2022. For year-to-date 2023, other revenues were $516 million compared to $403 million for the corresponding period in 2022. The increases for the third quarter and year-to-date 2023 were primarily due to increases of $27 million and $78 million, respectively, in unregulated sales associated with power delivery construction and maintenance, outdoor lighting, and energy conservation projects, net increases of $7 million and $18 million, respectively, in realized gains associated with price stability products for retail customers on variable demand-driven pricing tariffs, and increases of $10 million in retail solar program fees. Also contributing to the increase for year-to-date 2023 was an $11 million increase in open access transmission tariff sales.
Fuel and Purchased Power Expenses
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | ||||||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | ||||||||||||||||||||
| Fuel | $ | (265) | (31.5) | $ | (495) | (26.2) | |||||||||||||||||
| Purchased power – non-affiliates | (173) | (56.9) | (303) | (43.3) | |||||||||||||||||||
| Purchased power – affiliates | (350) | (61.3) | (521) | (47.4) | |||||||||||||||||||
| Total fuel and purchased power expenses | $ | (788) | $ | (1,319) |
In the third quarter 2023, total fuel and purchased power expenses were $0.9 billion compared to $1.7 billion for the corresponding period in 2022. For year-to-date 2023, total fuel and purchased power expenses were $2.4 billion compared to $3.7 billion for the corresponding period in 2022. The decreases for the third quarter and year-to-date 2023 were due to decreases of $689 million and $1.0 billion, respectively, related to the average cost of fuel and purchased power and net decreases of $99 million and $293 million, respectively, 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 (B) to the Condensed Financial Statements herein and Note 2 to the financial statements in Item 8 of the Form 10-K under "Georgia Power – Fuel Cost Recovery" for additional information.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Details of Georgia Power's generation and purchased power were as follows:
| Third Quarter 2023 | Third Quarter 2022 | Year-To-Date 2023 | Year-To-Date 2022 | ||||||||||||||||||||
| Total generation (in billions of KWHs)(a) | 18 | 15 | 46 | 45 | |||||||||||||||||||
| Total purchased power (in billions of KWHs) | 9 | 11 | 23 | 27 | |||||||||||||||||||
| Sources of generation (percent) — | |||||||||||||||||||||||
| Gas | 47 | 53 | 51 | 48 | |||||||||||||||||||
| Nuclear(a) | 26 | 28 | 27 | 26 | |||||||||||||||||||
| Coal | 25 | 16 | 19 | 22 | |||||||||||||||||||
| Hydro and other | 2 | 3 | 3 | 4 | |||||||||||||||||||
| Cost of fuel, generated (in cents per net KWH) — | |||||||||||||||||||||||
| Gas | 2.99 | 6.10 | 3.07 | 4.99 | |||||||||||||||||||
| Nuclear(a) | 0.87 | 0.75 | 0.79 | 0.76 | |||||||||||||||||||
| Coal | 5.69 | 4.73 | 5.80 | 3.84 | |||||||||||||||||||
| Average cost of fuel, generated (in cents per net KWH)(a) | 3.11 | 4.32 | 2.98 | 3.56 | |||||||||||||||||||
| Average cost of purchased power (in cents per net KWH)(b) | 4.55 | 10.14 | 4.64 | 8.00 |
(a)Excludes KWHs generated from test period energy at Plant Vogtle Unit 3 prior to its in-service date. The related fuel costs are charged to CWIP in accordance with FERC guidance. See Note (B) to the Condensed Financial Statements under "Georgia Power – Nuclear Construction" herein for additional information on Plant Vogtle Units 3 and 4.
(b)Average cost of purchased power includes fuel purchased by Georgia Power for tolling agreements where power is generated by the provider.
Fuel
In the third quarter 2023, fuel expense was $576 million compared to $841 million for the corresponding period in 2022. The decrease was primarily due to a decrease of 51.0% in the average cost per KWH generated by natural gas, partially offset by increases of 78.6% in the volume of KWHs generated by coal, 20.3% in the average cost per KWH generated by coal, 16.0% in the average cost per KWH generated by nuclear, 8.8% in the volume of KWHs generated by nuclear, and 3.0% in the volume of KWHs generated by natural gas.
For year-to-date 2023, fuel expense was $1.39 billion compared to $1.89 billion for the corresponding period in 2022. The decrease was primarily due to decreases of 38.5% in the average cost per KWH generated by natural gas and 10.2% in the volume of KWHs generated by coal, partially offset by increases of 51.0% in the average cost per KWH generated by coal and 7.0% in the volume of KWHs generated by natural gas.
Purchased Power – Non-Affiliates
In the third quarter 2023, purchased power expense from non-affiliates was $131 million compared to $304 million for the corresponding period in 2022. For year-to-date 2023, purchased power expense from non-affiliates was $397 million compared to $700 million for the corresponding period in 2022. The decreases for the third quarter and year-to-date 2023 were primarily due to decreases of 38.1% and 37.8%, respectively, in the volume of KWHs purchased as Georgia Power and other Southern Company system units generally dispatched at a lower cost than available market resources and 45.1% and 24.1%, respectively, in the average cost per KWH purchased primarily due to lower natural gas 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Purchased Power – Affiliates
In the third quarter 2023, purchased power expense from affiliates was $221 million compared to $571 million for the corresponding period in 2022. For year-to-date 2023, purchased power expense from affiliates was $579 million compared to $1.1 billion for the corresponding period in 2022. The decreases for the third quarter and year-to-date 2023 reflect decreases of 60.0% and 49.8%, respectively, in the average cost per KWH purchased primarily due to lower natural gas prices. Also contributing to the decrease in the third quarter 2023 was a 5.5% decrease in the volume of KWHs purchased.
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
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(83) | (13.9) | $(181) | (10.7) |
In the third quarter 2023, other operations and maintenance expenses were $512 million compared to $595 million for the corresponding period in 2022. The decrease was primarily due to decreases of $64 million in transmission and distribution expenses primarily associated with line maintenance, $45 million in storm damage recovery as authorized in the 2022 ARP, and $25 million in generation non-outage maintenance expenses. These decreases were partially offset by increases of $21 million in generation environmental projects and $20 million from unregulated power delivery construction and maintenance and energy conservation projects.
For year-to-date 2023, other operations and maintenance expenses were $1.51 billion compared to $1.69 billion for the corresponding period in 2022. The decrease was primarily due to decreases of $136 million in storm damage recovery as authorized in the 2022 ARP, $121 million in transmission and distribution expenses primarily associated with line maintenance, $74 million in generation non-outage maintenance expenses, and $14 million in certain employee compensation and benefit expenses. These decreases were partially offset by increases of $48 million from unregulated power delivery construction and maintenance and energy conservation projects, $41 million in generation environmental projects, and $39 million in technology infrastructure and application production costs, as well as a $12 million decrease in nuclear property insurance refunds.
See Note 2 to the financial statements under "Georgia Power – Storm Damage Recovery" in Item 8 of the Form 10-K for additional information.
Depreciation and Amortization
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $70 | 19.5 | $182 | 17.1 |
In the third quarter 2023, depreciation and amortization was $429 million compared to $359 million for the corresponding period in 2022. For year-to-date 2023, depreciation and amortization was $1.25 billion compared to $1.07 billion for the corresponding period in 2022. The increases for the third quarter and year-to-date 2023 were primarily due to increases of $48 million and $142 million, respectively, resulting from higher depreciation rates as authorized in the 2022 ARP and $21 million and $51 million, respectively, associated with additional plant in service. Partially offsetting the increase for year-to-date 2023 was a decrease of $11 million in amortization of regulatory assets related to the retirement of certain generating units that ended in 2022.
See Note 5 to the financial statements under "Depreciation and Amortization" in Item 8 of the Form 10-K for additional information.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Taxes Other Than Income Taxes
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(11) | (7.1) | $(14) | (3.3) |
In the third quarter 2023, taxes other than income taxes were $144 million compared to $155 million for the corresponding period in 2022. For year-to-date 2023, taxes other than income taxes were $406 million compared to $420 million for the corresponding period in 2022. The decreases for the third quarter and year-to-date 2023 were due to decreases of $15 million and $33 million, respectively, in municipal franchise fees resulting from lower retail revenues, partially offset by increases of $3 million and $21 million, respectively, in property taxes primarily resulting from an increase in the assessed value of property.
Estimated Loss on Plant Vogtle Units 3 and 4
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $230 | N/M | $178 | N/M |
Georgia Power recorded pre-tax charges (credits) to income for the estimated probable loss on Plant Vogtle Units 3 and 4 totaling $160 million and $(70) million in the third quarter 2023 and 2022, respectively, and $160 million and $(18) million for year-to-date 2023 and 2022, respectively. The charges (credits) reflected revisions to the total project capital cost forecast to complete construction and start-up of Plant Vogtle Units 3 and 4. See Note (B) to the Condensed Financial Statements herein and Note 2 to the financial statements in Item 8 of the Form 10-K under "Georgia Power – Nuclear Construction" for additional information.
Allowance for Equity Funds Used During Construction
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $— | — | $19 | 18.6 |
For year-to-date 2023, allowance for equity funds used during construction was $121 million compared to $102 million for the corresponding period in 2022. The increase was primarily due to an increase in capital expenditures subject to AFUDC.
Interest Expense, Net of Amounts Capitalized
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $43 | 35.0 | $125 | 36.0 |
In the third quarter 2023, interest expense, net of amounts capitalized was $166 million compared to $123 million for the corresponding period in 2022. For year-to-date 2023, interest expense, net of amounts capitalized was $472 million compared to $347 million for the corresponding period in 2022. The increases for the third quarter and year-to-date 2023 were primarily associated with increases of approximately $20 million and $64 million, respectively, related to higher average outstanding borrowings and $19 million and $59 million, respectively, related to higher interest rates. See FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" and "Financing Activities" herein for additional information on borrowings.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Other Income (Expense), Net
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $9 | 25.0 | $(15) | (10.7) |
In the third quarter 2023, other income (expense), net was $45 million compared to $36 million for the corresponding period in 2022. The increase was primarily due to a $6 million decrease in non-operating marketing expenses.
For year-to-date 2023, other income (expense), net was $125 million compared to $140 million for the corresponding period in 2022. The decrease was primarily due to a decrease of $13 million in customer charges related to contributions in aid of construction and a $7 million charge in the second quarter 2023 under a stipulation agreement approved by the Georgia PSC related to Georgia Power's fuel cost recovery case, partially offset by a $6 million decrease in non-operating marketing expenses. See Note (B) to the Condensed Financial Statements herein under "Georgia Power – Fuel Cost Recovery" for additional information.
Income Taxes
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(26) | (11.5) | $(76) | (18.1) |
In the third quarter 2023, income taxes were $200 million compared to $226 million for the corresponding period in 2022. For year-to-date 2023, income taxes were $345 million compared to $421 million for the corresponding period in 2022. The decreases were primarily due to lower pre-tax earnings largely resulting from higher charges associated with the construction of Plant Vogtle Units 3 and 4 and a decrease in a valuation allowance on certain state tax credit carryforwards in 2023, partially offset by the flowback of certain excess deferred income taxes that ended in 2022. Also contributing to the year-to-date 2023 decrease was an adjustment in the second quarter 2022 related to a prior year state tax credit carryforward. See Note (G) to the Condensed Financial Statements herein for additional information.
Mississippi Power
Net Income
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $13 | 21.0 | $23 | 15.3 |
Mississippi Power's net income for the third quarter 2023 was $75 million compared to $62 million for the corresponding period in 2022. The increase was primarily due to an increase in revenues due to warmer weather in the third quarter 2023 when compared to the corresponding period in 2022.
Mississippi Power's net income for year-to-date 2023 was $173 million compared to $150 million for the corresponding period in 2022. The increase was primarily due to an increase in affiliate wholesale capacity revenues, partially offset by an increase in interest expense.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Retail Revenues
In the third quarter 2023, retail revenues were $284 million compared to $250 million for the corresponding period in 2022. For year-to-date 2023, retail revenues were $747 million compared to $718 million for the corresponding period in 2022. Details of the changes in retail revenues were as follows:
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | ||||||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | ||||||||||||||||||||
| Rates and pricing | $ | (3) | (1.2) | % | $ | 2 | 0.2 | % | |||||||||||||||
| Sales growth | 5 | 2.0 | 4 | 0.6 | |||||||||||||||||||
| Weather | 9 | 3.6 | (1) | (0.1) | |||||||||||||||||||
| Fuel and other cost recovery | 23 | 9.2 | 24 | 3.3 | |||||||||||||||||||
| Retail revenues | $ | 34 | 13.6 | % | $ | 29 | 4.0 | % |
Revenues associated with changes in rates and pricing decreased in the third quarter 2023 and increased year-to-date 2023 when compared to the corresponding periods in 2022. The third quarter 2023 decrease was primarily due to lower contributions from commercial and industrial customers with variable demand-driven pricing and the expiration of a PEP surcharge at the end of 2022 that became effective for the first billing cycle of April 2022, partially offset by higher revenues associated with a tolling arrangement accounted for as a sales-type lease. The year-to-date 2023 increase was primarily due to ECO Plan rates that became effective in May 2022 and higher revenues associated with a tolling arrangement accounted for as a sales-type lease, partially offset by the expiration of the PEP surcharge at the end of 2022 that became effective for the first billing cycle of April 2022. See Notes 2 and 9 to the financial statements under "Mississippi Power" and "Lessor," respectively, in Item 8 of the Form 10-K and Note (D) to the Condensed Financial Statements under "Lease Income" herein for additional information.
Revenues attributable to changes in sales increased in the third quarter and year-to-date 2023 when compared to the corresponding periods in 2022. Weather-adjusted residential KWH sales increased 0.9% in the third quarter 2023 when compared to the corresponding period in 2022 due to an increase in customer usage. Weather-adjusted residential KWH sales decreased 0.3% year-to-date 2023 when compared to the corresponding period in 2022 due to a decrease in customer usage. Weather-adjusted commercial KWH sales increased 11.8% and 6.4% in the third quarter and year-to-date 2023, respectively, when compared to the corresponding periods in 2022 due to sales growth associated with new commercial contracts. Industrial KWH sales increased 1.1% and 1.3% in the third quarter and year-to-date 2023, respectively, when compared to the corresponding periods in 2022 primarily due to an increase in the non-manufacturing sector, partially offset by a decrease in the chemicals sector.
Fuel and other cost recovery revenues increased in the third quarter and year-to-date 2023 when compared to the corresponding periods in 2022 primarily as a result of higher recoverable fuel costs. 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 Power's service territory. Electric rates 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. See Note 2 to the financial statements in Item 8 of the Form 10-K for additional information.
Wholesale Revenues – Non-Affiliates
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $17 | 28.3 | $10 | 5.2 |
In the third quarter 2023, wholesale revenues from sales to non-affiliates were $77 million compared to $60 million for the corresponding period in 2022. The increase was primarily due to an $11 million increase associated with
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
MRA customers and a $6 million increase associated with opportunity sales. The increase from MRA customers was primarily due to higher recoverable fuel costs and an increase in demand as a result of weather impacts.
For year-to-date 2023, wholesale revenues from sales to non-affiliates were $201 million compared to $191 million for the corresponding period in 2022. The increase was due to a $6 million increase associated with MRA customers and a $4 million increase associated with opportunity sales. The increase from MRA customers was primarily due to a rate increase under the MRA tariff effective September 2022 and higher recoverable fuel costs, partially offset by a decrease in demand as a result of weather impacts.
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 municipalities located in southeastern Mississippi under cost-based electric tariffs which are subject to regulation by the FERC. See Note 2 to the financial statements under "Mississippi Power" in Item 8 of the Form 10-K for additional information. See Note (B) to the Condensed Financial Statements under "Mississippi Power – Municipal and Rural Associations Tariff" herein for additional information.
Wholesale Revenues – Affiliates
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(122) | (65.2) | $(178) | (53.0) |
In the third quarter 2023, wholesale revenues from sales to affiliates were $65 million compared to $187 million for the corresponding period in 2022. The decrease was primarily due to a $141 million decrease associated with lower natural gas prices, partially offset by a $19 million increase associated with higher KWH sales.
For year-to-date 2023, wholesale revenues from sales to affiliates were $158 million compared to $336 million for the corresponding period in 2022. The decrease was primarily due to a $216 million decrease associated with lower natural gas prices, partially offset by a $29 million increase in capacity revenues resulting from an increase in pricing and volume of generation reserves and a $9 million increase associated with higher KWH sales.
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. Energy revenues related to these transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost.
Fuel and Purchased Power Expenses
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | ||||||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | ||||||||||||||||||||
| Fuel | $ | (80) | (33.1) | $ | (167) | (29.6) | |||||||||||||||||
| Purchased power | (13) | (65.0) | (18) | (50.0) | |||||||||||||||||||
| Total fuel and purchased power expenses | $ | (93) | $ | (185) |
In the third quarter 2023, total fuel and purchased power expenses were $169 million compared to $262 million for the corresponding period in 2022. For year-to-date 2023, total fuel and purchased power expenses were $416 million compared to $601 million for the corresponding period in 2022. The decreases for the third quarter and year-to-date 2023 were primarily due to decreases of $122 million and $203 million, respectively, related to the
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
average cost of fuel and purchased power, partially offset by net increases of $29 million and $18 million, respectively, related to the volume of KWHs generated and purchased.
Fuel and purchased power energy transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Mississippi Power's fuel cost recovery clause.
Details of Mississippi Power's generation and purchased power were as follows:
| Third Quarter 2023 | Third Quarter 2022 | Year-To-Date 2023 | Year-To-Date 2022 | ||||||||||||||||||||
| Total generation (in millions of KWHs) | 5,783 | 5,093 | 14,123 | 13,650 | |||||||||||||||||||
| Total purchased power (in millions of KWHs) | 153 | 241 | 427 | 527 | |||||||||||||||||||
| Sources of generation (percent) – | |||||||||||||||||||||||
| Gas | 87 | 89 | 92 | 89 | |||||||||||||||||||
| Coal | 13 | 11 | 8 | 11 | |||||||||||||||||||
| Cost of fuel, generated (in cents per net KWH) – | |||||||||||||||||||||||
| Gas | 2.52 | 5.10 | 2.72 | 4.43 | |||||||||||||||||||
| Coal | 5.49 | 4.50 | 5.64 | 4.12 | |||||||||||||||||||
| Average cost of fuel, generated (in cents per net KWH) | 2.92 | 5.02 | 2.97 | 4.40 | |||||||||||||||||||
| Average cost of purchased power (in cents per net KWH) | 4.61 | 8.15 | 4.27 | 6.83 |
Fuel
In the third quarter 2023, fuel expense was $162 million compared to $242 million for the corresponding period in 2022. The decrease was due to a 50.6% decrease in the average cost of natural gas per KWH generated, partially offset by a 28.5% increase in the volume of KWHs generated by coal, a 22.0% increase in the average cost of coal per KWH generated, and a 13.5% increase in the volume of KWHs generated by natural gas.
For year-to-date 2023, fuel expense was $398 million compared to $565 million for the corresponding period in 2022. The decrease was due to a 38.6% decrease in the average cost of natural gas per KWH generated and a 21.7% decrease in the volume of KWHs generated by coal, partially offset by a 36.9% increase in the average cost of coal per KWH generated and a 7.5% increase in the volume of KWHs generated by natural gas.
Purchased Power
In the third quarter 2023, purchased power expense was $7 million compared to $20 million for the corresponding period in 2022. For year-to-date 2023, purchased power expense was $18 million compared to $36 million for the corresponding period in 2022. The decreases for the third quarter and year-to-date 2023 were due to decreases of 43.4% and 37.5%, respectively, in the average cost per KWH purchased primarily due to lower natural gas prices and decreases of 36.4% and 18.9%, respectively, in the volume of KWHs purchased.
Other Operations and Maintenance Expenses
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(2) | (2.3) | $6 | 2.4 |
For year-to-date 2023, other operations and maintenance expenses were $258 million compared to $252 million for the corresponding period in 2022. The increase was primarily due to increases of $5 million in generation expenses and $4 million in storm reserve accruals, partially offset by a decrease of $5 million in sales and use taxes associated with the Kemper County energy facility.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
See Notes 2 and 3 to the financial statements under "Mississippi Power – System Restoration Rider" and "Other Matters – Mississippi Power," respectively, in Item 8 of the Form 10-K and Notes (B) and (C) to the Condensed Financial Statements under "Mississippi Power – System Restoration Rider" and "Other Matters – Mississippi Power," respectively, herein for additional information.
Interest Expense, Net of Amounts Capitalized
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $4 | 26.7 | $11 | 26.2 |
In the third quarter 2023, interest expense, net of amounts capitalized was $19 million compared to $15 million for the corresponding period in 2022. For year-to-date 2023, interest expense, net of amounts capitalized was $53 million compared to $42 million for the corresponding period in 2022. The increases for the third quarter and year-to-date 2023 were associated with increases of approximately $2 million and $8 million, respectively, related to higher interest rates and $2 million and $4 million, respectively, related to higher average outstanding borrowings. See FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" and "Financing Activities" herein for additional information on borrowings.
Income Taxes
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $1 | 5.9 | $(3) | (7.9) |
For year-to-date 2023, income taxes were $35 million compared to $38 million for the corresponding period in 2022. The decrease was primarily due to a decrease of $7 million associated with the flowback of certain excess deferred income taxes, largely offset by an increase of $5 million associated with higher pre-tax earnings. See Note (G) to the Condensed Financial Statements herein for additional information.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Southern Power
Net Income Attributable to Southern Power
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $5 | 5.3 | $23 | 8.7 |
Net income attributable to Southern Power in the third quarter 2023 was $100 million compared to $95 million for the corresponding period in 2022. The increase was primarily due to an arbitration interim award received for losses previously incurred, higher HLBV income associated with tax equity partnerships, and receipts of liquidated damages associated with generation facility production guarantees, partially offset by lower revenues driven by lower market prices of energy.
Net income attributable to Southern Power for year-to-date 2023 was $288 million compared to $265 million for the corresponding period in 2022. The increase was primarily due to an arbitration interim award received for losses previously incurred, a gain on the sale of spare parts, higher HLBV income associated with tax equity partnerships, and receipts of liquidated damages and insurance proceeds related to generation facility production and equipment, as well as changes in state apportionment methodology related to tax legislation enacted by the State of Tennessee. These increases were largely offset by lower revenues driven by lower market prices of energy.
See Note (C) to the Condensed Financial Statements under "General Litigation Matters – Southern Power" herein for additional information.
Operating Revenues
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(527) | (44.7) | $(932) | (35.6) |
Total operating revenues include PPA capacity revenues, which are derived primarily from long-term contracts involving natural gas facilities, 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 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
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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" in Item 7 of the Form 10-K for additional information regarding Southern Power's PPAs.
Operating Revenues Details
Details of Southern Power's operating revenues were as follows:
| Third Quarter 2023 | Third Quarter 2022 | Year-To-Date 2023 | Year-To-Date 2022 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| PPA capacity revenues | $ | 134 | $ | 131 | $ | 360 | $ | 344 | |||||||||||||||
| PPA energy revenues | 370 | 736 | 953 | 1,657 | |||||||||||||||||||
| Total PPA revenues | 504 | 867 | 1,313 | 2,001 | |||||||||||||||||||
| Non-PPA revenues | 131 | 304 | 327 | 590 | |||||||||||||||||||
| Other revenues | 18 | 9 | 46 | 27 | |||||||||||||||||||
| Total operating revenues | $ | 653 | $ | 1,180 | $ | 1,686 | $ | 2,618 |
In the third quarter 2023, total operating revenues were $653 million, reflecting a $527 million, or 44.7%, decrease from the corresponding period in 2022. The change in operating revenues was primarily due to the following:
-
PPA energy revenues decreased $366 million, or 49.7%, primarily due to a $378 million decrease in sales under natural gas PPAs resulting from a $304 million decrease in the price of fuel and purchased power and a $75 million decrease in the volume of KWHs sold.
-
Non-PPA revenues decreased $173 million, or 56.9%, primarily due to a $252 million decrease in the market price of energy, partially offset by a $76 million increase in the volume of KWHs sold through short-term sales.
-
Other revenues increased $9 million, or 100.0%, primarily due to an arbitration interim award received for losses previously incurred. See Note (C) to the Condensed Financial Statements under "General Litigation Matters – Southern Power" herein for additional information.
For year-to-date 2023, total operating revenues were $1.7 billion, reflecting a $932 million, or 35.6%, decrease from the corresponding period in 2022. The change in operating revenues was primarily due to the following:
-
PPA capacity revenues increased $16 million, or 4.7%, primarily due to a net increase in MW capacity under contract from natural gas PPAs and an increase associated with a change in rates from natural gas PPAs.
-
PPA energy revenues decreased $704 million, or 42.5%, primarily due to a $706 million decrease in sales under natural gas PPAs resulting from a $577 million decrease in the price of fuel and purchased power and a $129 million decrease in the volume of KWHs sold.
-
Non-PPA revenues decreased $263 million, or 44.6%, primarily due to a $522 million decrease in the market price of energy, partially offset by a $255 million increase in the volume of KWHs sold through short-term sales.
-
Other revenues increased $19 million, or 70.4%, primarily due to receipts of liquidated damages associated with generation facility production guarantees, an arbitration interim award received for losses previously incurred, and business interruption insurance proceeds for damaged generation equipment. See Note (C) to the Condensed Financial Statements under "General Litigation Matters – Southern Power" herein for additional information.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Fuel and Purchased Power Expenses
Details of Southern Power's generation and purchased power were as follows:
| Third Quarter 2023 | Third Quarter 2022 | Year-To-Date 2023 | Year-To-Date 2022 | ||||||||||||||
| (in billions of KWHs) | |||||||||||||||||
| Generation | 12.9 | 12.8 | 36.9 | 36.7 | |||||||||||||
| Purchased power | 0.8 | 1.2 | 2.4 | 2.3 | |||||||||||||
| Total generation and purchased power | 13.7 | 14.0 | 39.3 | 39.0 | |||||||||||||
| Total generation and purchased power (excluding solar, wind, fuel cells, and tolling agreements) | 8.5 | 8.8 | 24.7 | 23.2 |
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.
Details of Southern Power's fuel and purchased power expenses were as follows:
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | ||||||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | ||||||||||||||||||||
| Fuel | $ | (409) | (67.6) | $ | (748) | (58.7) | |||||||||||||||||
| Purchased power | (111) | (77.1) | (146) | (62.7) | |||||||||||||||||||
| Total fuel and purchased power expenses | $ | (520) | $ | (894) |
In the third quarter 2023, total fuel and purchased power expenses decreased $520 million, or 69.4%, compared to the corresponding period in 2022. Fuel expense decreased $409 million primarily due to a $421 million decrease associated with the average cost of fuel. Purchased power expense decreased $111 million due to a $61 million decrease associated with the average cost of purchased power and a $50 million decrease associated with the volume of KWHs purchased.
For year-to-date 2023, total fuel and purchased power expenses decreased $894 million, or 59.3%, compared to the corresponding period in 2022. Fuel expense decreased $748 million due to an $835 million decrease associated with the average cost of fuel, partially offset by an $87 million increase associated with the volume of KWHs generated. Purchased power expense decreased $146 million primarily due to a $152 million decrease associated with the average cost of purchased power.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Other Operations and Maintenance Expenses
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(9) | (8.0) | $(5) | (1.5) |
In the third quarter 2023, other operations and maintenance expenses were $104 million compared to $113 million for the corresponding period in 2022. For year-to-date 2023, other operations and maintenance expenses were $327 million compared to $332 million for the corresponding period in 2022. The decreases were primarily due to $11 million from an arbitration interim award received for losses previously incurred. The year-to-date 2023 decrease was largely offset by an increase in generation maintenance expenses. See Note (C) to the Condensed Financial Statements under "General Litigation Matters – Southern Power" herein for additional information.
Gain on Dispositions, Net
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $— | — | $18 | N/M |
For year-to-date 2023, gain on dispositions, net was $20 million compared to $2 million for the corresponding period in 2022. The increase was primarily due to a $16 million gain on the sale of spare parts in 2023.
Interest Expense, Net of Amounts Capitalized
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $— | — | $(7) | (6.7) |
For year-to-date 2023, interest expense, net of amounts capitalized was $98 million compared to $105 million for the corresponding period in 2022. The decrease was primarily due to lower average outstanding borrowings.
Income Taxes
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $3 | 8.3 | $(11) | (22.4) |
For year-to-date 2023, income tax expense was $38 million compared to $49 million for the corresponding period in 2022. The decrease was primarily due to a change in state apportionment methodology resulting from tax legislation enacted by the State of Tennessee in the second quarter 2023, partially offset by higher pre-tax earnings. See Note (G) to the Condensed Financial Statements herein for additional information.
Net Income (Loss) Attributable to Noncontrolling Interests
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(2) | (16.7) | $(13) | (23.6) |
In the third quarter 2023, net income attributable to noncontrolling interests was $10 million compared to $12 million for the corresponding period in 2022. The decrease was primarily due to $7 million in higher HLBV loss allocations to wind tax equity partners, largely offset by an allocation of $6 million to equity partners related to an arbitration interim award received for losses previously incurred.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
For year-to-date 2023, net loss attributable to noncontrolling interests was $68 million compared to $55 million for the corresponding period in 2022. The increase was primarily due to $16 million in higher HLBV loss allocations to wind tax equity partners and $12 million in lower income allocations to equity partners, partially offset by $15 million in lower loss allocations to battery energy storage partners.
See Note (C) to the Condensed Financial Statements under "General Litigation Matters – Southern Power" herein for additional information.
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. 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.
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.
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. Southern Company Gas' base operating expenses, excluding cost of natural gas and bad debt expense, 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 for the interim periods presented are not necessarily indicative of annual results and can vary significantly from quarter to quarter.
Net Income
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(1) | (1.2) | $(41) | (7.9) |
Southern Company Gas' net income for year-to-date 2023 was $475 million compared to $516 million for the corresponding period in 2022. The decrease was primarily due to lower net income at gas distribution operations primarily as a result of a $28 million regulatory disallowance at Nicor Gas and a $6 million decrease in net income at gas marketing services primarily related to hedge losses. See Note (B) to the Condensed Financial Statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects" herein for additional information.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Natural Gas Revenues
In the third quarter 2023, natural gas revenues were $0.7 billion compared to $0.9 billion for the corresponding period in 2022. For year-to-date 2023, natural gas revenues were $3.4 billion compared to $4.0 billion for the corresponding period in 2022. Details of the changes in natural gas revenues were as follows:
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | ||||||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | ||||||||||||||||||||
| Infrastructure replacement programs and rate changes | $ | 9 | 1.1 | % | $ | 97 | 2.4 | % | |||||||||||||||
| Gas costs and other cost recovery | (181) | (21.1) | (645) | (16.1) | |||||||||||||||||||
| Gas marketing services | (22) | (2.6) | (44) | (1.1) | |||||||||||||||||||
| Other | 26 | 3.0 | 11 | 0.3 | |||||||||||||||||||
| Natural gas revenues | $ | (168) | (19.6) | % | $ | (581) | (14.5) | % |
Revenues from infrastructure replacement programs and rate changes increased in the third quarter and year-to-date 2023 compared to the corresponding periods in 2022 primarily due to rate increases at the natural gas distribution utilities and continued investment in infrastructure replacement. The year-to-date 2023 increase was partially offset by a regulatory disallowance at Nicor Gas. See Note 2 to the financial statements under "Southern Company Gas – Rate Proceedings" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects" herein for additional information.
Revenues from gas costs and other cost recovery decreased in the third quarter and year-to-date 2023 compared to the corresponding periods in 2022 primarily due to lower natural gas cost recovery associated with lower natural gas prices, the timing of natural gas purchases, and the recovery of those costs from customers. See "Cost of Natural Gas" herein for additional information. Revenue impacts from weather and customer growth are described further below.
Revenues from gas marketing services decreased in the third quarter and year-to-date 2023 compared to the corresponding periods in 2022 primarily due to lower natural gas prices and lower variable price spreads.
Southern Company Gas' natural gas distribution utilities have various regulatory mechanisms that limit their exposure to weather changes. Southern Company Gas also uses hedges for the majority of any remaining exposure to warmer-than-normal weather in Illinois for gas distribution operations and in Illinois and Georgia for gas marketing services; therefore, weather typically does not have a significant net income impact. The following table presents Heating Degree Days information for Illinois and Georgia, the primary locations where Southern Company Gas' operations are impacted by weather:
| Third Quarter | Year-to-Date | ||||||||||||||||||||||||||||||||||||||||
| 2023 vs. normal | 2023 vs. 2022 | 2023 vs. normal | 2023 vs. 2022 | ||||||||||||||||||||||||||||||||||||||
| Normal**(*)** | 2023 | 2022 | warmer | warmer | Normal**(*)** | 2023 | 2022 | warmer | warmer | ||||||||||||||||||||||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||||||||||||||||||||||||||||
| Illinois | 40 | 18 | 56 | (55.0) | % | (67.9) | % | 3,755 | 3,216 | 3,683 | (14.4) | % | (12.7) | % | |||||||||||||||||||||||||||
| Georgia | 3 | — | — | — | % | — | % | 1,461 | 1,029 | 1,361 | (29.6) | % | (24.4) | % |
(*)Normal represents the 10-year average from January 1, 2013 through September 30, 2022 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.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following table provides the number of customers served by Southern Company Gas at September 30, 2023 and 2022:
| September 30, | |||||||||||||||||
| 2023 | 2022 | 2023 vs. 2022 | |||||||||||||||
| (in thousands, except market share %) | (% change) | ||||||||||||||||
| Gas distribution operations | 4,316 | 4,300 | 0.4 | % | |||||||||||||
| Gas marketing services | |||||||||||||||||
| Energy customers(*) | 656 | 598 | 9.7 | % | |||||||||||||
| Market share of energy customers in Georgia | 29.9 | % | 28.3 | % | |||||||||||||
(*)Gas marketing services' customers are primarily located in Georgia, Ohio, and Illinois.
Southern Company Gas anticipates customer growth and uses a variety of targeted marketing programs to attract new customers and to retain existing customers.
Cost of Natural Gas
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(192) | (65.3) | $(641) | (34.8) |
Excluding Atlanta Gas Light, which does not sell natural gas to end-use customers, natural gas distribution rates include provisions to adjust billings for fluctuations in natural gas costs. Therefore, gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas and do not affect net income from gas distribution operations. Cost of natural gas at gas distribution operations represented 76% and 84% of the total cost of natural gas in the third quarter and year-to-date 2023, respectively. See MANAGEMENT'S DISCUSSION AND ANALYSIS – RESULTS OF OPERATIONS – "Southern Company Gas – Cost of Natural Gas" in Item 7 of the Form 10-K and "Natural Gas Revenues" herein for additional information.
In the third quarter 2023, cost of natural gas was $102 million compared to $294 million for the corresponding period in 2022. For year-to-date 2023, cost of natural gas was $1.2 billion compared to $1.8 billion for the corresponding period in 2022. The decreases reflect lower gas cost recovery as a result of decreases of 69% and 60% in natural gas prices in the third quarter and year-to-date 2023, respectively, compared to the corresponding periods in 2022.
The following table details the volumes of natural gas sold during both periods presented:
| Third Quarter | Year-to-Date | ||||||||||||||||||||||
| 2023 | 2022 | 2023 vs. 2022 | 2023 | 2022 | 2023 vs. 2022 | ||||||||||||||||||
| Gas distribution operations (mmBtu in millions) | |||||||||||||||||||||||
| Firm | 71 | 70 | 1.4 | % | 429 | 485 | (11.5) | % | |||||||||||||||
| Interruptible | 22 | 22 | — | 70 | 69 | 1.4 | |||||||||||||||||
| Total | 93 | 92 | 1.1 | % | 499 | 554 | (9.9) | % | |||||||||||||||
| Gas marketing services (mmBtu in millions) | |||||||||||||||||||||||
| Firm: | |||||||||||||||||||||||
| Georgia | 3 | 3 | — | % | 21 | 24 | (12.5) | % | |||||||||||||||
| Illinois | 1 | — | 100.0 | 5 | 4 | 25.0 | |||||||||||||||||
| Other | 3 | 2 | 50.0 | 9 | 8 | 12.5 | |||||||||||||||||
| Interruptible large commercial and industrial | 2 | 3 | (33.3) | 10 | 11 | (9.1) | |||||||||||||||||
| Total | 9 | 8 | 12.5 | % | 45 | 47 | (4.3) | % |
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Other Operations and Maintenance Expenses
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $12 | 4.8 | $55 | 6.7 |
In the third quarter 2023, other operations and maintenance expenses were $264 million compared to $252 million for the corresponding period in 2022. The increase for the third quarter 2023 was primarily due to increases of $8 million in compensation and benefits, $5 million related to energy service contracts, and $4 million at gas marketing services primarily related to customer service and information. The increases were partially offset by a decrease of $12 million in expenses passed through to customers primarily related to bad debt and energy efficiency programs at gas distribution operations.
For year-to-date 2023, other operations and maintenance expenses were $879 million compared to $824 million for the corresponding period in 2022. The increase was primarily due to increases of $52 million in compensation and benefits, $30 million related to a regulatory disallowance at Nicor Gas, and an increase of $20 million related to energy service contracts, partially offset by a decrease of $32 million in expenses passed through to customers primarily related to bad debt and energy efficiency programs at gas distribution operations. See Note (B) to the Condensed Financial Statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects" herein for additional information on the regulatory disallowance.
Depreciation and Amortization
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $5 | 3.6 | $15 | 3.6 |
In the third quarter 2023, depreciation and amortization was $145 million compared to $140 million for the corresponding period in 2022. For year-to-date 2023, depreciation and amortization was $429 million compared to $414 million for the corresponding period in 2022. The increases were primarily due to continued infrastructure investments at the natural gas distribution utilities.
Taxes Other Than Income Taxes
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $(3) | (6.7) | $(5) | (2.4) |
In the third quarter 2023, taxes other than income taxes was $42 million compared to $45 million for the corresponding period in 2022. For year-to-date 2023, taxes other than income taxes was $203 million compared to $208 million for the corresponding period in 2022. The decreases for the third quarter and year-to-date 2023 were primarily due to decreases of $3 million and $15 million, respectively, in revenue taxes. The year-to-date 2023 decrease was largely offset by increases of $8 million and $2 million in payroll and property taxes, respectively.
Interest Expense, Net of Amounts Capitalized
| Third Quarter 2023 vs. Third Quarter 2022 | Year-To-Date 2023 vs. Year-To-Date 2022 | |||||||||||||||||||
| (change in millions) | (% change) | (change in millions) | (% change) | |||||||||||||||||
| $12 | 18.5 | $39 | 20.9 |
In the third quarter 2023, interest expense, net of amounts capitalized was $77 million compared to $65 million for the corresponding period in 2022. For year-to-date 2023, interest expense, net of amounts capitalized was $226 million compared to $187 million for the corresponding period in 2022. The increases for the third quarter and year-to-date 2023 were primarily associated with increases of approximately $8 million and $31 million, respectively,
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
related to higher interest rates and approximately $3 million and $7 million, respectively, related to higher outstanding debt. See FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" and "Financing Activities" herein for additional information on borrowings.
Segment Information
Operating revenues, operating expenses, and net income for each segment are provided in the table below. See Note (L) to the Condensed Financial Statements under "Southern Company Gas" herein for additional information.
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| Operating Revenues | Operating Expenses | Net Income (Loss) | Operating Revenues | Operating Expenses | Net Income (Loss) | ||||||||||||||||||||||||||||||
| (in millions) | (in millions) | ||||||||||||||||||||||||||||||||||
| Third Quarter | |||||||||||||||||||||||||||||||||||
| Gas distribution operations | $ | 619 | $ | 485 | $ | 70 | $ | 751 | $ | 629 | $ | 59 | |||||||||||||||||||||||
| Gas pipeline investments | 8 | 2 | 24 | 8 | 3 | 24 | |||||||||||||||||||||||||||||
| Gas marketing services | 56 | 53 | 2 | 85 | 87 | (2) | |||||||||||||||||||||||||||||
| All other | 8 | 12 | (14) | 16 | 12 | 2 | |||||||||||||||||||||||||||||
| Intercompany eliminations | (2) | 1 | — | (3) | — | — | |||||||||||||||||||||||||||||
| Consolidated | $ | 689 | $ | 553 | $ | 82 | $ | 857 | $ | 731 | $ | 83 | |||||||||||||||||||||||
| Year-to-Date | |||||||||||||||||||||||||||||||||||
| Gas distribution operations | $ | 3,002 | $ | 2,386 | $ | 352 | $ | 3,533 | $ | 2,922 | $ | 365 | |||||||||||||||||||||||
| Gas pipeline investments | 24 | 7 | 73 | 24 | 8 | 76 | |||||||||||||||||||||||||||||
| Gas marketing services | 376 | 292 | 59 | 420 | 327 | 65 | |||||||||||||||||||||||||||||
| All other | 30 | 30 | (9) | 43 | 48 | 10 | |||||||||||||||||||||||||||||
| Intercompany eliminations | (15) | (5) | — | (22) | (19) | — | |||||||||||||||||||||||||||||
| Consolidated | $ | 3,417 | $ | 2,710 | $ | 475 | $ | 3,998 | $ | 3,286 | $ | 516 |
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. See Note 2 to the financial statements under "Southern Company Gas" in Item 8 of the Form 10-K for additional information.
In the third quarter 2023, net income increased $11 million, or 18.6%, when compared to the corresponding period in 2022, as described further below:
- Operating revenues decreased $132 million primarily due to lower gas cost recovery, partially offset by rate increases and continued investment in infrastructure replacement. Gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
-
Operating expenses decreased $144 million primarily due to a $152 million decrease in cost of natural gas as a result of lower gas prices compared to 2022, partially offset by higher depreciation resulting from additional assets placed in service and an increase related to energy service contracts. The decrease in operating expenses also includes costs passed through directly to customers, primarily related to bad debt expenses, energy efficiency programs, and revenue taxes.
-
Interest expense, net of amounts capitalized increased $7 million primarily due to higher interest rates and higher average outstanding debt.
For year-to-date 2023, net income decreased $13 million, or 3.6%, when compared to the corresponding period in 2022, as described further below:
-
Operating revenues decreased $531 million primarily due to lower gas cost recovery, partially offset by rate increases and continued investment in infrastructure replacement. Gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas.
-
Operating expenses decreased $536 million primarily due to a $599 million decrease in cost of natural gas as a result of lower gas prices and lower volumes sold compared to 2022, partially offset by higher depreciation resulting from additional assets placed in service, higher compensation and benefits, $30 million related to the regulatory disallowance at Nicor Gas, and a $20 million increase related to energy service contracts. The decrease in operating expenses also includes costs passed through directly to customers, primarily related to bad debt expenses, energy efficiency programs, and revenue taxes.
-
Interest expense, net of amounts capitalized increased $32 million primarily due to higher interest rates and higher average outstanding debt.
-
Income taxes decreased $13 million primarily as a result of the tax benefit resulting from the regulatory disallowance at Nicor Gas.
See Note (B) to the Condensed Financial Statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects" herein for additional information.
Gas Pipeline Investments
Gas pipeline investments consists primarily of joint ventures in natural gas pipeline investments including SNG and Dalton Pipeline. See Note (E) to the Condensed Financial Statements under "Southern Company Gas" herein for additional information.
Gas Marketing Services
Gas marketing services provides energy-related products and services to natural gas markets and participants in customer choice programs that were approved in various states to increase competition. These programs allow customers to choose their natural gas supplier while the local distribution utility continues to provide distribution and transportation services. Gas marketing services is weather sensitive and uses a variety of hedging strategies, such as weather derivative instruments and other risk management tools, to partially mitigate potential weather impacts.
In the third quarter 2023, net income increased $4 million, when compared to the corresponding period in 2022 primarily due to a $39 million decrease in cost of gas, largely offset by a $29 million decrease in operating revenue primarily due to lower price spreads and lower gas prices and a $4 million increase in operations and maintenance expenses primarily related to customer service and information.
For year-to-date 2023, net income decreased $6 million, or 9.2%, when compared to the corresponding period in 2022 primarily due to a $44 million decrease in operating revenue, primarily due to lower price spreads, lower gas prices, and lower volumes sold, as well as a $9 million increase in operations and maintenance expenses, largely offset by a $44 million decrease in cost of gas.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
All Other
All other includes natural gas storage businesses, a renewable natural gas business, 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. All other included a natural gas storage facility in Texas through its sale in November 2022 and a natural gas storage facility in California through its sale in September 2023. See Note 15 to the financial statements in Item 8 of the Form 10-K and Note (K) to the Condensed Financial Statements herein under "Southern Company Gas" for additional information.
In the third quarter 2023, net income decreased $16 million when compared to the corresponding period in 2022, primarily due to a decrease in operating revenue and increases in operating expenses, interest expenses, and income taxes.
For year-to-date 2023, net income decreased $19 million when compared to the corresponding period in 2022. The decrease was primarily related to a decrease in operating revenue and increases in interest expenses and income taxes, partially offset by a decrease in operating expenses primarily related to lower depreciation in 2023, lower cost of gas, and lower taxes other than income taxes.
FUTURE EARNINGS POTENTIAL
Each Registrant's results of operations are not necessarily indicative of its future earnings potential. The level of the Registrants' future earnings depends on numerous factors that affect the opportunities, challenges, and risks of the Registrants' primary businesses of selling electricity and/or distributing natural gas, as described further herein.
For the traditional electric operating companies, these factors include the ability to maintain constructive regulatory environments that allow for the timely recovery of prudently-incurred costs during a time of increasing costs, including those related to projected long-term demand growth, stringent environmental standards, including CCR rules, safety, system reliability and resiliency, fuel, restoration following major storms, and capital expenditures, including constructing new electric generating plants and expanding and improving the transmission and distribution systems; continued customer growth; and the trends of higher inflation and reduced electricity usage per customer, especially in residential and commercial markets. For Georgia Power, other major factors are completing construction and start-up of Plant Vogtle Unit 4, meeting the related cost and schedule projections, and completing the related cost recovery proceedings for Plant Vogtle Units 3 and 4.
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 continue to be significantly affected by a series of demand and supply shocks that caused a global and national economic recession in 2020 and have been further impacted by the invasion of Ukraine and significant declines in labor force participation rates. The confluence of these disruptions has resulted in the highest levels of inflation globally in 40 years and driven a significant policy response by central banks across the global economy. The U.S. Federal Reserve has increased interest rates faster than any rate increase cycle in the last 40 years and to levels high enough to slow economic activity and reduce inflation rates, although target inflation levels have not yet been achieved. These actions and impacts, including increased costs for goods and services and borrowing costs, have led to a slowing of some economic activity and an increased risk of recession. Additionally, inflation remains elevated in part due to continued supply chain and labor market constraints. Electricity sales across all classes have recovered to pre-COVID-19 pandemic levels and customer growth at both the traditional electric operating companies and natural gas distribution utilities has remained strong. However, weakening economic activity increases the risk of slowing to declining energy sales. Additionally, the current economic environment has increased the uncertainty of future energy demand and operating costs. See RESULTS OF OPERATIONS herein for information on energy sales in the Southern Company system's service territory during the first nine months of 2023.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The level of future earnings for Southern Power's competitive wholesale electric business depends on numerous factors including the parameters of the wholesale market and the efficient operation of its wholesale generating assets; Southern Power's ability to execute its growth strategy through the development, construction, or acquisition of renewable facilities and other energy projects while containing costs; regulatory matters; customer creditworthiness; total electric generating capacity available in Southern Power's market areas; Southern Power's ability to successfully remarket capacity as current contracts expire; renewable portfolio standards; continued availability of federal and state ITCs and PTCs, which could be impacted by future tax legislation; transmission constraints; cost of generation from units within the Southern Company power pool; and operational limitations. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters" in Item 7 of the Form 10-K for information regarding the Inflation Reduction Act's expansion of the availability of federal ITCs and PTCs and Note (K) to the Condensed Financial Statements under "Southern Power" herein for information regarding acquisitions.
The level of future earnings for Southern Company Gas' primary business of distributing natural gas and its complementary businesses in the gas pipeline investments and gas marketing services sectors depends on numerous factors. These factors include the natural gas distribution utilities' ability to maintain constructive regulatory environments that allow for the timely recovery of prudently-incurred costs, including those related to projected long-term demand growth, safety, system reliability and resiliency, natural gas, and capital expenditures, including expanding and improving the natural gas distribution systems; the completion and subsequent operation of ongoing infrastructure and other construction projects; customer creditworthiness; and certain policies to limit the use of natural gas, such as the potential across certain parts of the U.S. for state or municipal bans on the use of natural gas or policies designed to promote electrification. The volatility of natural gas prices has an impact 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 business to capture value from locational and seasonal spreads. Additionally, changes in commodity prices, primarily driven by tight gas supplies, geopolitical events, and diminished gas production, subject a portion of Southern Company Gas' operations to earnings variability and may result in higher natural gas prices. Additional economic factors may contribute to this environment. The demand for natural gas may increase, which may cause natural gas prices to rise and drive higher volatility in the natural gas markets on a longer-term basis. Alternatively, a significant drop in oil and natural gas prices could lead to a consolidation of natural gas producers or reduced levels of natural gas production.
Earnings for both the electricity and natural gas businesses are subject to a variety of other factors. These factors include weather; competition; developing new and maintaining existing energy contracts and associated load requirements with wholesale customers; customer energy conservation practices; the use of alternative energy sources by customers; government incentives to reduce overall energy usage; fuel, labor, and material prices in an environment of heightened inflation and material and labor supply chain disruptions; and the price elasticity of demand. Demand for electricity and natural gas in the Registrants' service territories is primarily driven by the pace of economic growth or decline that may be affected by changes in regional and global economic conditions, which may impact future earnings.
As part of its ongoing effort to adapt to changing market conditions, Southern Company continues to evaluate and consider a wide array of potential business strategies. These strategies may include business combinations, partnerships, and acquisitions involving other utility or non-utility businesses or properties, disposition of, or the sale of interests in, certain assets or businesses, internal restructuring, or some combination thereof. Furthermore, Southern Company may engage in new business ventures that arise from competitive and regulatory changes in the utility industry. Pursuit of any of the above strategies, or any combination thereof, may significantly affect the business operations, risks, and financial condition 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 in Item 8 of the Form 10-K and Note (K) to the Condensed Financial Statements herein for additional information.
For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL in Item 7 of the Form 10-K.
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AND RESULTS OF OPERATIONS (Continued)
Environmental Matters
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" in Item 7 and Note 3 to the financial statements under "Environmental Remediation" in Item 8 of the Form 10-K, as well as Note (C) to the Condensed Financial Statements under "General Litigation Matters" and "Environmental Remediation" herein, for additional information.
Environmental Laws and Regulations
Air Quality
On February 13, 2023, the EPA published a final rule disapproving 19 state implementation plans (SIPs), including the States of Alabama and Mississippi, under the interstate transport (good neighbor) provisions of the Clean Air Act for the 2015 Ozone National Ambient Air Quality Standards (NAAQS). On March 14, 2023 and March 15, 2023, the State of Mississippi and Mississippi Power, respectively, challenged the EPA's disapproval of the Mississippi SIP in the U.S. Court of Appeals for the Fifth Circuit. On May 11, 2023, the State of Mississippi and Mississippi Power filed a joint motion for stay of the EPA's disapproval of the Mississippi SIP, which was granted on June 8, 2023. On April 13, 2023 and April 14, 2023, the State of Alabama, Alabama Power, and PowerSouth Energy Cooperative challenged the EPA's disapproval of the Alabama SIP in the U.S. Court of Appeals for the Eleventh Circuit. On June 13, 2023, the State of Alabama, Alabama Power, and PowerSouth Energy Cooperative filed a joint motion for stay of the EPA's disapproval of the Alabama SIP, which was granted on August 17, 2023.
On June 5, 2023, the EPA published the 2015 Ozone NAAQS Good Neighbor federal implementation plans (FIP), which became effective on August 4, 2023. On June 16, 2023 and June 27, 2023, the State of Mississippi and Mississippi Power, respectively, challenged the FIP for Mississippi in the U.S. Court of Appeals for the Fifth Circuit. On June 30, 2023, the State of Mississippi and Mississippi Power filed in the U.S. Court of Appeals for the Fifth Circuit a joint motion for stay of the FIP for Mississippi and a request to hold the case in abeyance pending resolution of the Mississippi SIP disapproval case. On July 20, 2023, the U.S. Court of Appeals for the Fifth Circuit denied the motion for stay but granted the motion to hold the case in abeyance. On August 4, 2023, the State of Alabama, Alabama Power, and PowerSouth Energy Cooperative challenged the FIP for Alabama in the U.S. Court of Appeals for the Eleventh Circuit. On August 16, 2023, the State of Alabama, Alabama Power, and PowerSouth Energy Cooperative filed in the U.S. Court of Appeals for the Eleventh Circuit a joint motion requesting an abeyance of the case pending resolution of the Alabama SIP disapproval case, which was granted on August 30, 2023.
On July 31, 2023, the EPA published an Interim Final Rule that stays the implementation of the FIPs for states with judicially stayed SIP disapprovals, including Mississippi. On September 29, 2023, the EPA published an updated Interim Final Rule addressing judicial stays of states' interstate transport SIP disapprovals, including Alabama. The Interim Final Rule revises the existing regulations to maintain currently applicable trading programs for those states.
The ultimate impact of the rule and associated legal matters cannot be determined at this time; however, implementation of the FIPs will likely result in increased compliance costs for the traditional electric operating companies.
Water Quality
On March 29, 2023, the EPA published a proposed ELG Supplemental Rule revising certain effluent limits of the 2020 and 2015 ELG rules. The proposal imposes more stringent requirements for flue gas desulfurization wastewater, bottom ash transport water, and combustion residual leachate to be met no later than December 31, 2029. The EPA is also proposing that a limited number of facilities already achieving compliance with the 2020 ELG Reconsideration Rule be allowed to elect retirement or repowering by December 31, 2032 as opposed to meeting the new more stringent requirements. The proposal maintains the 2020 ELG Reconsideration Rule's permanent cessation of coal combustion subcategory allowing units to continue to operate until the end of 2028 without having to install additional technologies. A final rule is anticipated in 2024. The ultimate impact of this proposal cannot be determined at this time; however, it may result in significant compliance costs.
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AND RESULTS OF OPERATIONS (Continued)
In 2021, Alabama Power submitted its notice of planned participation (NOPP) to the Alabama Department of Environmental Management (ADEM), which included plans to retire Plant Barry Unit 5. Alabama Power subsequently indicated that it expected to retire Plant Barry Unit 5 in late 2023 or early 2024 subject to certain operating conditions. Alabama Power has continued to evaluate operating conditions relevant to the expected retirement of Plant Barry Unit 5 in late 2023 or early 2024 and now expects the unit to remain in service beyond these periods. Alabama Power plans to retire the unit on or before the NOPP compliance date of December 31, 2028. The ultimate impact of this matter cannot be determined at this time.
Coal Combustion Residuals
On May 18, 2023, the EPA published a proposal to establish two new categories of federally regulated CCR, legacy surface impoundments and CCR management units (CCRMUs). The EPA is proposing to define a legacy surface impoundment as a CCR surface impoundment that no longer receives CCR but contained both CCR and liquids on or after October 19, 2015 and that is located at an inactive electric generating facility. The EPA is proposing that owners and operators of legacy surface impoundments comply with all of the existing CCR Rule requirements with the exception of location restrictions and liner demonstrations. The proposal establishes accelerated compliance deadlines for legacy surface impoundments to meet regulatory requirements, including a requirement to initiate closure within 12 months after the effective date of the final rule. The EPA is also proposing to define CCRMUs as any area of land on which any non-containerized accumulation of CCR is received, placed, or otherwise managed at any time, that is not a CCR unit, including inactive CCR landfills and CCR units that closed prior to October 17, 2015. The EPA's proposal would require evaluations to be completed at both active facilities and inactive facilities with one or more legacy surface impoundment. CCRMUs must comply with the CCR Rule's provisions for groundwater monitoring, corrective action, closure, and post-closure activities. A final rule is anticipated in 2024. The ultimate impact of this proposal cannot be determined at this time; however, it may result in significant compliance costs.
On August 14, 2023, the EPA published a proposal to deny the ADEM's CCR permit program application. Alabama Power's permits to close its CCR facilities remain valid under state law. In the absence of an EPA-approved state permit program, CCR facilities in Alabama will remain subject to both the federal and state CCR rules.
Based on requirements for closure and monitoring of landfills and ash ponds pursuant to the CCR Rule and applicable state rules, the traditional electric operating companies have periodically updated, and expect to continue periodically updating, their related cost estimates and ARO liabilities for each CCR unit as additional information related to closure methodologies, schedules, and/or costs becomes available. Some of these updates have been, and future updates may be, material. Additionally, the closure designs and plans in the States of Alabama and Georgia are subject to approval by environmental regulatory agencies. Absent continued recovery of ARO costs through regulated rates, results of operations, cash flows, and financial condition for Southern Company and the traditional electric operating companies could be materially impacted. See Note 6 to the financial statements in Item 8 of the Form 10-K and Notes (A) and (C) to the Condensed Financial Statements under "Asset Retirement Obligations" and "General Litigation Matters – Alabama Power," respectively, herein for additional information.
Greenhouse Gases
On May 23, 2023, the EPA published the proposed GHG standards and state plan guidelines for fossil fuel-fired power plants. The proposal includes GHG limits for both new and existing units based on technologies such as carbon capture and sequestration, low-GHG hydrogen co-firing, and natural gas co-firing. The proposed standards for new combustion turbines include subcategories for different operational uses including peaking, intermediate, and base load. Compliance with new source standards, once finalized, begins when the unit comes online. The EPA proposes a phased approach for intermediate and base load units that increases in stringency over time. The proposed state plan guidelines for existing units include subcategories based on unit type, retirement date, size, and capacity factor. The EPA is proposing a 24-month state plan submission deadline for the existing unit implementation and proposes to potentially allow some limited form of trading and averaging for the state plans. Existing source compliance is proposed to begin as early as January 1, 2030, depending on the unit type and
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
subcategory. The EPA also proposes to simultaneously repeal the Affordable Clean Energy rule. A final rule is anticipated in 2024. The ultimate impact of this proposal cannot be determined at this time; however, it may result in significant compliance costs.
Regulatory Matters
See Note 2 to the financial statements in Item 8 of the Form 10-K, OVERVIEW – "Recent Developments" herein, and Note (B) to the Condensed Financial Statements herein 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.
Alabama Power
On July 14, 2023, Alabama Power issued a request for proposals of between 100 MWs and 1,200 MWs of capacity beginning no later than December 1, 2028, with consideration for commencement as early as 2025. Any purchases will depend upon the cost competitiveness of the respective offers, as well as other options available to Alabama Power, and would ultimately require approval by the Alabama PSC. The ultimate outcome of this matter cannot be determined at this time.
Construction Programs
The Subsidiary Registrants are engaged in continuous construction programs to accommodate existing and estimated future loads on their respective systems. The Southern Company system strategy continues to include developing and constructing new electric generating facilities, expanding and improving the electric transmission and electric and natural gas distribution systems, and undertaking projects to comply with environmental laws and regulations.
For the traditional electric operating companies, major generation construction projects are subject to state PSC approval in order to be included in retail rates. The largest construction project currently underway in the Southern Company system is Plant Vogtle Unit 4. See Note (B) to the Condensed Financial Statements under "Georgia Power – Nuclear Construction" herein for additional information. Also see Note 2 to the financial statements in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein under "Alabama Power – Certificates of Convenience and Necessity" for information regarding Alabama Power's construction of Plant Barry Unit 8, which was placed in service on November 1, 2023.
See Note (K) to the Condensed Financial Statements under "Southern Power" herein for information relating to Southern Power's 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 resiliency, reduce emissions, and meet operational flexibility and growth. The natural gas distribution utilities recover their investment and a return associated with these infrastructure programs through their regulated rates. See Note 2 to the financial statements in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein under "Southern Company Gas" for additional information on Southern Company Gas' construction program.
See FINANCIAL CONDITION AND LIQUIDITY – "Cash Requirements" herein for additional information regarding the Registrants' capital requirements for their construction programs.
Income Tax Matters
In June 2023, the Internal Revenue Service issued temporary regulations related to the transferability of tax credits. Southern Company and certain subsidiaries are considering the sale of tax credits that are eligible to be transferred. See Note (G) to the Condensed Financial Statements herein for additional information. Additionally, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters" in Item 7 of the Form 10-K for information regarding the Inflation Reduction Act's expansion of the availability of federal ITCs and PTCs.
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AND RESULTS OF OPERATIONS (Continued)
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 (B) and (C) to the Condensed Financial Statements herein, 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 (B) and (C) to the Condensed Financial Statements for a discussion of various contingencies, including matters being litigated, regulatory matters, and other matters which may affect future earnings potential.
Traditional Electric Operating Companies
See BUSINESS – "The Southern Company System – Traditional Electric Operating Companies" in Item 1 of the Form 10-K for information regarding the Southeast Energy Exchange Market (SEEM). On July 14, 2023, the U.S. Court of Appeals for the District of Columbia Circuit vacated the FERC's orders related to SEEM and remanded the proceeding to the FERC. The ultimate outcome of this matter cannot be determined at this time.
ACCOUNTING POLICIES
See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES in Item 7 of the Form 10-K for a complete discussion of the Registrants' critical accounting policies and estimates, as well as recently issued accounting standards.
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 Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on the Registrants' results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements.
Estimated Cost, Schedule, and Rate Recovery for the Construction of Plant Vogtle Units 3 and 4
(Southern Company and Georgia Power)
On August 30, 2023, as provided for in the December 2017 Georgia PSC approval of the seventeenth VCM report, Georgia Power filed with the Georgia PSC an application to adjust rates to include reasonable and prudent Plant Vogtle Units 3 and 4 costs (Application). The Application provides the necessary support to justify the reasonableness, prudence, and recovery of $8.826 billion in total construction and capital costs, $1.07 billion in associated retail rate base items, and the operating costs related to the full operation and output of Plant Vogtle Units 3 and 4. Also on August 30, 2023, the staff of the Georgia PSC filed a stipulated agreement (Prudency Stipulation) among Georgia Power, the staff of the Georgia PSC, and certain intervenors. If the Prudency Stipulation is approved, Georgia Power will recover $7.562 billion in total construction and capital costs and associated retail rate base items of $1.02 billion, which includes AFUDC financing costs above $4.418 billion (the Georgia PSC-certified amount) up to $7.562 billion. Georgia Power expects the Georgia PSC to render a final decision on these matters on December 19, 2023.
As of September 30, 2023, Georgia Power revised its total project capital cost forecast to $10.8 billion (net of $1.7 billion received under the Guarantee Settlement Agreement and approximately $188 million in related customer refunds). This forecast includes construction contingency of $17 million and is based on the actual in-service date of July 2023 for Unit 3 and a projected in-service date of March 2024 for Unit 4.
On October 5, 2023 and October 17, 2023, Georgia Power reached agreements with OPC and Dalton, respectively, to resolve its respective dispute with each of OPC and Dalton regarding the proper interpretation of the cost-sharing and tender provisions of the joint ownership agreements relating to the Global Amendments. Under the terms of the agreements with OPC and Dalton, among other items, (i) each of OPC and Dalton retracted its exercise of the tender
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AND RESULTS OF OPERATIONS (Continued)
option and will retain its full ownership interest in Plant Vogtle Units 3 and 4, (ii) Georgia Power made payments immediately after execution of the agreements of $308 million and $17 million to OPC and Dalton, respectively, representing payment for a portion of each of OPC's and Dalton's costs of construction for Plant Vogtle Units 3 and 4 previously incurred, (iii) Georgia Power will pay a portion of each of OPC's and Dalton's further costs of construction for Plant Vogtle Units 3 and 4 as such costs are incurred and with no further adjustment for force majeure costs, which payments will be in an aggregate amount of approximately $105 million and $6 million for OPC and Dalton, respectively, based on the current project capital cost forecast, and (iv) Georgia Power will pay 66% of each of OPC's and Dalton's costs of construction with respect to any amounts above the current project capital cost forecast, with no further adjustment for force majeure costs.
Georgia Power recorded a pre-tax charge to income in the third quarter 2023 of approximately $160 million ($120 million after tax) associated with the cost-sharing provisions of the Global Amendments, including the settlements with OPC and Dalton, which is included in the total project capital cost forecast and will not be recovered from retail customers.
The ultimate outcome of these matters cannot be determined at this time. However, any extension of the in-service date beyond the March 2024 for Unit 4, including the current level of cost sharing described in Note (B) to the Condensed Financial Statements under "Georgia Power – Nuclear Construction" herein, is estimated to result in additional base capital costs for Georgia Power of up to $25 million per month, as well as the related AFUDC and any additional related construction, support resources, or testing costs. See Note 2 to the financial statements in Item 8 of the Form 10-K under "Georgia Power – Nuclear Construction" and Note (B) to the Condensed Financial Statements herein under "Georgia Power – Plant Vogtle Units 3 and 4 Prudency Proceeding" and " – Nuclear Construction" for additional information.
FINANCIAL CONDITION AND LIQUIDITY
Overview
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" in Item 7 of the Form 10-K for additional information. The financial condition of each Registrant remained stable at September 30, 2023. The Registrants intend to 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 "Cash Requirements," "Sources of Capital," and "Financing Activities" herein for additional information.
At the end of the third quarter 2023, the market price of Southern Company's common stock was $64.72 per share (based on the closing price as reported on the NYSE) and the book value was $28.77 per share, representing a market-to-book ratio of 225%, compared to $71.41, $27.93, and 256%, respectively, at the end of 2022. Southern Company's common stock dividend for the third quarter 2023 was $0.70 per share compared to $0.68 per share in the third quarter 2022.
Cash Requirements
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Cash Requirements" in Item 7 of the Form 10-K for a description of the Registrants' significant cash requirements.
The Registrants' significant cash requirements include estimated capital expenditures associated with their construction programs and, for the traditional electric operating companies, operating cash flows related to fuel cost under recovery. The fuel cost under recovery balances are primarily the result of higher than forecasted prices for natural gas and purchased power. See Note (B) to the Condensed Financial Statements herein under "Georgia Power – Fuel Cost Recovery" for additional information.
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
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AND RESULTS OF OPERATIONS (Continued)
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 and/or regulation; the cost, availability, and efficiency of construction labor, equipment, and materials; project scope and design changes; abnormal weather; delays in construction due to judicial or regulatory action; storm impacts; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures and AROs will be fully recovered. Additionally, expenditures associated with Southern Power's planned acquisitions may vary due to market opportunities and the execution of its growth strategy.
The construction program of Georgia Power includes Plant Vogtle Unit 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 in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein under "Georgia Power – Nuclear Construction" for information regarding Plant Vogtle Units 3 and 4 and additional factors that may impact construction expenditures.
See Note (B) to the Condensed Financial Statements under "Georgia Power – Integrated Resource Plans" herein for information regarding Georgia Power's 2023 IRP Update, which includes requests that, if approved, would result in incremental cash requirements for capital expenditures and PPAs.
Southern Power's construction program includes the South Cheyenne and Millers Branch solar projects. The remaining aggregate construction costs for these projects are expected to be between $300 million and $375 million. The ultimate outcome of this matter cannot be determined at this time. See Note (K) to the Condensed Financial Statements under "Southern Power" herein for additional information.
Long-term debt maturities and the interest payable on long-term debt each represent a significant cash requirement for the Registrants. See "Financing Activities" herein for information on changes in the Registrants' long-term debt balances since December 31, 2022.
Sources of Capital
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" in Item 7 of the Form 10-K for additional information. Southern Company intends to meet its future capital needs through operating cash flows, borrowings from financial institutions, and debt, hybrid, and/or equity issuances. Equity capital can be provided from any combination of Southern Company's stock plans, private placements, or public offerings.
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. Operating cash flows provide a substantial portion of the Registrants' cash needs. Georgia Power intends to utilize a mix of senior note issuances, short-term floating rate bank loans, and commercial paper issuances to continue funding operating cash flows related to fuel cost under recovery.
The amount, type, and timing of any financings in 2023, as well as in subsequent years, will be contingent on investment opportunities and the Registrants' capital requirements and will depend upon prevailing market conditions, regulatory approvals (for certain of the Subsidiary Registrants), and other factors. See "Cash Requirements" and "Financing Activities" 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 the nine months ended September 30, 2023, Southern Power obtained tax equity funding for existing tax equity partnerships totaling $21 million. See Note 1 to the financial statements under "General" in Item 8 of the Form 10-K for additional information.
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AND RESULTS OF OPERATIONS (Continued)
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 September 30, 2023, the amount of subsidiary retained earnings restricted to dividend totaled $1.6 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.
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. The following table shows the amount by which current liabilities exceeded current assets at September 30, 2023 for the applicable Registrants:
| At September 30, 2023 | Southern Company | Georgia Power | Mississippi Power | Southern Company Gas | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Current liabilities in excess of current assets | $ | 2,126 | $ | 1,690 | $ | 239 | $ | 176 |
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 September 30, 2023, the Registrants' unused committed credit arrangements with banks were as follows:
| At September 30, 2023 | Southern Company parent | Alabama Power | Georgia Power | Mississippi Power | Southern Power**(a)** | Southern Company Gas**(b)** | SEGCO | Southern Company | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| Unused committed credit | $ | 1,998 | $ | 1,350 | $ | 1,726 | $ | 275 | $ | 589 | $ | 1,598 | $ | 30 | $ | 7,566 |
(a)At September 30, 2023, Southern Power also had two continuing letters of credit facilities for standby letters of credit, of which $25 million was unused. Southern Power's subsidiaries are not parties to its bank credit arrangements or letter of credit facilities.
(b)Includes $798 million and $800 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 certain revenue bonds of the traditional electric operating companies and the commercial paper programs of the Registrants, Nicor Gas, and SEGCO. At September 30, 2023, outstanding variable rate demand revenue bonds of the traditional electric operating companies with allocated liquidity support totaled approximately $1.7 billion (comprised of approximately $818 million at Alabama Power, $819 million at Georgia Power, and $69 million at Mississippi Power). In addition, at September 30, 2023, Alabama Power and Georgia Power had approximately $120 million and $325 million, respectively, of fixed rate revenue bonds outstanding that are required to be remarketed within the next 12 months. The variable rate demand revenue bonds and fixed rate revenue bonds required to be remarketed within the next 12 months are classified as long-term debt on the balance sheets as a result of available long-term committed credit.
See Note 8 to the financial statements in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein under "Bank Credit Arrangements" for additional information.
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AND RESULTS OF OPERATIONS (Continued)
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 September 30, 2023 | Short-term Debt During the Period**(*)** | ||||||||||||||||||||||||||||
| Amount Outstanding | Weighted Average Interest Rate | Average Amount Outstanding | Weighted Average Interest Rate | Maximum Amount Outstanding | |||||||||||||||||||||||||
| (in millions) | (in millions) | (in millions) | |||||||||||||||||||||||||||
| Southern Company | $ | 1,726 | 6.0 | % | $ | 2,069 | 5.9 | % | $ | 2,615 | |||||||||||||||||||
| Alabama Power | — | — | 2 | 5.3 | 25 | ||||||||||||||||||||||||
| Georgia Power | 1,250 | 6.2 | 1,534 | 6.0 | 1,910 | ||||||||||||||||||||||||
| Mississippi Power | 20 | 5.5 | 41 | 5.5 | 76 | ||||||||||||||||||||||||
| Southern Power | 359 | 5.6 | 88 | 5.9 | 359 | ||||||||||||||||||||||||
| Southern Company Gas: | |||||||||||||||||||||||||||||
| Southern Company Gas Capital | $ | 75 | 5.5 | % | $ | 211 | 5.5 | % | $ | 440 | |||||||||||||||||||
(*)Average and maximum amounts are based upon daily balances during the three-month period ended September 30, 2023.
Analysis of Cash Flows
Net cash flows provided from (used for) operating, investing, and financing activities for the nine months ended September 30, 2023 and 2022 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) | ||||||||||||||||||||
| Nine Months Ended September 30, 2023 | ||||||||||||||||||||
| Operating activities | $ | 5,740 | $ | 1,522 | $ | 1,969 | $ | 260 | $ | 799 | $ | 1,644 | ||||||||
| Investing activities | (6,721) | (1,546) | (3,376) | (280) | (224) | (1,226) | ||||||||||||||
| Financing activities | 834 | 66 | 1,183 | (12) | (451) | (102) | ||||||||||||||
| Nine Months Ended September 30, 2022 | ||||||||||||||||||||
| Operating activities | $ | 5,017 | $ | 1,072 | $ | 1,482 | $ | 279 | $ | 827 | $ | 1,532 | ||||||||
| Investing activities | (5,952) | (1,641) | (2,653) | (219) | (128) | (1,239) | ||||||||||||||
| Financing activities | 1,119 | 967 | 1,171 | (72) | (603) | (313) |
Fluctuations in cash flows from financing activities vary from year to year based on capital needs and the maturity or redemption of securities.
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AND RESULTS OF OPERATIONS (Continued)
Southern Company
Net cash provided from operating activities increased $0.7 billion for the nine months ended September 30, 2023 as compared to the corresponding period in 2022 primarily due to increased fuel cost recovery and the timing of customer receivable collections, partially offset by the timing of vendor payments.
The net cash used for investing activities for the nine months ended September 30, 2023 was primarily related to the Subsidiary Registrants' construction programs.
The net cash provided from financing activities for the nine months ended September 30, 2023 was primarily related to net issuances of long-term debt, partially offset by common stock dividend payments, net repayments of short-term bank loans, and a reduction in commercial paper borrowings.
Alabama Power
Net cash provided from operating activities increased $450 million for the nine months ended September 30, 2023 as compared to the corresponding period in 2022 primarily due to an increase in fuel cost recovery and the timing of customer receivable collections, partially offset by the timing of vendor payments and fuel stock purchases.
The net cash used for investing activities for the nine months ended September 30, 2023 was primarily related to gross property additions, including approximately $66 million related to the construction of Plant Barry Unit 8. See Note (B) to the Condensed Financial Statements under "Alabama Power" herein for additional information.
The net cash provided from financing activities for the nine months ended September 30, 2023 was primarily related to capital contributions from Southern Company and issuances of revenue bonds and senior notes, largely offset by common stock dividend payments.
Georgia Power
Net cash provided from operating activities increased $487 million for the nine months ended September 30, 2023 as compared to the corresponding period in 2022 primarily due to increased fuel cost recovery, partially offset by the timing of vendor payments.
The net cash used for investing activities for the nine months ended September 30, 2023 was primarily related to gross property additions, including a total of approximately $590 million related to the construction of Plant Vogtle Units 3 and 4. See Note (B) to the Condensed Financial Statements under "Georgia Power – Nuclear Construction" herein for additional information on Plant Vogtle Units 3 and 4.
The net cash provided from financing activities for the nine months ended September 30, 2023 was primarily related to capital contributions from Southern Company, net issuances of senior notes, and reofferings of pollution control revenue bonds which were previously held by Georgia Power, partially offset by common stock dividend payments and a net decrease in short-term borrowings.
Mississippi Power
Net cash provided from operating activities decreased $19 million for the nine months ended September 30, 2023 as compared to the corresponding period in 2022 primarily due to the timing of vendor payments, partially offset by the timing of customer receivable collections.
The net cash used for investing activities for the nine months ended September 30, 2023 was primarily related to gross property additions.
The net cash used for financing activities for the nine months ended September 30, 2023 was primarily related to common stock dividend payments, partially offset by the issuance of senior notes.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Southern Power
Net cash provided from operating activities decreased $28 million for the nine months ended September 30, 2023 as compared to the corresponding period in 2022 primarily due to the timing of vendor payments and a change in the utilization of tax credits, partially offset by the timing of customer receivable collections.
The net cash used for investing activities for the nine months ended September 30, 2023 was primarily related to the acquisitions of the South Cheyenne and Millers Branch solar facilities and ongoing construction activities, partially offset by proceeds from the sale of equity investments. See Note (K) to the Condensed Financial Statements under "Southern Power" herein for additional information.
The net cash used for financing activities for the nine months ended September 30, 2023 was primarily related to repayment of senior notes at maturity, common stock dividend payments, and net distributions to noncontrolling interests, partially offset by net proceeds from short-term debt.
Southern Company Gas
Net cash provided from operating activities increased $112 million for the nine months ended September 30, 2023 as compared to the corresponding period in 2022 primarily due to the timing of customer receivable collections, partially offset by the timing of vendor payments.
The net cash used for investing activities for the nine months ended September 30, 2023 was primarily related to construction of transportation and distribution assets recovered through base rates and infrastructure investment recovered through replacement programs at gas distribution operations.
The net cash used for financing activities for the nine months ended September 30, 2023 was primarily related to repayment of short-term borrowings and common stock dividend payments, partially offset by capital contributions from Southern Company and proceeds from other long-term debt.
Significant Balance Sheet Changes
Southern Company
Significant balance sheet changes for the nine months ended September 30, 2023 included:
-
an increase of $4.1 billion in long-term debt (including securities due within one year) related to new issuances;
-
an increase of $3.7 billion in total property, plant, and equipment primarily related to the Subsidiary Registrants' construction programs;
-
a decrease of $0.9 billion in notes payable due to the repayment of short-term bank loans and a reduction in commercial paper borrowings;
-
an increase of $0.8 billion in total stockholders' equity primarily related to net income, partially offset by common stock dividend payments;
-
an increase of $0.7 billion in accumulated deferred income taxes primarily related to the expected utilization of ITCs in 2023, as well as an increase in property-related timing differences;
-
a decrease of $0.6 billion in accounts payable primarily related to the timing of vendor payments; and
-
a decrease of $0.5 billion in unbilled revenues as a result of seasonality.
See "Financing Activities" herein and Notes (B) and (G) to the Condensed Financial Statements herein for additional information.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Alabama Power
Significant balance sheet changes for the nine months ended September 30, 2023 included:
-
an increase of $664 million in common stockholder's equity primarily due to net income and capital contributions from Southern Company, partially offset by dividends paid to Southern Company;
-
an increase of $553 million in long-term debt (including securities due within one year) primarily due to the issuance of revenue bonds and senior notes;
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an increase of $426 million in total property, plant, and equipment primarily related to the construction of Plant Barry Unit 8 and transmission and distribution facilities;
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a decrease of $401 million in other regulatory assets, deferred primarily due to a decrease in the under recovered fuel clause balance;
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a decrease of $299 million in deferred credits related to income taxes primarily due to the amortization of accumulated deferred income taxes; and
-
a decrease of $264 million in other accounts payable primarily due to the timing of vendor payments.
See "Financing Activities – Alabama Power" herein and Notes (B) and (G) to the Condensed Financial Statements herein under "Alabama Power" for additional information.
Georgia Power
Significant balance sheet changes for the nine months ended September 30, 2023 included:
-
an increase of $2.5 billion in total property, plant, and equipment primarily related to the construction of generation, transmission, and distribution facilities, including $944 million for Plant Vogtle Units 3 and 4;
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an increase of $2.0 billion in common stockholder's equity primarily due to capital contributions from Southern Company and net income, partially offset by dividends paid to Southern Company;
-
an increase of $1.1 billion in long-term debt (including securities due within one year) primarily due to net issuances of senior notes;
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an increase of $556 million in other accounts payable primarily due to the timing of vendor payments;
-
a decrease of $350 million in notes payable primarily due to repayments of short-term bank debt; and
-
an increase of $321 million in customer accounts receivable, net primarily due to the timing of collections.
See "Financing Activities – Georgia Power" herein and Note (B) to the Condensed Financial Statements herein under "Georgia Power – Nuclear Construction" for additional information.
Mississippi Power
Significant balance sheet changes for the nine months ended September 30, 2023 included:
-
an increase of $120 million in total property, plant, and equipment primarily related to the construction of transmission and distribution facilities;
-
an increase of $99 million in long-term debt (including securities due within one year) primarily due to issuances of senior notes;
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a decrease of $45 million in other accounts payable due to the timing of vendor payments;
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decreases of $44 million in affiliated receivables and $42 million in affiliated accounts payable primarily due to fluctuations in affiliate sales/purchases and the timing of payments; and
-
an increase of $43 million in common stockholder's equity related to net income and capital contributions from Southern Company, partially offset by dividends paid to Southern Company.
See "Financing Activities – Mississippi Power" herein for additional information.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Southern Power
Significant balance sheet changes for the nine months ended September 30, 2023 included:
-
increases of $340 million in accumulated deferred income tax liabilities and $125 million in prepaid income taxes primarily related to the expected utilization of ITCs in 2023;
-
a decrease of $292 million in long-term debt (including securities due within one year) primarily related to the repayment of senior notes at maturity;
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a decrease of $137 million in total property, plant, and equipment due to the continued depreciation of assets, partially offset by an increase in construction work in progress, primarily related to the acquisition of the South Cheyenne and Millers Branch solar facilities;
-
an increase of $134 million in notes payable primarily due to net issuances of commercial paper; and
-
an increase of $105 million in cash and cash equivalents, as discussed further under "Analysis of Cash Flows – Southern Power" herein.
See "Financing Activities – Southern Power" herein and Notes (G) and (K) to the Condensed Financial Statements herein for additional information.
Southern Company Gas
Significant balance sheet changes for the nine months ended September 30, 2023 included:
-
an increase of $807 million in total property, plant, and equipment primarily related to the construction of transportation and distribution assets and additional infrastructure investment;
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a decrease of $777 million in total accounts receivable primarily related to decreases of $379 million in unbilled revenues and $374 million in customer accounts receivable as a result of seasonality;
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a decrease of $693 million in notes payable due to a reduction in commercial paper borrowings and the repayment of short-term bank loans;
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an increase of $615 million in long-term debt due to issuances by Southern Company Gas Capital and Nicor Gas;
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an increase of $436 million in common stockholder's equity related to net income and capital contributions from Southern Company, partially offset by dividends paid to Southern Company;
-
a decrease of $327 million in other accounts payable due to seasonality and the timing of vendor payments; and
-
an increase of $316 million in cash and cash equivalents, as discussed further under "Analysis of Cash Flows – Southern Company Gas" herein.
See "Financing Activities – Southern Company Gas" herein and Note (B) to the Condensed Financial Statements herein for additional information.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Financing Activities
The following table outlines the Registrants' long-term debt financing activities for the first nine months of 2023:
| Issuances and Reofferings | Maturities and Redemptions | ||||||||||||||||||||||
| Company | Senior Notes | Revenue Bonds | Other Long- Term Debt | Senior Notes | Other Long- Term Debt**(a)** | ||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Southern Company parent | $ | 4,525 | $ | — | $ | — | $ | 1,850 | $ | 550 | |||||||||||||
| Alabama Power | 200 | 326 | 28 | — | 1 | ||||||||||||||||||
| Georgia Power | 1,750 | 229 | — | 800 | 72 | ||||||||||||||||||
| Mississippi Power | 100 | — | — | — | — | ||||||||||||||||||
| Southern Power | — | — | — | 290 | — | ||||||||||||||||||
| Southern Company Gas | 500 | — | 154 | — | — | ||||||||||||||||||
| Other | — | — | — | — | 6 | ||||||||||||||||||
| Elimination(b) | — | — | — | — | (3) | ||||||||||||||||||
| Southern Company | $ | 7,075 | $ | 555 | $ | 182 | $ | 2,940 | $ | 626 |
(a)Includes reductions in finance lease obligations resulting from cash payments under finance leases and, for Georgia Power, principal amortization payments totaling $64 million for FFB borrowings. See Note 8 to the financial statements under "Long-term Debt – DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K for additional information.
(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 the first nine months of 2023, Southern Company issued approximately 1.9 million shares of common stock primarily through employee equity compensation plans and received proceeds of approximately $26 million.
In January 2023, Southern Company redeemed all $550 million aggregate principal amount of its Series 2016B Junior Subordinated Notes due March 15, 2057.
In February 2023, Southern Company issued $1.5 billion aggregate principal amount of its Series 2023A 3.875% Convertible Senior Notes due December 15, 2025 (Series 2023A Convertible Senior Notes) in a private offering. In March 2023, Southern Company issued an additional $225 million aggregate principal amount of the Series 2023A Convertible Senior Notes upon the exercise by the initial purchasers of their over-allotment option. See Note (F) to the Condensed Financial Statements under "Convertible Senior Notes" herein for additional information.
In May 2023, Southern Company repaid at maturity $600 million aggregate principal amount of its 2021C Floating Rate Senior Notes.
Also in May 2023, Southern Company issued $750 million aggregate principal amount of Series 2023B 4.85% Senior Notes due June 15, 2028 and $750 million aggregate principal amount of Series 2023C 5.20% Senior Notes due June 15, 2033.
In July 2023, Southern Company repaid at maturity $1.25 billion aggregate principal amount of its 2.95% Senior Notes.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
In September 2023, Southern Company issued $600 million aggregate principal amount of Series 2023D 5.50% Senior Notes due March 15, 2029 and $700 million aggregate principal amount of Series 2023E 5.70% Senior Notes due March 15, 2034.
Alabama Power
During the first nine months of 2023, a subsidiary of Alabama Power borrowed $19 million under a $39 million long-term floating rate bank loan entered into in December 2022 with a maturity date of December 12, 2029.
In May 2023, Alabama Power issued $200 million aggregate principal amount of Series 2023A Floating Rate Senior Notes due May 15, 2073.
In August 2023, the Walker County Economic and Industrial Development Authority issued for the benefit of Alabama Power $228 million aggregate principal amount of Solid Waste Disposal Revenue Bonds (Alabama Power Company Plant Gorgas Project), First Series 2023 ($140 million aggregate principal amount) and Second Series 2023 ($88 million aggregate principal amount) due August 1, 2063. The proceeds from the revenue bonds are being used to finance certain solid waste disposal facilities at Plant Gorgas.
Also in August 2023, the Industrial Development Board of the Town of West Jefferson issued for the benefit of Alabama Power $98 million aggregate principal amount of Solid Waste Disposal Revenue Bonds (Alabama Power Company Plant Miller Project), Series 2023 due August 1, 2063. The proceeds from the revenue bonds are being used to finance certain solid waste disposal facilities at Plant Miller.
In September 2023, a subsidiary of Alabama Power assumed two fixed rate bank loans totaling $9 million, both maturing on August 30, 2028.
Georgia Power
In March 2023, Georgia Power reoffered to the public the following pollution control revenue bonds that previously had been purchased and were held by Georgia Power at December 31, 2022:
-
approximately $28 million aggregate principal amount of Development Authority of Monroe County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Scherer Project), Second Series 2006;
-
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;
-
approximately $49 million aggregate principal amount of Development Authority of Monroe County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Scherer Project), First Series 2012;
-
approximately $18 million aggregate principal amount of Development Authority of Monroe County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Scherer Project), First Series 2013; and
-
$46 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), First Series 1996.
Also in March 2023, Georgia Power borrowed $100 million pursuant to a short-term uncommitted bank credit arrangement bearing interest at a mutually agreed upon rate and payable on demand. In April 2023, Georgia Power borrowed an additional $150 million under the arrangement. In May 2023, Georgia Power repaid the aggregate $250 million outstanding.
Also in March 2023, Georgia Power repaid at maturity a $200 million short-term floating rate bank loan entered into in March 2022.
In April 2023, Georgia Power repaid at maturity $100 million aggregate principal amount of its Series N 5.750% Senior Notes.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Also in April 2023, Georgia Power repaid at maturity a $200 million short-term floating rate bank loan entered into in April 2022.
In May 2023, Georgia Power issued $750 million aggregate principal amount of Series 2023A 4.65% Senior Notes due May 16, 2028 and $1.0 billion aggregate principal amount of Series 2023B 4.95% Senior Notes due May 17, 2033.
In July 2023, Georgia Power repaid at maturity $700 million aggregate principal amount of its Series 2020A 2.10% Senior Notes.
Mississippi Power
In March 2023, Mississippi Power borrowed $50 million of short-term debt pursuant to its $125 million revolving credit arrangement, which it repaid in June 2023.
In June 2023, Mississippi Power issued in a private placement $65 million aggregate principal amount of Series 2023A 5.64% Senior Notes due July 15, 2026 and $35 million aggregate principal amount of Series 2023B 5.63% Senior Notes due July 15, 2033.
Southern Power
In January 2023, Southern Power borrowed $100 million pursuant to a short-term uncommitted bank credit arrangement bearing interest at a mutually agreed upon rate and payable on demand. During the second quarter 2023, Southern Power made net repayments of $50 million of the $100 million borrowed. Subsequent to September 30, 2023, Southern Power borrowed the remaining $50 million under the arrangement.
In September 2023, Southern Power repaid at maturity $290 million aggregate principal amount of its Series 2016C 2.75% Senior Notes.
Southern Company Gas
In February 2023, Nicor Gas repaid its $150 million and $50 million short-term floating rate bank loans entered into in February 2022 and March 2022, respectively.
During the first nine months of 2023, Southern Company Gas received cash advances totaling $29 million under a long-term financing agreement related to a construction contract.
In July 2023, Nicor Gas issued in a private placement $50 million aggregate principal amount of 5.28% Series First Mortgage Bonds due July 31, 2030 and $75 million aggregate principal amount of 5.43% Series First Mortgage Bonds due July 31, 2035. Subsequent to September 30, 2023, pursuant to the same agreement, Nicor Gas issued in a private placement $75 million aggregate principal amount of 5.67% Series First Mortgage Bonds due October 31, 2053 and $75 million aggregate principal amount of 5.77% Series First Mortgage Bonds due October 31, 2063.
In September 2023, Southern Company Gas Capital issued $500 million aggregate principal amount of Series 2023A 5.75% Senior Notes due September 15, 2033, guaranteed by Southern Company Gas.
Subsequent to September 30, 2023, Southern Company Gas Capital repaid at maturity $350 million aggregate principal amount of its 2.450% Senior Notes.
Credit Rating Risk
At September 30, 2023, 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, services at Plant Vogtle Units 3 and 4.
Table of Contents Index to Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The maximum potential collateral requirements under these contracts at September 30, 2023 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 | $ | 33 | $ | 1 | $ | — | $ | — | $ | 32 | $ | — | ||||||||
| At BBB- and/or Baa3 | 415 | 2 | 60 | 1 | 353 | — | ||||||||||||||
| At BB+ and/or Ba1 or below | 2,084 | 411 | 939 | 315 | 1,275 | 16 |
(*)Southern Power has PPAs that could require collateral, but not accelerated payment, in the event of a downgrade of Southern Power's credit. The PPAs require credit assurances without stating a specific credit rating. The amount of collateral required would depend upon actual losses resulting from a credit downgrade. Southern Power had $106 million of cash collateral posted related to PPA requirements at September 30, 2023.
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.
On August 2, 2023, S&P revised its credit rating outlook for Southern Company and its subsidiaries to positive from stable.
On September 26, 2023, Moody's upgraded Mississippi Power's senior unsecured long-term debt rating to A3 from Baa1 and revised its rating outlook to stable from positive.
Also on September 26, 2023, Moody's revised its ratings outlooks for Southern Company and Georgia Power to positive from stable.
Previous: Item 1. Financial Statements (Unaudited). · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk.