UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 20182019
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number | | Registrant, State of Incorporation, Address and Telephone Number | | I.R.S. Employer Identification No. |
| 1-3526 | | The Southern Company (A Delaware Corporation) 30 Ivan Allen Jr. Boulevard, N.W. Atlanta, Georgia 30308 (404) 506-5000 | | 58-0690070 |
| | | | | |
| 1-3164 | | Alabama Power Company (An Alabama Corporation) 600 North 18th Street Birmingham, Alabama 35203 (205) 257-1000 | | 63-0004250 |
| | | | | |
| 1-6468 | | Georgia Power Company (A Georgia Corporation) 241 Ralph McGill Boulevard, N.E. Atlanta, Georgia 30308 (404) 506-6526 | | 58-0257110 |
| | | | | |
001-31737 | | Gulf Power Company
(A Florida Corporation)
One Energy Place
Pensacola, Florida 32520
(850) 444-6111
| | 59-0276810 |
| | | | |
| 001-11229 | | Mississippi Power Company (A Mississippi Corporation) 2992 West Beach Boulevard Gulfport, Mississippi 39501 (228) 864-1211 | | 64-0205820 |
| | | | | |
| 001-37803 | | Southern Power Company (A Delaware Corporation) 30 Ivan Allen Jr. Boulevard, N.W. Atlanta, Georgia 30308 (404) 506-5000 | | 58-2598670 |
| | | | | |
| 1-14174 | | Southern Company Gas
(A Georgia Corporation)
Ten Peachtree Place, N.E. Atlanta, Georgia 30309
(404) 584-4000 | | 58-2210952 |
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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| | | | | | | | | | |
| Registrant | | Large Accelerated Filer | | Accelerated Filer | | Non- accelerated Filer | | Smaller Reporting Company | | Emerging Growth Company |
| The Southern Company | | X | | | | | | | | |
| Alabama Power Company | | | | | | X | | | | |
Georgia Power Company | | | | | | X | | | | |
Gulf Power Company | | | | | | X | | | | |
| Mississippi Power Company | | | | | | X | | | | |
| Southern Power Company | | | | | | X | | | | |
| Southern Company Gas | | | | | | X | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ (Response applicable to all registrants.)
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| | | | | |
| Registrant | | Description of Common Stock | | Shares Outstanding at March 31, 20182019 |
|
| The Southern Company | | Par Value $5 Per Share | | 1,011,624,6201,040,295,732 |
|
| Alabama Power Company | | Par Value $40 Per Share | | 30,537,500 |
|
| Georgia Power Company | | Without Par Value | | 9,261,500 |
|
Gulf Power Company | | Without Par Value | | 7,392,717 |
|
| Mississippi Power Company | | Without Par Value | | 1,121,000 |
|
| Southern Power Company | | Par Value $0.01 Per Share | | 1,000 |
|
| Southern Company Gas | | Par Value $0.01 Per Share | | 100 |
|
This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company, Southern Power Company, and Southern Company Gas. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 20182019
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| | PART I—FINANCIAL INFORMATION | |
| Item 1. | Financial Statements (Unaudited) | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
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INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 20182019
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Number |
| | PART I—FINANCIAL INFORMATION (CONTINUED) | |
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| Item 3. | | |
| Item 4. | | |
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| | PART II—OTHER INFORMATION | |
| Item 1. | | |
| Item 1A. | | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | Inapplicable |
| Item 3. | Defaults Upon Senior Securities | Inapplicable |
| Item 4. | Mine Safety Disclosures | Inapplicable |
| Item 5. | Other Information | Inapplicable |
| Item 6. | | |
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| |
| Term | Meaning |
| |
| 2013 ARP | Alternative Rate Plan approved by the Georgia PSC in 2013 for Georgia Power for the years 2014 through 2016 and subsequently extended through 2019 |
| AFUDC | Allowance for funds used during construction |
| Alabama Power | Alabama Power Company |
| Amended and Restated Loan Guarantee Agreement | Loan guarantee agreement entered into by Georgia Power with the DOE in 2014, as amended and restated on March 22, 2019, under which the proceeds of borrowings may be used to reimburse Georgia Power for Eligible Project Costs incurred in connection with its construction of Plant Vogtle Units 3 and 4 |
| ARO | Asset retirement obligation |
| ASC | Accounting Standards Codification |
| ASU | Accounting Standards Update |
| Atlanta Gas Light | Atlanta Gas Light Company, a wholly-owned subsidiary of Southern Company Gas |
| Atlantic Coast Pipeline | Atlantic Coast Pipeline, LLC, a joint venture to construct and operate a natural gas pipeline in which Southern Company Gas has a 5% ownership interest |
| Bechtel | Bechtel Power Corporation, the primary contractor for the remaining construction activities for Plant Vogtle Units 3 and 4 |
| Bechtel Agreement | The October 23, 2017 construction completion agreement between the Vogtle Owners and Bechtel |
| CCR | Coal combustion residuals |
| Chattanooga Gas | Chattanooga Gas Company, a wholly-owned subsidiary of Southern Company Gas |
CO2 | Carbon dioxide |
| COD | Commercial operation date |
| Contractor Settlement Agreement | The December 31, 2015 agreement between Westinghouse and the Vogtle Owners resolving disputes between the Vogtle Owners and the EPC Contractor under the Vogtle 3 and 4 Agreement |
CPCNCooperative Energy | Certificate of public convenience and necessityElectric cooperative in Mississippi |
| Customer Refunds | Refunds to be issued to Georgia Power customers no later than the end of the third quarterin 2018 as ordered by the Georgia PSC related to the Guarantee Settlement Agreement |
| CWIP | Construction work in progress |
| Dalton | City of Dalton, Georgia, an incorporated municipality in the State of Georgia, acting by and through its Board of Water, Light, and Sinking Fund Commissioners |
| Dalton Pipeline | A pipeline facility in Georgia in which Southern Company Gas has a 50% undivided ownership interest of Southern Company Gas in a pipeline facility in Georgia |
| DOE | U.S. Department of Energy |
| ECO Plan | Mississippi Power's environmental compliance overview plan |
| Eligible Project Costs | Certain costs of construction relating to Plant Vogtle Units 3 and 4 that are eligible for financing under the loan guarantee program established under Title XVII of the Energy Policy Act of 2005 |
| EPA | U.S. Environmental Protection Agency |
| EPC Contractor | Westinghouse and its affiliate, WECTEC Global Project Services Inc.; the former engineering, procurement, and construction contractor for Plant Vogtle Units 3 and 4 |
| FASB | Financial Accounting Standards Board |
| FERC | Federal Energy Regulatory Commission |
| FFB | Federal Financing Bank |
| Fitch | Fitch Ratings, Inc. |
| Form 10-K | Annual Report on Form 10-K of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Southern Power, and Southern Company Gas for the year ended December 31, 2017,2018, as applicable |
| GAAP | U.S. generally accepted accounting principles |
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| |
| Term | Meaning |
| Georgia Power | Georgia Power Company |
| GHG | Greenhouse gas |
| Guarantee Settlement Agreement | The June 9, 2017 settlement agreement between the Vogtle Owners and Toshiba related to certain payment obligations of the EPC Contractor guaranteed by Toshiba Guarantee |
| Gulf Power | Gulf Power Company, until January 1, 2019, a subsidiary of Southern Company |
| Heating Degree Days | A measure of weather, calculated when the average daily temperatures are less than 65 degrees Fahrenheit |
Horizon PipelineHeating Season | Horizon PipelineThe period from November through March when Southern Company LLCGas' natural gas usage and operating revenues are generally higher |
| HLBV | Hypothetical liquidation at book value |
| IGCC | Integrated coal gasification combined cycle, the technology originally approved for Mississippi Power's Kemper County energy facility (Plant Ratcliffe) |
| IIC | Intercompany interchange contractInterchange Contract |
| Illinois Commission | Illinois Commerce Commission |
DEFINITIONS
(continued)
|
| ITAAC | |
Term | Meaning |
Interim Assessment Agreement | Agreement entered intoInspections, Tests, Analyses, and Acceptance Criteria, standards established by the Vogtle Owners and the EPC Contractor to allow construction to continue after the EPC Contractor's bankruptcy filing |
IRS | Internal Revenue ServiceNRC |
| ITC | Investment tax credit |
| JEA | Jacksonville Electric Authority |
| KWH | Kilowatt-hour |
LIBOR | London Interbank Offered Rate |
| LIFO | Last-in, first-out |
LNG | Liquefied natural gas |
Loan Guarantee Agreement | Loan guarantee agreement entered into by Georgia Power with the DOE in 2014, under which the proceeds of borrowings may be used to reimburse Georgia Power for Eligible Project Costs incurred in connection with its construction of Plant Vogtle Units 3 and 4 |
| LOCOM | Lower of weighted average cost or current market price |
| LTSA | Long-term service agreement |
| MEAG | Municipal Electric Authority of Georgia |
| Merger | The merger, effective July 1, 2016, of a wholly-owned, direct subsidiary of Southern Company with and into Southern Company Gas, with Southern Company Gas continuing as the surviving corporation |
| Mississippi Power | Mississippi Power Company |
| mmBtu | Million British thermal units |
| Moody's | Moody's Investors Service, Inc. |
| MRA | Municipal and Rural Associations |
| MW | Megawatt |
| natural gas distribution utilities | Southern Company Gas' seven natural gas distribution utilities (Nicor Gas, Atlanta Gas Light, Virginia Natural Gas, Elizabethtown Gas, Florida City Gas, Chattanooga Gas, Company, and Elkton Gas)Gas as of June 30, 2018) (Nicor Gas, Atlanta Gas Light, Virginia Natural Gas, and Chattanooga Gas as of July 29, 2018) |
| NCCR | Georgia Power's Nuclear Construction Cost Recovery |
New Jersey BPUNextEra Energy | New Jersey Board of Public UtilitiesNextEra Energy, Inc. |
| Nicor Gas | Northern Illinois Gas Company, a wholly-owned subsidiary of Southern Company Gas |
| NRC | U.S. Nuclear Regulatory Commission |
| NYMEX | New York Mercantile Exchange, Inc. |
| OATT | Open access transmission tariff |
| OCI | Other comprehensive income |
| PennEast Pipeline | PennEast Pipeline Company, LLC, a joint venture to construct and operate a natural gas pipeline in which Southern Company Gas has a 20% ownership interest |
| PEP | Mississippi Power's Performance Evaluation Plan |
| Pivotal Home Solutions | Nicor Energy Services Company, until June 4, 2018 a wholly-owned subsidiary of Southern Company Gas, doing business as Pivotal Home Solutions |
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| Term | Meaning |
| Pivotal Utility Holdings | Pivotal Utility Holdings, Inc., until July 29, 2018 a wholly-owned subsidiary of Southern Company Gas, doing business as Elizabethtown Gas (until July 1, 2018), Elkton Gas (until July 1, 2018), and Florida City Gas |
| PowerSecure | PowerSecure, Inc. |
| power pool | The operating arrangement whereby the integrated generating resources of the traditional electric operating companies and Southern Power (excluding subsidiaries) are subject to joint commitment and dispatch in order to serve their combined load obligations |
| PPA | Power purchase agreements, as well as, for Southern Power, contracts for differences that provide the owner of a renewable facility a certain fixed price for the electricity sold to the grid |
| PSC | Public Service Commission |
| PTC | Production tax credit |
| Rate CNP | Alabama Power's Rate Certificated New Plant |
| Rate CNP Compliance | Alabama Power's Rate Certificated New Plant Compliance |
DEFINITIONS
(continued)
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| |
Term | Meaning |
| Rate CNP PPA | Alabama Power's Rate Certificated New Plant Power Purchase Agreement |
| Rate ECR | Alabama Power's Rate Energy Cost Recovery |
| Rate NDR | Alabama Power's Rate Natural Disaster Reserve |
| Rate RSE | Alabama Power's Rate Stabilization and Equalization plan |
| registrants | Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Southern Power Company, and Southern Company Gas |
| revenue from contracts with customers | Revenue from contracts accounted for under the guidance of ASC 606, Revenue from Contracts with Customers |
| ROE | Return on equity |
| S&P | S&P Global Ratings, a division of S&P Global Inc. |
| SCS | Southern Company Services, Inc. (the Southern Company system service company) |
| SEC | U.S. Securities and Exchange Commission |
| SNG | Southern Natural Gas Company, L.L.C. |
| Southern Company | The Southern Company |
| Southern Company Gas | Southern Company Gas and its subsidiaries |
| Southern Company Gas Capital | Southern Company Gas Capital Corporation, a 100%-owned subsidiary of Southern Company Gas |
| Southern Company Gas Dispositions | Southern Company Gas' disposition of Pivotal Home Solutions, Pivotal Utility Holdings' disposition of Elizabethtown Gas and Elkton Gas, and NUI Corporation's disposition of Pivotal Utility Holdings, which primarily consisted of Florida City Gas |
| Southern Company system | Southern Company, the traditional electric operating companies, Southern Power, Southern Company Gas, Southern Electric Generating Company, Southern Nuclear, SCS, Southern Communications Services, Inc., PowerSecure, and other subsidiaries |
| Southern Nuclear | Southern Nuclear Operating Company, Inc. |
| Southern Power | Southern Power Company and its subsidiaries |
| SP Solar | SP Solar Holdings I, LP |
| SP Wind | SP Wind Holdings II, LLC |
| Tax Reform Legislation | The Tax Cuts and Jobs Act, which was signed into law on December 22, 2017 and became effective on January 1, 2018 |
| Toshiba | Toshiba Corporation, the parent company of Westinghouse |
Toshiba Guarantee | Certain payment obligations of the EPC Contractor guaranteed by Toshiba |
| traditional electric operating companies | Alabama Power, Georgia Power, Gulf Power, and Mississippi Power through December 31, 2018; Alabama Power, Georgia Power, and Mississippi Power as of January 1, 2019 |
| Triton | Triton Container Investments, LLC |
| VCM | Vogtle Construction Monitoring |
| VIE | Variable interest entity |
| Virginia Commission | Virginia State Corporation Commission |
|
| |
| Term | Meaning |
| Virginia Natural Gas | Virginia Natural Gas, Inc., a wholly-owned subsidiary of Southern Company Gas |
| Vogtle 3 and 4 Agreement | Agreement entered into with the EPC Contractor in 2008 by Georgia Power, acting for itself and as agent for the Vogtle Owners, and rejected in bankruptcy in July 2017, pursuant to which the EPC Contractor agreed to design, engineer, procure, construct, and test Plant Vogtle Units 3 and 4 |
| Vogtle Owners | Georgia Power, Oglethorpe Power Corporation, the Municipal Electric Authority of Georgia,MEAG, and the City of Dalton Georgia, an incorporated municipality in the State of Georgia acting by and through its Board of Water, Light, and Sinking Fund Commissioners |
| Vogtle Services Agreement | The June 9, 2017 services agreement between the Vogtle Owners and the EPC Contractor, as amended and restated on July 20, 2017, for the EPC Contractor to transition construction management of Plant Vogtle Units 3 and 4 to Southern Nuclear and to provide ongoing design, engineering, and procurement services to Southern Nuclear |
| WACOG | Weighted average cost of gas |
| Westinghouse | Westinghouse Electric Company LLC |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION8
This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements include, among other things, statements concerning regulated rates, the strategic goals for the wholesale business, customer and sales growth, economic conditions, fuel and environmental cost recovery and other rate actions, current and proposed environmental regulations and related compliance plans and estimated expenditures, pending or potential litigation matters, access to sourcesTable of capital, financing activities, completion dates of construction projects, completion of announced acquisitions or dispositions, filings with state and federal regulatory authorities, impacts of the Tax Reform Legislation, federal and state income tax benefits, estimated sales and purchases under power sale and purchase agreements, and estimated construction and other plans and expenditures. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "could," "should," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential," or "continue" or the negative of these terms or other similar terminology. There are various factors that could cause actual results to differ materially from those suggested by the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include:Contents
the impact of recent and future federal and state regulatory changes, including environmental laws and regulations governing air, water, land, and protection of other natural resources, and also changes in tax and other laws and regulations to which Southern Company and its subsidiaries are subject, as well as changes in application of existing laws and regulations;
the uncertainty surrounding the Tax Reform Legislation, including implementing regulations and IRS interpretations, actions that may be taken in response by regulatory authorities, and its impact, if any, on the credit ratings of Southern Company and its subsidiaries;
current and future litigation or regulatory investigations, proceedings, or inquiries;
the effects, extent, and timing of the entry of additional competition in the markets in which Southern Company's subsidiaries operate;
variations in demand for electricity and natural gas, including those relating to weather, the general economy, population and business growth (and declines), the effects of energy conservation and efficiency measures, including from the development and deployment of alternative energy sources such as self-generation and distributed generation technologies, and any potential economic impacts resulting from federal fiscal decisions;
available sources and costs of natural gas and other fuels;
limits on pipeline capacity;
transmission constraints;
effects of inflation;
the ability to control costs and avoid cost overruns during the development, construction, and operation of facilities, which include the development and construction of generating facilities with designs that have not been previously constructed, including changes in labor costs and productivity, adverse weather conditions, shortages, increased costs or inconsistent quality of equipment, materials, and labor, including any changes related to imposition of import tariffs, contractor or supplier delay, non-performance under construction, operating, or other agreements, operational readiness, including specialized operator training and required site safety programs, unforeseen engineering or design problems, start-up activities (including major equipment failure and system integration), and/or operational performance;
the ability to construct facilities in accordance with the requirements of permits and licenses (including satisfaction of NRC requirements), to satisfy any environmental performance standards and the requirements of tax credits and other incentives, and to integrate facilities into the Southern Company system upon completion of construction;
investment performance of the Southern Company system's employee and retiree benefit plans and nuclear decommissioning trust funds;
advances in technology;
ongoing renewable energy partnerships and development agreements;
state and federal rate regulations and the impact of pending and future rate cases and negotiations, including rate actions relating to fuel and other cost recovery mechanisms;
the ability to successfully operate the electric utilities' generating, transmission, and distribution facilities and Southern Company Gas' natural gas distribution and storage facilities and the successful performance of necessary corporate functions;
legal proceedings and regulatory approvals and actions related to Plant Vogtle Units 3 and 4, including Georgia PSC approvals and NRC actions;
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements include, among other things, statements concerning regulated rates, the strategic goals for the business, customer and sales growth, economic conditions, fuel and environmental cost recovery and other rate actions, projected equity ratios, current and proposed environmental regulations and related compliance plans and estimated expenditures, pending or potential litigation matters, access to sources of capital, financing activities, completion dates of construction projects, matters related to the abandonment of the Kemper IGCC, completion of announced dispositions, filings with state and federal regulatory authorities, and estimated construction plans and expenditures. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "could," "would," "should," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential," or "continue" or the negative of these terms or other similar terminology. There are various factors that could cause actual results to differ materially from those suggested by the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include:
the impact of recent and future federal and state regulatory changes, including tax and environmental laws and regulations and other laws and regulations to which Southern Company and its subsidiaries are subject, as well as changes in application of existing laws and regulations;
the extent and timing of costs and legal requirements related to CCR;
current and future litigation or regulatory investigations, proceedings, or inquiries, including litigation and other disputes related to the Kemper County energy facility;
the effects, extent, and timing of the entry of additional competition in the markets in which Southern Company's subsidiaries operate, including from the development and deployment of alternative energy sources;
variations in demand for electricity and natural gas;
available sources and costs of natural gas and other fuels;
the ability to complete necessary or desirable pipeline expansion or infrastructure projects, limits on pipeline capacity, and operational interruptions to natural gas distribution and transmission activities;
transmission constraints;
effects of inflation;
the ability to control costs and avoid cost and schedule overruns during the development, construction, and operation of facilities, including Plant Vogtle Units 3 and 4, which includes components based on new technology that only recently began initial operation in the global nuclear industry at this scale, and including changes in labor costs, availability, and productivity; challenges with management of contractors, subcontractors, or vendors; adverse weather conditions; shortages, increased costs, or inconsistent quality of equipment, materials, and labor; contractor or supplier delay; non-performance under construction, operating, or other agreements; operational readiness, including specialized operator training and required site safety programs; engineering or design problems; design and other licensing-based compliance matters, including the timely resolution of ITAAC and the related approvals by the NRC; challenges with start-up activities, including major equipment failure and system integration; and/or operational performance;
the ability to construct facilities in accordance with the requirements of permits and licenses (including satisfaction of NRC requirements), to satisfy any environmental performance standards and the requirements of tax credits and other incentives, and to integrate facilities into the Southern Company system upon completion of construction;
investment performance of the employee and retiree benefit plans and nuclear decommissioning trust funds;
advances in technology;
ongoing renewable energy partnerships and development agreements;
state and federal rate regulations and the impact of pending and future rate cases and negotiations, including rate actions relating to ROE, equity ratios, and fuel and other cost recovery mechanisms;
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
(continued)
ifthe ability to successfully operate the electric utilities' generating, transmission, and distribution facilities and Southern Company Gas' natural gas distribution and storage facilities and the successful performance of necessary corporate functions;
legal proceedings and regulatory approvals and actions related to construction projects, such as Plant Vogtle Units 3 and 4 and pipeline projects, including PSC approvals and FERC and NRC actions;
under certain adverse events were to occur,specified circumstances, a decision by holders of more than 10% of the ownersownership interests of Plant Vogtle Units 3 and 4 not to proceed with construction;construction and the ability of other Vogtle Owners to tender a portion of their ownership interests to Georgia Power following certain construction cost increases;
litigation relatedin the event Georgia Power becomes obligated to provide funding to MEAG with respect to the Kemper County energy facility;portion of MEAG's ownership interest in Plant Vogtle Units 3 and 4 involving JEA, any inability of Georgia Power to receive repayment of such funding;
the inherent risks involved in operating and constructing nuclear generating facilities, including environmental, health, regulatory, natural disaster, terrorism, and financial risks;facilities;
the inherent risks involved in transporting and storing natural gas;
the performance of projects undertaken by the non-utility businesses and the success of efforts to invest in and develop new opportunities;
internal restructuring or other restructuring options that may be pursued;
potential business strategies, including acquisitions or dispositions of assets or businesses, including the proposed disposition by a wholly-owned subsidiarydispositions of Southern Company Gas of Elizabethtown Gas and Elkton Gas, the proposed disposition by Southern Company Gas of Pivotal Home Solutions,Plant Mankato and the potential sale of a 33% equity interest in substantially all of Southern Power's solar assets,Nacogdoches biomass-fueled facility, which cannot be assured to be completed or beneficial to Southern Company or its subsidiaries;
the possibility that the anticipated benefits from the Merger cannot be fully realized or may take longer to realize than expected and the possibility that costs related to the integration of Southern Company and Southern Company Gas will be greater than expected;
the ability of counterparties of Southern Company and its subsidiaries to make payments as and when due and to perform as required;
the ability to obtain new short- and long-term contracts with wholesale customers;
the direct or indirect effect on the Southern Company system's business resulting from cyber intrusion or physical attack and the threat of physical attacks;
interest rate fluctuations and financial market conditions and the results of financing efforts;
access to capital markets and other financing sources;
changes in Southern Company's and any of its subsidiaries' credit ratings, including impacts on interest rates, access to capital markets, and collateral requirements;
the impacts of any sovereign financial issues, including impacts on interest rates, access to capital markets, impacts on foreign currency exchange rates, counterparty performance, and the economy in general, as well as potential impacts on the benefits of the DOE loan guarantees;ratings;
the ability of Southern Company's electric utilities to obtain additional generating capacity (or sell excess generating capacity) at competitive prices;
catastrophic events such as fires, earthquakes, explosions, floods, tornadoes, hurricanes and other storms, droughts, pandemic health events, such as influenzas, or other similar occurrences;
the direct or indirect effects on the Southern Company system's business resulting from incidents affecting the U.S. electric grid, natural gas pipeline infrastructure, or operation of generating or storage resources;
impairments of goodwill or long-lived assets;
the effect of accounting pronouncements issued periodically by standard-setting bodies; and
other factors discussed elsewhere herein and in other reports (including the Form 10-K) filed by the registrants from time to time with the SEC.
The registrants expressly disclaim any obligation to update any forward-looking statements.
THE SOUTHERN COMPANY
AND SUBSIDIARY COMPANIES
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
| | | | For the Three Months
Ended March 31, | For the Three Months
Ended March 31, |
| | 2018 | | 2017 | 2019 | | 2018 |
| | (in millions) | (in millions) |
| Operating Revenues: | | | | | | |
| Retail electric revenues | $ | 3,568 |
| | $ | 3,394 |
| $ | 3,084 |
| | $ | 3,568 |
|
| Wholesale electric revenues | 619 |
| | 531 |
| 499 |
| | 623 |
|
| Other electric revenues | 165 |
| | 175 |
| 168 |
| | 161 |
|
Natural gas revenues (includes alternative revenue programs of
$(24) and $9, respectively) | 1,607 |
| | 1,530 |
| |
Natural gas revenues (includes alternative revenue programs of
$(2) and $(24), respectively) | | 1,474 |
| | 1,607 |
|
| Other revenues | 413 |
| | 141 |
| 187 |
| | 413 |
|
| Total operating revenues | 6,372 |
| | 5,771 |
| 5,412 |
| | 6,372 |
|
| Operating Expenses: | | | | | | |
| Fuel | 1,101 |
| | 996 |
| 850 |
| | 1,101 |
|
| Purchased power | 267 |
| | 179 |
| 170 |
| | 267 |
|
| Cost of natural gas | 720 |
| | 719 |
| 686 |
| | 720 |
|
| Cost of other sales | 289 |
| | 88 |
| 118 |
| | 289 |
|
| Other operations and maintenance | 1,451 |
| | 1,383 |
| 1,312 |
| | 1,451 |
|
| Depreciation and amortization | 769 |
| | 716 |
| 751 |
| | 769 |
|
| Taxes other than income taxes | 355 |
| | 330 |
| 329 |
| | 355 |
|
| Estimated loss on Kemper IGCC | 44 |
| | 108 |
| |
| Estimated loss on plants under construction | | 2 |
| | 44 |
|
| Gain on dispositions, net | | (2,497 | ) | | — |
|
| Total operating expenses | 4,996 |
| | 4,519 |
| 1,721 |
| | 4,996 |
|
| Operating Income | 1,376 |
| | 1,252 |
| 3,691 |
| | 1,376 |
|
| Other Income and (Expense): | | | | | | |
| Allowance for equity funds used during construction | 30 |
| | 57 |
| 32 |
| | 30 |
|
| Earnings from equity method investments | 41 |
| | 39 |
| 48 |
| | 41 |
|
| Interest expense, net of amounts capitalized | (458 | ) | | (416 | ) | (430 | ) | | (458 | ) |
| Other income (expense), net | 60 |
| | 48 |
| 78 |
| | 60 |
|
| Total other income and (expense) | (327 | ) | | (272 | ) | (272 | ) | | (327 | ) |
| Earnings Before Income Taxes | 1,049 |
| | 980 |
| 3,419 |
| | 1,049 |
|
| Income taxes | 113 |
| | 315 |
| 1,360 |
| | 113 |
|
| Consolidated Net Income | 936 |
| | 665 |
| 2,059 |
| | 936 |
|
| Dividends on preferred and preference stock of subsidiaries | 4 |
| | 11 |
| |
| Dividends on preferred stock of subsidiaries | | 4 |
| | 4 |
|
| Net loss attributable to noncontrolling interests | (6 | ) | | (4 | ) | (29 | ) | | (6 | ) |
Consolidated Net Income Attributable to Southern Company | $ | 938 |
| | $ | 658 |
| $ | 2,084 |
| | $ | 938 |
|
| Common Stock Data: | | | | | | |
| Earnings per share — | | | | |
| Earnings per share - | | | | |
| Basic | $ | 0.93 |
| | $ | 0.66 |
| $ | 2.01 |
| | $ | 0.93 |
|
| Diluted | $ | 0.92 |
| | $ | 0.66 |
| $ | 1.99 |
| | $ | 0.92 |
|
| Average number of shares of common stock outstanding (in millions) | | | | | | |
| Basic | 1,011 |
| | 993 |
| 1,038 |
| | 1,011 |
|
| Diluted | 1,016 |
| | 1,000 |
| 1,045 |
| | 1,016 |
|
| Cash dividends paid per share of common stock | $ | 0.58 |
| | $ | 0.56 |
| |
The accompanying notes as they relate to Southern Company are an integral part of these condensed consolidated financial statements.
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2019 | | 2018 |
| | (in millions) |
| Consolidated Net Income | $ | 2,059 |
| | $ | 936 |
|
| Other comprehensive income (loss): | | | |
| Qualifying hedges: | | | |
| Changes in fair value, net of tax of $(9) and $16, respectively | (28 | ) | | 47 |
|
Reclassification adjustment for amounts included in net income,
net of tax of $9 and $(6), respectively | 28 |
| | (19 | ) |
| Pension and other postretirement benefit plans: | | | |
Reclassification adjustment for amounts included in net income,
net of tax of $- and $-, respectively | — |
| | 2 |
|
| Total other comprehensive income (loss) | — |
| | 30 |
|
| Comprehensive Income | 2,059 |
| | 966 |
|
| Dividends on preferred stock of subsidiaries | 4 |
| | 4 |
|
| Comprehensive loss attributable to noncontrolling interests | (29 | ) | | (6 | ) |
Consolidated Comprehensive Income Attributable to
Southern Company | $ | 2,084 |
| | $ | 968 |
|
The accompanying notes as they relate to Southern Company are an integral part of these condensed consolidated financial statements.
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMECASH FLOWS (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2019 | | 2018 |
| | (in millions) |
| Operating Activities: | | | |
| Consolidated net income | $ | 2,059 |
| | $ | 936 |
|
| Adjustments to reconcile consolidated net income to net cash provided from operating activities — | | | |
| Depreciation and amortization, total | 851 |
| | 873 |
|
| Deferred income taxes | 191 |
| | 34 |
|
| Allowance for equity funds used during construction | (32 | ) | | (30 | ) |
| Mark-to-market adjustments | 46 |
| | (60 | ) |
| Pension, postretirement, and other employee benefits | (53 | ) | | (27 | ) |
| Settlement of asset retirement obligations | (62 | ) | | (41 | ) |
| Stock based compensation expense | 64 |
| | 69 |
|
| Estimated loss on plants under construction | 6 |
| | 37 |
|
| Gain on dispositions, net | (2,503 | ) | | 1 |
|
| Other, net | 19 |
| | 73 |
|
| Changes in certain current assets and liabilities — | | | |
| -Receivables | 378 |
| | 197 |
|
| -Prepayments | (129 | ) | | (82 | ) |
| -Natural gas for sale | 363 |
| | 413 |
|
| -Other current assets | 17 |
| | 7 |
|
| -Accounts payable | (783 | ) | | (425 | ) |
| -Accrued taxes | 928 |
| | (79 | ) |
| -Accrued compensation | (489 | ) | | (471 | ) |
| -Other current liabilities | (127 | ) | | 84 |
|
| Net cash provided from operating activities | 744 |
| | 1,509 |
|
| Investing Activities: | | | |
| Business acquisitions, net of cash acquired | (2 | ) | | (46 | ) |
| Property additions | (1,678 | ) | | (1,781 | ) |
| Nuclear decommissioning trust fund purchases | (197 | ) | | (306 | ) |
| Nuclear decommissioning trust fund sales | 192 |
| | 301 |
|
| Proceeds from dispositions | 4,427 |
| | 135 |
|
| Cost of removal, net of salvage | (89 | ) | | (79 | ) |
| Change in construction payables, net | (146 | ) | | (112 | ) |
| Investment in unconsolidated subsidiaries | (10 | ) | | (30 | ) |
| Payments pursuant to LTSAs | (28 | ) | | (73 | ) |
| Other investing activities | (15 | ) | | (4 | ) |
| Net cash provided from (used for) investing activities | 2,454 |
| | (1,995 | ) |
| Financing Activities: | | | |
| Increase in notes payable, net | 86 |
| | 782 |
|
| Proceeds — | | | |
| Long-term debt | 1,220 |
| | 600 |
|
| Common stock | 224 |
| | 113 |
|
| Short-term borrowings | — |
| | 1,200 |
|
| Redemptions and repurchases — | | | |
| Long-term debt | (2,429 | ) | | (1,283 | ) |
| Short-term borrowings | (1,750 | ) | | (150 | ) |
| Distributions to noncontrolling interests | (36 | ) | | (13 | ) |
| Capital contributions from noncontrolling interests | 3 |
| | 8 |
|
| Payment of common stock dividends | (623 | ) | | (586 | ) |
| Other financing activities | (48 | ) | | (42 | ) |
| Net cash provided from (used for) financing activities | (3,353 | ) | | 629 |
|
| Net Change in Cash, Cash Equivalents, and Restricted Cash | (155 | ) | | 143 |
|
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 1,519 |
| | 2,147 |
|
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 1,364 |
| | $ | 2,290 |
|
| Supplemental Cash Flow Information: | | | |
| Cash paid (received) during the period for — | | | |
| Interest (net of $18 and $17 capitalized for 2019 and 2018, respectively) | $ | 462 |
| | $ | 499 |
|
| Income taxes, net | — |
| | (1 | ) |
| Noncash transactions — Accrued property additions at end of period | 899 |
| | 894 |
|
The accompanying notes as they relate to Southern Company are an integral part of these condensed consolidated financial statements.
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2018 | | 2017 |
| | (in millions) |
| Consolidated Net Income | $ | 936 |
| | $ | 665 |
|
| Other comprehensive income (loss): | | | |
| Qualifying hedges: | | | |
| Changes in fair value, net of tax of $16 and $(5), respectively | 47 |
| | (9 | ) |
Reclassification adjustment for amounts included in net income,
net of tax of $(6) and $(1), respectively | (19 | ) | | (1 | ) |
| Pension and other postretirement benefit plans: | | | |
Reclassification adjustment for amounts included in net income,
net of tax of $- and $-, respectively | 2 |
| | 1 |
|
| Total other comprehensive income (loss) | 30 |
| | (9 | ) |
| Comprehensive Income | 966 |
| | 656 |
|
| Dividends on preferred and preference stock of subsidiaries | 4 |
| | 11 |
|
| Comprehensive loss attributable to noncontrolling interests | (6 | ) | | (4 | ) |
| Consolidated Comprehensive Income Attributable to Southern Company | $ | 968 |
| | $ | 649 |
|
|
| | | | | | | | |
| Assets | | At March 31, 2019 | | At December 31, 2018 |
| | | (in millions) |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 1,361 |
| | $ | 1,396 |
|
| Receivables — | | | | |
| Customer accounts receivable | | 1,715 |
| | 1,726 |
|
| Energy marketing receivables | | 529 |
| | 801 |
|
| Unbilled revenues | | 555 |
| | 654 |
|
| Under recovered fuel clause revenues | | 73 |
| | 115 |
|
| Other accounts and notes receivable | | 863 |
| | 813 |
|
| Accumulated provision for uncollectible accounts | | (46 | ) | | (50 | ) |
| Materials and supplies | | 1,477 |
| | 1,465 |
|
| Fossil fuel for generation | | 427 |
| | 405 |
|
| Natural gas for sale | | 189 |
| | 524 |
|
| Prepaid expenses | | 786 |
| | 432 |
|
| Assets from risk management activities, net of collateral | | 111 |
| | 222 |
|
| Other regulatory assets | | 482 |
| | 525 |
|
| Assets held for sale | | 55 |
| | 393 |
|
| Other current assets | | 132 |
| | 162 |
|
| Total current assets | | 8,709 |
| | 9,583 |
|
| Property, Plant, and Equipment: | | | | |
| In service | | 102,673 |
| | 103,706 |
|
| Less: Accumulated depreciation | | 30,834 |
| | 31,038 |
|
| Plant in service, net of depreciation | | 71,839 |
| | 72,668 |
|
| Other utility plant, net | | 1,315 |
| | — |
|
| Nuclear fuel, at amortized cost | | 885 |
| | 875 |
|
| Construction work in progress | | 7,598 |
| | 7,254 |
|
| Total property, plant, and equipment | | 81,637 |
| | 80,797 |
|
| Other Property and Investments: | | | | |
| Goodwill | | 5,284 |
| | 5,315 |
|
| Equity investments in unconsolidated subsidiaries | | 1,598 |
| | 1,580 |
|
Other intangible assets, net of amortization of $251 and $235
at March 31, 2019 and December 31, 2018, respectively | | 585 |
| | 613 |
|
| Nuclear decommissioning trusts, at fair value | | 1,875 |
| | 1,721 |
|
| Leveraged leases | | 806 |
| | 798 |
|
| Miscellaneous property and investments | | 363 |
| | 269 |
|
| Total other property and investments | | 10,511 |
| | 10,296 |
|
| Deferred Charges and Other Assets: | | | | |
| Operating lease right-of-use assets, net of amortization | | 1,881 |
| | — |
|
| Deferred charges related to income taxes | | 794 |
| | 794 |
|
| Unamortized loss on reacquired debt | | 318 |
| | 323 |
|
| Other regulatory assets, deferred | | 8,191 |
| | 8,308 |
|
| Assets held for sale, deferred | | 763 |
| | 5,350 |
|
| Other deferred charges and assets | | 1,292 |
| | 1,463 |
|
| Total deferred charges and other assets | | 13,239 |
| | 16,238 |
|
| Total Assets | | $ | 114,096 |
| | $ | 116,914 |
|
The accompanying notes as they relate to Southern Company are an integral part of these condensed consolidated financial statements.
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSBALANCE SHEETS (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2018 | | 2017 |
| | (in millions) |
| Operating Activities: | | | |
| Consolidated net income | $ | 936 |
| | $ | 665 |
|
| Adjustments to reconcile consolidated net income to net cash provided from operating activities — | | | |
| Depreciation and amortization, total | 873 |
| | 823 |
|
| Deferred income taxes | 34 |
| | 161 |
|
| Allowance for equity funds used during construction | (30 | ) | | (57 | ) |
| Stock based compensation expense | 69 |
| | 61 |
|
| Estimated loss on Kemper IGCC | 37 |
| | 108 |
|
| Mark-to-market adjustments | (60 | ) | | (81 | ) |
| Other, net | 6 |
| | (10 | ) |
| Changes in certain current assets and liabilities — | | | |
| -Receivables | 197 |
| | 310 |
|
| -Prepayments | (82 | ) | | (111 | ) |
| -Natural gas for sale, net of temporary LIFO liquidation | 413 |
| | 411 |
|
| -Other current assets | 7 |
| | (31 | ) |
| -Accounts payable | (425 | ) | | (533 | ) |
| -Accrued taxes | (79 | ) | | (212 | ) |
| -Accrued compensation | (471 | ) | | (438 | ) |
| -Retail fuel cost over recovery | 3 |
| | (122 | ) |
| -Other current liabilities | 81 |
| | (48 | ) |
| Net cash provided from operating activities | 1,509 |
| | 896 |
|
| Investing Activities: | | | |
| Business acquisitions, net of cash acquired | (46 | ) | | (1,004 | ) |
| Property additions | (1,781 | ) | | (1,488 | ) |
| Nuclear decommissioning trust fund purchases | (306 | ) | | (224 | ) |
| Nuclear decommissioning trust fund sales | 301 |
| | 218 |
|
| Asset dispositions | 135 |
| | 64 |
|
| Cost of removal, net of salvage | (79 | ) | | (61 | ) |
| Change in construction payables, net | (112 | ) | | (170 | ) |
| Investment in unconsolidated subsidiaries | (30 | ) | | (81 | ) |
| Payments pursuant to LTSAs | (73 | ) | | (55 | ) |
| Other investing activities | (4 | ) | | 4 |
|
| Net cash used for investing activities | (1,995 | ) | | (2,797 | ) |
| Financing Activities: | | | |
| Increase in notes payable, net | 782 |
| | 573 |
|
| Proceeds — | | | |
| Long-term debt | 600 |
| | 1,409 |
|
| Common stock | 113 |
| | 186 |
|
| Short-term borrowings | 1,200 |
| | 4 |
|
| Redemptions and repurchases — | | | |
| Long-term debt | (1,283 | ) | | (608 | ) |
| Short-term borrowings | (150 | ) | | — |
|
| Distributions to noncontrolling interests | (13 | ) | | (18 | ) |
| Capital contributions from noncontrolling interests | 8 |
| | 71 |
|
| Payment of common stock dividends | (586 | ) | | (556 | ) |
| Other financing activities | (42 | ) | | (36 | ) |
| Net cash provided from financing activities | 629 |
| | 1,025 |
|
| Net Change in Cash, Cash Equivalents, and Restricted Cash | 143 |
| | (876 | ) |
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 2,147 |
| | 1,992 |
|
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 2,290 |
| | $ | 1,116 |
|
| Supplemental Cash Flow Information: | | | |
| Cash paid (received) during the period for — | | | |
| Interest (net of $17 and $25 capitalized for 2018 and 2017, respectively) | $ | 499 |
| | $ | 461 |
|
| Income taxes, net | (1 | ) | | (6 | ) |
| Noncash transactions — Accrued property additions at end of period | 894 |
| | 578 |
|
|
| | | | | | | | |
| Liabilities and Stockholders' Equity | | At March 31, 2019 | | At December 31, 2018 |
| | | (in millions) |
| Current Liabilities: | | | | |
| Securities due within one year | | $ | 2,315 |
| | $ | 3,198 |
|
| Notes payable | | 1,251 |
| | 2,915 |
|
| Energy marketing trade payables | | 532 |
| | 856 |
|
| Accounts payable | | 2,037 |
| | 2,580 |
|
| Customer deposits | | 483 |
| | 522 |
|
| Accrued taxes — | | | | |
| Accrued income taxes | | 340 |
| | 21 |
|
| Other accrued taxes | | 331 |
| | 635 |
|
| Accrued interest | | 412 |
| | 472 |
|
| Accrued compensation | | 473 |
| | 1,030 |
|
| Asset retirement obligations | | 417 |
| | 404 |
|
| Other regulatory liabilities | | 310 |
| | 376 |
|
| Liabilities held for sale | | 38 |
| | 425 |
|
| Operating lease obligations | | 226 |
| | — |
|
| Other current liabilities | | 754 |
| | 852 |
|
| Total current liabilities | | 9,919 |
| | 14,286 |
|
| Long-term Debt | | 40,457 |
| | 40,736 |
|
| Deferred Credits and Other Liabilities: | | | | |
| Accumulated deferred income taxes | | 7,937 |
| | 6,558 |
|
| Deferred credits related to income taxes | | 6,417 |
| | 6,460 |
|
| Accumulated deferred ITCs | | 2,353 |
| | 2,372 |
|
| Employee benefit obligations | | 2,084 |
| | 2,147 |
|
| Operating lease obligations, deferred | | 1,720 |
| | — |
|
| Asset retirement obligations, deferred | | 9,011 |
| | 8,990 |
|
| Accrued environmental remediation | | 261 |
| | 268 |
|
| Other cost of removal obligations | | 2,304 |
| | 2,297 |
|
| Other regulatory liabilities, deferred | | 211 |
| | 169 |
|
| Liabilities held for sale, deferred | | 39 |
| | 2,836 |
|
| Other deferred credits and liabilities | | 405 |
| | 465 |
|
| Total deferred credits and other liabilities | | 32,742 |
| | 32,562 |
|
| Total Liabilities | | 83,118 |
| | 87,584 |
|
| Redeemable Preferred Stock of Subsidiaries | | 291 |
| | 291 |
|
Total Stockholders' Equity (See accompanying statements) | | 30,687 |
| | 29,039 |
|
| Total Liabilities and Stockholders' Equity | | $ | 114,096 |
| | $ | 116,914 |
|
The accompanying notes as they relate to Southern Company are an integral part of these condensed consolidated financial statements.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
|
| | | | | | | | |
| Assets | | At March 31, 2018 | | At December 31, 2017 |
| | | (in millions) |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 2,284 |
| | $ | 2,130 |
|
| Receivables — | | | | |
| Customer accounts receivable | | 1,683 |
| | 1,806 |
|
| Energy marketing receivables | | 448 |
| | 607 |
|
| Unbilled revenues | | 777 |
| | 810 |
|
| Under recovered fuel clause revenues | | 156 |
| | 171 |
|
| Other accounts and notes receivable | | 703 |
| | 698 |
|
| Accumulated provision for uncollectible accounts | | (54 | ) | | (44 | ) |
| Materials and supplies | | 1,430 |
| | 1,438 |
|
| Fossil fuel for generation | | 565 |
| | 594 |
|
| Natural gas for sale | | 235 |
| | 595 |
|
| Prepaid expenses | | 432 |
| | 452 |
|
| Other regulatory assets, current | | 579 |
| | 604 |
|
| Other current assets | | 286 |
| | 211 |
|
| Total current assets | | 9,524 |
| | 10,072 |
|
| Property, Plant, and Equipment: | | | | |
| In service | | 104,499 |
| | 103,542 |
|
| Less: Accumulated depreciation | | 31,920 |
| | 31,457 |
|
| Plant in service, net of depreciation | | 72,579 |
| | 72,085 |
|
| Nuclear fuel, at amortized cost | | 908 |
| | 883 |
|
| Construction work in progress | | 7,460 |
| | 6,904 |
|
| Total property, plant, and equipment | | 80,947 |
| | 79,872 |
|
| Other Property and Investments: | | | | |
| Goodwill | | 6,226 |
| | 6,268 |
|
| Equity investments in unconsolidated subsidiaries | | 1,542 |
| | 1,513 |
|
Other intangible assets, net of amortization of $212 and $186
at March 31, 2018 and December 31, 2017, respectively | | 848 |
| | 873 |
|
| Nuclear decommissioning trusts, at fair value | | 1,827 |
| | 1,832 |
|
| Leveraged leases | | 781 |
| | 775 |
|
| Miscellaneous property and investments | | 250 |
| | 249 |
|
| Total other property and investments | | 11,474 |
| | 11,510 |
|
| Deferred Charges and Other Assets: | | | | |
| Deferred charges related to income taxes | | 818 |
| | 825 |
|
| Unamortized loss on reacquired debt | | 203 |
| | 206 |
|
| Other regulatory assets, deferred | | 6,948 |
| | 6,943 |
|
| Other deferred charges and assets | | 1,653 |
| | 1,577 |
|
| Total deferred charges and other assets | | 9,622 |
| | 9,551 |
|
| Total Assets | | $ | 111,567 |
| | $ | 111,005 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Southern Company Common Stockholders' Equity | | | | |
| | Number of
Common Shares | | Common Stock | | | | Accumulated
Other
Comprehensive Income
(Loss) | | | | |
| | Issued | | Treasury | | Par Value | | Paid-In Capital | | Treasury | | Retained Earnings | | | Noncontrolling Interests | | Total |
| | (in thousands) | | (in millions) |
| Balance at December 31, 2017 | 1,008,532 |
| | (929 | ) | | $ | 5,037 |
| | $ | 10,470 |
| | $ | (36 | ) | | $ | 8,885 |
| | $ | (189 | ) | | $ | 1,361 |
| | $ | 25,528 |
|
Consolidated net income attributable to
Southern Company | — |
| | — |
| | — |
| | — |
| | — |
| | 938 |
| | — |
| | — |
| | 938 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 30 |
| | — |
| | 30 |
|
| Stock issued | 4,055 |
| | — |
| | 16 |
| | 97 |
| | — |
| | — |
| | — |
| | — |
| | 113 |
|
| Stock-based compensation | — |
| | — |
| | — |
| | 36 |
| | — |
| | — |
| | — |
| | — |
| | 36 |
|
| Cash dividends of $0.58 per share | — |
| | — |
| | — |
| | — |
| | — |
| | (586 | ) | | — |
| | — |
| | (586 | ) |
| Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 9 |
| | 9 |
|
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (13 | ) | | (13 | ) |
Net income (loss) attributable
to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (6 | ) | | (6 | ) |
| Other | — |
| | (33 | ) | | 1 |
| | — |
| | (2 | ) | | 20 |
| | (41 | ) | | (2 | ) | | (24 | ) |
| Balance at March 31, 2018 | 1,012,587 |
| | (962 | ) | | $ | 5,054 |
| | $ | 10,603 |
| | $ | (38 | ) | | $ | 9,257 |
| | $ | (200 | ) | | $ | 1,349 |
| | $ | 26,025 |
|
| | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2018 | 1,034,741 |
| | (953 | ) | | $ | 5,164 |
| | $ | 11,094 |
| | $ | (38 | ) | | $ | 8,706 |
| | $ | (203 | ) | | $ | 4,316 |
| | $ | 29,039 |
|
Consolidated net income attributable to
Southern Company | — |
| | — |
| | — |
| | — |
| | — |
| | 2,084 |
| | — |
| | — |
| | 2,084 |
|
| Stock issued | 6,547 |
| | — |
| | 28 |
| | 196 |
| | — |
| | — |
| | — |
| | — |
| | 224 |
|
| Stock-based compensation | — |
| | — |
| | — |
| | 24 |
| | — |
| | — |
| | — |
| | — |
| | 24 |
|
| Cash dividends of $0.60 per share | — |
| | — |
| | — |
| | — |
| | — |
| | (622 | ) | | — |
| | — |
| | (622 | ) |
| Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
| | 3 |
|
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (41 | ) | | (41 | ) |
Net income (loss) attributable to
noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (29 | ) | | (29 | ) |
| Other | — |
| | (39 | ) | | — |
| | 7 |
| | (2 | ) | | (1 | ) | | — |
| | 1 |
| | 5 |
|
| Balance at March 31, 2019 | 1,041,288 |
| | (992 | ) | | $ | 5,192 |
| | $ | 11,321 |
| | $ | (40 | ) | | $ | 10,167 |
| | $ | (203 | ) | | $ | 4,250 |
| | $ | 30,687 |
|
The accompanying notes as they relate to Southern Company are an integral part of these condensed consolidated financial statements.
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Liabilities and Stockholders' Equity | | At March 31, 2018 | | At December 31, 2017 |
| | | (in millions) |
| Current Liabilities: | | | | |
| Securities due within one year | | $ | 3,235 |
| | $ | 3,892 |
|
| Notes payable | | 4,271 |
| | 2,439 |
|
| Energy marketing trade payables | | 437 |
| | 546 |
|
| Accounts payable | | 2,089 |
| | 2,530 |
|
| Customer deposits | | 530 |
| | 542 |
|
| Accrued taxes | | 368 |
| | 636 |
|
| Accrued interest | | 432 |
| | 488 |
|
| Accrued compensation | | 493 |
| | 959 |
|
| Asset retirement obligations, current | | 301 |
| | 351 |
|
| Other regulatory liabilities, current | | 551 |
| | 337 |
|
| Other current liabilities | | 923 |
| | 874 |
|
| Total current liabilities | | 13,630 |
| | 13,594 |
|
| Long-term Debt | | 44,446 |
| | 44,462 |
|
| Deferred Credits and Other Liabilities: | | | | |
| Accumulated deferred income taxes | | 6,930 |
| | 6,842 |
|
| Deferred credits related to income taxes | | 7,179 |
| | 7,256 |
|
| Accumulated deferred ITCs | | 2,362 |
| | 2,267 |
|
| Employee benefit obligations | | 2,206 |
| | 2,256 |
|
| Asset retirement obligations, deferred | | 4,536 |
| | 4,473 |
|
| Accrued environmental remediation | | 378 |
| | 389 |
|
| Other cost of removal obligations | | 2,667 |
| | 2,684 |
|
| Other regulatory liabilities, deferred | | 224 |
| | 239 |
|
| Other deferred credits and liabilities | | 660 |
| | 691 |
|
| Total deferred credits and other liabilities | | 27,142 |
| | 27,097 |
|
| Total Liabilities | | 85,218 |
| | 85,153 |
|
| Redeemable Preferred Stock of Subsidiaries | | 324 |
| | 324 |
|
| Stockholders' Equity: | | | | |
| Common Stockholders' Equity: | | | | |
| Common stock, par value $5 per share — | | | | |
| Authorized — 1.5 billion shares | | | | |
| Issued — 1.0 billion shares | | | | |
| Treasury — March 31, 2018: 1.0 million shares | | | | |
| — December 31, 2017: 0.9 million shares | | | | |
| Par value | | 5,054 |
| | 5,038 |
|
| Paid-in capital | | 10,603 |
| | 10,469 |
|
| Treasury, at cost | | (38 | ) | | (36 | ) |
| Retained earnings | | 9,257 |
| | 8,885 |
|
| Accumulated other comprehensive loss | | (200 | ) | | (189 | ) |
| Total Common Stockholders' Equity | | 24,676 |
| | 24,167 |
|
| Noncontrolling Interests | | 1,349 |
| | 1,361 |
|
| Total Stockholders' Equity | | 26,025 |
| | 25,528 |
|
| Total Liabilities and Stockholders' Equity | | $ | 111,567 |
| | $ | 111,005 |
|
The accompanying notes as they relate to Southern Company are an integral part of these condensed consolidated financial statements.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 20182019 vs. FIRST QUARTER 20172018
OVERVIEW
Southern Company is a holding company that owns all of the common stock of the traditional electric operating companies and the parent entities of Southern Power and Southern Company Gas and owns other direct and indirect subsidiaries. Discussion of the results of operations is focused on the Southern Company system's primary businesses of electricity sales by the traditional electric operating companies and Southern Power and the distribution of natural gas by Southern Company Gas. The four traditional electric operating companies are vertically integrated utilities providing electric service in fourthree Southeastern states. Southern Power develops, constructs, acquires, owns, and manages power generation assets, including renewable energy projects, and sells electricity at market-based rates in the wholesale market. Southern Company Gas distributes natural gas through its natural gas distribution utilities in seven states and is involved in several other complementary businesses including gas marketing services,pipeline investments, wholesale gas services, and gas midstream operations.marketing services. The Southern Company'sCompany system's other business activities include providing energy technologies and services to electric utilities and large industrial, commercial, institutional, and municipal customers. Customer solutions, includesuch as distributed generation systems, utilityenergy infrastructure, solutions, and energy efficiency products and services.services, and utility infrastructure services, to customers. Other business activities also include investments in telecommunications, leveraged lease projects, and gas storage facilities. For additional information, see BUSINESS – "The Southern Company System – Traditional Electric Operating Companies," " – Southern Power," " – Southern Company Gas," and " – Other Businesses" in Item 1 of the Form 10-K. See FUTURE EARNINGS POTENTIAL herein for information regarding agreements entered into by
On January 1, 2019, Southern Company Gas to sell twocompleted its sale of its natural gas distribution utilities and Pivotal Home Solutions.
Alabama Power, Georgia Power, and Gulf Power recently reached agreementsto NextEra Energy for an aggregate cash purchase price of approximately $5.8 billion (less $1.3 billion of indebtedness assumed), subject to customary working capital adjustments. The preliminary gain associated with their respective state PSCs relating to the regulatory impactssale of the Tax Reform Legislation, which include capital structure adjustments expected to help mitigate the potential adverse impacts to certain of their credit metrics. In addition, MississippiGulf Power Atlanta Gas Light, and Nicor Gas have each made filings with their respective state PSC or other regulatory agency relating to the Tax Reform Legislation and are awaiting final approval.totaled $2.5 billion pre-tax ($1.3 billion after tax). See Note (B)(K) to the Condensed Financial Statements under "Regulatory Matters""Southern Company" herein for additional information regarding stateinformation.
Georgia Power and Atlanta Gas Light are required to file base rate cases with the Georgia PSC or other regulatory agency actions relatedby July 1, 2019 and June 3, 2019, respectively. Nicor Gas filed a rate case with the Illinois Commission in November 2018. These three rate cases are expected to conclude in 2019. In addition, Mississippi Power is scheduled to file a base rate case with the Tax Reform Legislation. Also see MANAGEMENT'S DISCUSSION AND ANALYSIS –Mississippi PSC in the fourth quarter 2019. The ultimate outcome of these matters cannot be determined at this time. See FUTURE EARNINGS POTENTIAL – "Income Tax"Regulatory Matters" of Southern Companyherein and Note 2 to the financial statements in Item 78 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk" and Note (H) to the Condensed Financial Statements herein for information regarding the Tax Reform Legislation.additional information.
Southern Company continues to focus on several key performance indicators. These indicators include, but are not limited to, customer satisfaction, plant availability, electric and natural gas system reliability, execution of major construction projects, and earnings per share.
Plant Vogtle Units 3 and 4 Status
In 2009, the Georgia PSC certified construction of Plant Vogtle Units 3 and 4. In 2012, the NRC issued the related combined construction and operating licenses, which allowed full construction of the two AP1000 nuclear units4 (with electric generating capacity of approximately 1,100 MWs each) and related facilities to begin. Until March 2017, construction on. Georgia Power holds a 45.7% ownership interest in Plant Vogtle Units 3 and 4 continued under the Vogtle 3 and 4 Agreement, which was a substantially fixed price agreement.4. In March 2017, the EPC Contractor filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code.
In connection with the EPC Contractor's bankruptcy filing, Georgia Power, acting for itself and as agent for the Vogtle Owners, entered into the Interim Assessment Agreement with the EPC Contractor to allow construction to continue. The Interim Assessment Agreement expired in JulyDecember 2017, when the Vogtle Services Agreement became effective. In August 2017, following completion of comprehensive cost to complete and cancellation cost assessments, Georgia Power filed its seventeenth VCM report with the Georgia PSC which includedapproved Georgia Power's recommendation to continue construction. The current expected in-service dates remain November 2021 for Unit 3 and November 2022 for Unit 4.
In the second quarter 2018, Georgia Power revised its base capital cost forecast and estimated contingency to complete construction and start-up of Plant Vogtle Units 3 and 4 to $8.0 billion and $0.4 billion, respectively, for a total project capital cost forecast of $8.4 billion (net of $1.7 billion received under the Guarantee Settlement Agreement and approximately $188 million in related Customer Refunds), with respect to Georgia Power's ownership interest.
As a result of the increase in the total project capital cost forecast and Georgia Power's decision not to seek rate recovery of the increase in the base capital costs, the holders of at least 90% of the ownership interests in Plant
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
recommendationVogtle Units 3 and 4 were required to vote to continue construction. In September 2018, the Vogtle Owners unanimously voted to continue construction of Plant Vogtle Units 3 and 4,4. In connection with Southern Nuclear serving as project manager and Bechtel serving as the primary construction contractor. In December 2017, the Georgia PSC approved Georgia Power's recommendationvote to continue construction.
construction, Georgia Power expectsentered into (i) a binding term sheet (Vogtle Owner Term Sheet) with the other Vogtle Owners and certain of MEAG's wholly-owned subsidiaries, including MEAG Power SPVJ, LLC (MEAG SPVJ), to take certain actions which partially mitigate potential financial exposure for the other Vogtle Owners and (ii) a term sheet (MEAG Term Sheet) with MEAG and MEAG SPVJ to provide funding with respect to MEAG SPVJ's ownership interest in Plant Vogtle Units 3 and 4 under certain circumstances. On January 14, 2019, Georgia Power, MEAG, and MEAG SPVJ entered into an agreement to be placed in service by November 2021implement the provisions of the MEAG Term Sheet. On February 18, 2019, Georgia Power, the other Vogtle Owners, and November 2022, respectively. Georgia Power'scertain of MEAG's wholly-owned subsidiaries entered into certain amendments to their joint ownership agreements to implement the provisions of the Vogtle Owner Term Sheet.
In April 2019, Southern Nuclear completed a cost and schedule validation process to verify and update quantities of commodities remaining to install, labor hours to install remaining quantities and related productivity, testing and system turnover requirements, and forecasted staffing needs and related costs. This process confirmed the total estimated project capital cost forecast for its 45.7% proportionate share of Plant Vogtle Units 3 and 4 is $8.8 billion ($7.3 billion after reflecting $1.7 billion received from Toshiba in 2017 under the Guarantee Settlement Agreement and $188 million in Customer Refunds recognized as a regulatory liability in 2017). Georgia Power's CWIP balance for Plant Vogtle Units 3 and 4. The expected in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4, was $3.6 billion atas previously approved by the Georgia PSC, remain unchanged.
In March 31, 2018, which is net of the Guarantee Settlement Agreement payments less the Customer Refunds.2019, Georgia Power estimates thatentered into the Amended and Restated Loan Guarantee Agreement with the DOE, under which the proceeds of borrowings may be used to reimburse Georgia Power for Eligible Project Costs incurred in connection with its financing costs for construction of Plant Vogtle Units 3 and 4, willup to approximately $5.130 billion. At March 31, 2019, Georgia Power had a total approximately $3.1of $3.46 billion of which $1.6 billion had been incurred through March 31, 2018.borrowings outstanding under the related multi-advance credit facilities.
The ultimate outcome of these matters cannot be determined at this time.
See FUTURE EARNINGS POTENTIAL – "Construction Program – Nuclear Construction" and Note (F) to the Condensed Financial Statements under "DOE Loan Guarantee Borrowings" herein for additional information.
RESULTS OF OPERATIONS
Net Income
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $280 | | 42.6 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $1,146 | | 122.2 |
Consolidated net income attributable to Southern Company was $2.1 billion ($2.01 per share) for the first quarter 2019 compared to $938 million ($0.93 per share) for the first quarter 2018 compared to $658 million ($0.66 per share) for the corresponding period in 2017.2018. The increase was primarily due to the $2.5 billion ($1.3 billion after tax) gain on the sale of Gulf Power in 2019, partially offset by a lower federal income tax rate as a result of the Tax Reform Legislation and net state income tax benefits arising from the reorganization of Southern Power's legal entities, as well as higherdecrease in retail electric revenues due to coldermilder weather partially offset by reductions in retail revenues relatedcompared to the regulatory treatment ofcorresponding period in 2018. See Note (K) to the Tax Reform Legislation impacts.Condensed Financial Statements under "Southern Company" herein for additional information.
Retail Electric Revenues
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $174 | | 5.1 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(484) | | (13.6) |
In the first quarter 2018,2019, retail electric revenues were $3.6$3.1 billion compared to $3.4$3.6 billion for the corresponding period in 2017.
Details of the changes in retail electric revenues were as follows:
|
| | | | | | | |
| | | First Quarter 2018 |
| | | (in millions) | | (% change) |
| Retail electric – prior year | | $ | 3,394 |
| | |
| Estimated change resulting from – | | | | |
| Rates and pricing | | (103 | ) | | (3.0 | ) |
| Sales growth | | 26 |
| | 0.8 |
|
| Weather | | 144 |
| | 4.2 |
|
| Fuel and other cost recovery | | 107 |
| | 3.1 |
|
| Retail electric – current year | | $ | 3,568 |
| | 5.1 | % |
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of the changes in retail electric revenues were as follows:
|
| | | | | | | |
| | | First Quarter 2019 |
| | | (in millions) | | (% change) |
| Retail electric – prior year | | $ | 3,568 |
| | |
| Estimated change resulting from – | | | | |
| Rates and pricing | | 58 |
| | 1.6 |
|
| Sales decline | | (11 | ) | | (0.3 | ) |
| Weather | | (91 | ) | | (2.6 | ) |
| Fuel and other cost recovery | | (150 | ) | | (4.2 | ) |
| Gulf Power disposition | | (290 | ) | | (8.1 | ) |
| Retail electric – current year | | $ | 3,084 |
| | (13.6 | )% |
Revenues associated with changes in rates and pricing decreasedincreased in the first quarter 20182019 when compared to the corresponding period in 20172018 primarily due to revenues deferred as regulatory liabilities for future adjustments to customer billingsincreases under Rate CNP Compliance at Alabama Power and increases related to PEP and ECO Plan rate changes that became effective for the Tax Reform Legislation, as well as the rate pricing effectfirst billing cycle of increased customer usageSeptember 2018 at Georgia Power. The decrease in revenues also reflects a decrease in the recovery of Plant Vogtle Units 3 and 4 construction financing costs under the NCCR tariff at Georgia Power, also primarily related to the Tax Reform Legislation. These decreases were partially offset by higher contributions from variable demand-driven pricing from commercial and industrial customers at GeorgiaMississippi Power.
See Note 32 to the financial statements of Southern Company under "Regulatory Matters – Alabama"Alabama Power" and " – Georgia Power – Rate Plans""Mississippi Power" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein for additional information.
Revenues attributable to changes in sales increaseddecreased in the first quarter 2018 when2019 when compared to the corresponding period in 2017. Weather-adjusted2018. In the first quarter 2019, weather-adjusted residential KWH sales and weather-adjustedincreased 0.4% primarily due to customer growth, partially offset by decreased customer usage primarily resulting from an increase in energy efficient residential appliances. Weather-adjusted commercial KWH sales increased 1.1% and 1.2%, respectively, in the first quarter 2018decreased 1.9% primarily due to decreased customer usage resulting from an increase in energy saving initiatives, partially offset by customer growth. Industrial KWH sales increased 2.6%decreased 2.0% in the first quarter 2019 when compared to the corresponding period in 2018 as a result of a decrease in demand resulting from changes in production levels primarily in the primary metals, chemicals, and chemicalspaper sectors, partially offset by decreased salesincreased demand in the paperpipeline sector.
Fuel and other cost recovery revenues increased $107decreased $150 million in the first quarter 2018 when2019 compared to the corresponding period in 20172018 primarily due to higherdecreased energy sales driven by milder weather, resulting from colder weather.in lower customer demand and lower generation 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.
Wholesale Electric Revenues
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $88 | | 16.6 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(124) | | (19.9) |
Wholesale electric revenues consist of PPAs primarily with investor-owned utilities and electric cooperatives 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
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, Southern Company'sthe ability to recover fixed and variable operations and maintenance expenses is dependent upon the level of energy generated from these facilities, which can be impacted by weather conditions, equipment performance, transmission constraints, and other factors. Wholesale electric revenues at Mississippi Power include FERC-regulated 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.
In the first quarter 2018,2019, wholesale electric revenues were $619$499 million compared to $531$623 million for the corresponding period in 2017.2018. This increasedecrease was primarily related to a $91$106 million increasedecrease in energy revenues partially offset by a $3and an $18 million decrease in capacity revenues. The increaseExcluding a decrease of $7 million of energy revenues related to the sale of Gulf Power, the decrease in energy revenues primarily relatesrelated to Southern Power and includesincluded a decrease in non-PPA revenues due to a decrease in the volume of KWHs sold through short-term sales, primarily due to a reduction in uncovered natural gas capacity, as well as a decrease in revenues related to natural gas PPAs due to a decrease in the average cost of fuel and purchased power, partially offset by an increase in fuel costs that are contractually recovered through PPAs and new
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
natural gas PPAs related to existing facilities. Additionally, the increase in energy revenues isKWHs sold due to increased customer load. The decrease was also due to lower fuel prices and lower customer demand due to milder weather at the traditional electric operating companies. The decrease in capacity revenues primarily related to colder weather in the first quarter 2018 comparedsales of Gulf Power and Southern Power's Plant Oleander and Plant Stanton Unit A. See Note 15 to the corresponding periodfinancial statements under "Southern Power – Sales of Natural Gas Plants" in 2017.Item 8 of the Form 10-K for additional information.
Natural Gas Revenues
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $77 | | 5.0 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(133) | | (8.3) |
In the first quarter 2018,2019, natural gas revenues were $1.6$1.5 billion compared to $1.5$1.6 billion for the corresponding period in 2017.2018.
Details of the changes in natural gas revenues were as follows:
| | | | | First Quarter 2018 | | First Quarter 2019 |
| | | (in millions) | | (% change) | | (in millions) | | (% change) |
| Natural gas – prior year | | $ | 1,530 |
| | | |
| Natural gas revenues – prior year | | | $ | 1,607 |
| | |
| Estimated change resulting from – | | | | | | | | |
| Infrastructure replacement programs and base rate increases | | 47 |
| | 3.0 | % | |
| Tax reform regulatory liabilities | | (37 | ) | | (2.4 | ) | |
| Infrastructure replacement programs and base rate changes | | | 32 |
| | 2.0 |
|
| Gas costs and other cost recovery | | 1 |
| | 0.1 |
| | 62 |
| | 3.9 |
|
| Weather | | 8 |
| | 0.5 |
| | 7 |
| | 0.4 |
|
| Wholesale gas services | | 35 |
| | 2.3 |
| | (80 | ) | | (5.0 | ) |
| Southern Company Gas Dispositions | | | (167 | ) | | (10.4 | ) |
| Other | | 23 |
| | 1.5 |
| | 13 |
| | 0.8 |
|
| Natural gas – current year | | $ | 1,607 |
| | 5.0 | % | |
| Natural gas revenues – current year | | | $ | 1,474 |
| | (8.3 | )% |
The increase in natural gas revenues is primarily dueRevenues attributable to infrastructure investments recovered through replacement programs and increases in base rate revenueschanges at the natural gas distribution utilities anincreased for the first quarter 2019 compared to the corresponding period in 2018 primarily due to a $22 million increase at Nicor Gas and a $9 million increase at Atlanta Gas Light. These amounts include the natural gas distribution utilities' continued investments recovered through infrastructure replacement programs and base rate increases as well as increases due to the impacts of the Tax Reform Legislation.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues attributable to gas costs and other cost recovery increased in commercial activitythe first quarter 2019 compared to the corresponding period in 2018 primarily due to higher natural gas prices and increased volumes of natural gas sold at Southern Company Gas' wholesaleremaining four natural gas services business, colder weather, fixed and guaranteed bill revenue at Southern Company Gas' gas marketing services business as a result of adopting a new revenue recognition standard, and an increasedistribution utilities in revenues resulting from the Dalton Pipeline being placed in service. These increases were partially offset by revenues deferred as regulatory liabilities for expected adjustments to customer billings as a result of the regulatory treatment of the Tax Reform Legislation impacts.
first quarter 2019. 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 operations.utilities.
Revenues increased due to colder weather, as determined by Heating Degree Days, in Illinois in the first quarter 2019 compared to the corresponding period in 2018.
Revenues attributable to Southern Company Gas' wholesale gas services business decreased in the first quarter 2019 compared to the corresponding period in 2018 primarily due to decreased commercial activity, partially offset by derivative gains.
See Notes (A) andNote (B) to the Condensed Financial Statements herein under "Recently Adopted Accounting Standards – Revenue" and "Regulatory Matters – "Southern Company Gas" respectively, for additional information.
Other Revenues
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $272 | | 192.9 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(226) | | (54.7) |
In the first quarter 2018,2019, other revenues were $413$187 million compared to $141$413 million for the corresponding period in 2017. This increase2018. The decrease was primarily duerelated to PowerSecure's 2018 storm restoration services in Puerto Rico.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and Purchased Power Expenses
| | | | | First Quarter 2018
vs.
First Quarter 2017 | | First Quarter 2019
vs.
First Quarter 2018 |
| | | (change in millions) | | (% change) | | (change in millions) | | (% change) |
| Fuel | | $ | 105 |
| | 10.5 | | $ | (251 | ) | | (22.8) |
| Purchased power | | 88 |
| | 49.2 | | (97 | ) | | (36.3) |
| Total fuel and purchased power expenses | | $ | 193 |
| | | $ | (348 | ) | |
In the first quarter 2018,2019, total fuel and purchased power expenses were $1.4$1.0 billion compared to $1.2$1.4 billion for the corresponding period in 2017. The increase2018. Excluding a decrease of $121 million related to the sale of Gulf Power, the decrease was primarily the result of a $147$149 million increase in the volume of KWHs generated and purchased and a $46 million increasedecrease in the average cost of fuel and purchased power.power and a $78 million net decrease in the aggregate 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 FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Fuel Cost Recovery" herein 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.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of the Southern Company system's generation and purchased power were as follows:
| | | | | First Quarter 2018 | | First Quarter 2017 | | First Quarter 2019 | | First Quarter 2018(a) |
Total generation (in billions of KWHs) | | 48 | | 44 | | 43 | | 46 |
Total purchased power (in billions of KWHs) | | 5 | | 4 | | 4 | | 3 |
Sources of generation (percent) — | | | | |
| Gas | | 45 | | 46 | | 48 | | 45 |
| Coal | | 29 | | 29 | | 22 | | 29 |
| Nuclear | | 16 | | 17 | | 16 | | 16 |
| Hydro | | 4 | | 2 | | 8 | | 4 |
| Other | | 6 | | 6 | | 6 | | 6 |
Cost of fuel, generated (in cents per net KWH) — | | | | |
| Gas | | 2.85 | | 2.92 | | 2.56 | | 2.84 |
| Coal | | 2.90 | | 2.88 | | 2.92 | | 2.88 |
| Nuclear | | 0.78 | | 0.79 | | 0.79 | | 0.78 |
Average cost of fuel, generated (in cents per net KWH) | | 2.50 | | 2.50 | | 2.32 | | 2.47 |
Average cost of purchased power (in cents per net KWH)(*) | | 6.33 | | 5.10 | |
Average cost of purchased power (in cents per net KWH)(b) | | | 4.50 | | 7.04 |
| |
(*)(a) | Excludes Gulf Power, which was sold on January 1, 2019. |
| |
| (b) | 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 first quarter 2018,2019, fuel expense was $1.1 billion$850 million compared to $1.0$1.1 billion for the corresponding period in 2017. The increase2018. Excluding approximately $54 million related to Gulf Power in 2018, the decrease was primarily due to a 14.2% increase in the volume of KWHs generated by natural gas and a 10.8% increase29.1% decrease in the volume of KWHs generated by coal partially offset byand a 2.4%9.9% decrease in the average cost of natural gas per KWH generated.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Purchased Power
In the first quarter 2018,2019, purchased power expense was $267$170 million compared to $179$267 million for the corresponding period in 2017. The increase2018. Excluding approximately $67 million of non-affiliated purchases by Gulf Power in 2018 and $22 million of non-affiliated purchases from Gulf Power in 2019 that would have been eliminated in consolidation in 2018, the decrease was primarily due to a 24.1% increase29.1% decrease in the average cost per KWH purchased and a 14.0% increase inpurchased. See Note (K) to the volumeCondensed Financial Statements under "Southern Company" herein for information regarding the sale of KWHs purchased.Gulf Power.
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
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(34) | | (4.7) |
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
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 87% of total cost of natural gas for the first quarter 2019.
In the first quarter 2019, cost of natural gas was $686 million compared to $720 million for the corresponding period in 2018. Excluding a $79 million decrease related to the Southern Company Gas Dispositions, cost of natural gas increased $45 million. This increase reflects a 4.9% increase in natural gas prices and an increase in the volume of natural gas sold in the first quarter 2019 primarily as a result of colder weather in Illinois, as determined by Heating Degree Days, compared to the corresponding period in 2018.
Cost of Other Sales
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $201 | | 228.4 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(171) | | (59.2) |
In the first quarter 2018,2019, cost of other sales was $289$118 million compared to $88$289 million for the corresponding period in 2017.2018. The increasedecrease was primarily reflects costs related to PowerSecure's 2018 storm restoration services in Puerto Rico.
Other Operations and Maintenance Expenses
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $68 | | 4.9 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(139) | | (9.6) |
In the first quarter 2018,2019, other operations and maintenance expenses were $1.45$1.3 billion compared to $1.38$1.5 billion for the corresponding period in 2017.2018. The increase was primarily duedecrease reflects approximately $76 million related to aGulf Power in 2018 and $71 million related to the Southern Company Gas Dispositions, including the $42 million goodwill impairment charge recorded at Southern Company Gas in contemplation of the proposed sale of Pivotal Home Solutions. Additionally, the increase is related to a $28 million increase in employee compensation and benefits, including pension costs, a $19 million decrease in gains from sales of integrated transmission system assets at Georgia Power, and a $12 million increase at Southern Company Gas to align paid time off with the Southern Company system's policy. These increases were partially offset by $32.5 million resulting from the write-down of Gulf Power's ownership of Plant Scherer Unit 3 in the first quarter 2017 in accordance with a settlement agreement approved by the Florida PSC in April 2017 (2017 Gulf Power Rate Case Settlement Agreement).
See Notes (A) and (J) to the Condensed Financial Statements under "Goodwill and Other Intangible Assets" and "Southern Company Gas – Proposed Sale of Pivotal Home Solutions," respectively, herein for additional information regarding the proposed sale of Pivotal Home Solutions and Note (G) to the Condensed Financial Statements herein for additional information on pension costs. Also, see Note 3 to the financial statements of Southern Company under "Regulatory Matters – Gulf Power – Retail Base Rate Cases" in Item 8 of the Form 10-K for additional information regarding the 2017 Gulf Power Rate Case Settlement Agreement.
Depreciation and Amortization
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $53 | | 7.4 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(18) | | (2.3) |
In the first quarter 2018,2019, depreciation and amortization was $769$751 million compared to $716$769 million for the corresponding period in 2017.2018. The decrease was primarily due to decreases of $47 million related to the sale of Gulf Power and $16 million related to the Southern Company Gas Dispositions, partially offset by an increase reflects $34of $33 million related to additional plant in service and also reflects a $25.5 million reduction in depreciation credits recorded inservice.
Taxes Other Than Income Taxes
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(26) | | (7.3) |
In the first quarter 2017 as authorized2019, taxes other than income taxes were $329 million compared to $355 million for the corresponding period in 2018. The decrease primarily relates to the sale of Gulf Power's 2013 rate case settlement.Power.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
See Note 3 to the financial statements of Southern Company under "Regulatory Matters – Gulf Power – Retail Base Rate Cases" in Item 8 of the Form 10-K for additional information.
Taxes Other Than Income TaxesEstimated Loss on Plants Under Construction
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $25 | | 7.6 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(42) | | (95.5) |
In the first quarter 2018, taxes other than income taxes were $3552019, estimated loss on plants under construction was $2 million compared to $330$44 million for the corresponding period in 2017.2018. The increasedecrease was primarily due to increased municipal franchise fees and property taxes at Georgia Power and increased revenue tax expenses and payroll taxes related to aligning paid time off at Southern Company Gaslower costs associated with the Southern Company system's policy.
Estimated Loss on Kemper IGCC
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $(64) | | (59.3) |
Estimated losses on the Kemper IGCC of $44 million were recorded in the first quarter 2018 resulting from the abandonment and related closure activities for the mine and gasifier-related assets as compared to $108 million forof the corresponding period in 2017 related to revisions to the estimated construction costs prior to the June 2017 project suspension.Kemper IGCC at Mississippi Power.
See Note 32 to the financial statements of Southern Company under "Kemper County Energy Facility" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein under "Kemper"Mississippi Power – Kemper County Energy Facility"Facility" for additional information.
Gain on Dispositions, Net
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| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $2,497 | | N/M |
N/M - Not meaningful
In the first quarter 2019, a net gain on dispositions of $2.5 billion ($1.3 billion gain after tax) was recorded related to the sale of Gulf Power. See Note (K) to the Condensed Financial Statements under "Southern Company" herein for additional information.
Allowance for Equity Funds Used During ConstructionInterest Expense, Net of Amounts Capitalized
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $(27) | | (47.4) |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(28) | | (6.1) |
In the first quarter 2018, AFUDC equity2019, interest expense, net of amounts capitalized was $30$430 million compared to $57$458 million in the corresponding period in 2017. This2018. Excluding a decrease primarily resulted from Mississippi Power's suspension of $13 million related to the Kemper IGCC construction in June 2017.sale of Gulf Power, the decrease was immaterial.
See FINANCIAL CONDITION AND LIQUIDITY – "Financing Activities" herein, Note 38 to the financial statements of Southern Company under "Kemper County Energy Facility" in Item 8 of the Form 10-K, and Note (B)(F) to the Condensed Financial Statements under "Kemper County Energy Facility" herein for additional information.
Interest Expense,Other Income (Expense), Net of Amounts Capitalized
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $42 | | 10.1 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $18 | | 30.0 |
In the first quarter 2018, interest expense,2019, other income (expense), net of amounts capitalized was $458$78 million compared to $416$60 million infor the corresponding period in 2017.2018. The increase was largelyprimarily due to an increase in average outstanding long-term debt, primarilyinterest income from a new tolling arrangement accounted for as a lease at the parent companyMississippi Power and Southern Company Gas.temporary cash investments.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
See Note 6Income Taxes
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| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $1,247 | | N/M |
N/M - Not meaningful
In the first quarter 2019, income taxes were $1.4 billion compared to $113 million for the corresponding period in 2018. The increase was primarily due to tax expense related to the financial statementssale of Southern Company in Item 8 of the Form 10-KGulf Power.
See Notes (G) and Note (F)(K) to the Condensed Financial Statements herein for additional information.
Other Income (Expense), Net Loss Attributable to Noncontrolling Interests
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| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $12 | | 25.0 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $23 | | N/M |
In the first quarter 2018, other income (expense), net was $60 million comparedN/M - Not meaningful
Substantially all noncontrolling interests relate to $48 million for the corresponding period in 2017. The increase was primarily due to a gain from the settlement of a contractor litigation claimrenewable projects at Southern Company Gas.
Income Taxes
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $(202) | | (64.1) |
In the first quarter 2018, income taxes were $113 million compared to $315 million for the corresponding period in 2017. The decrease was primarily due to a lower federal income tax rate as a result of the Tax Reform Legislation, as well as net state income tax benefits arising from the reorganization of Southern Power's legal entities holding its solar facilities.
Power. See Note (H)7 to the Condensed Financial Statements herein for additional information.
Dividends on Preferred and Preference Stock of Subsidiaries
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| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $(7) | | (63.6) |
In the first quarter 2018, dividends on preferred and preference stock of subsidiaries was $4 million compared to $11 million for the corresponding period in 2017. The decrease was due to the 2017 redemptions of all outstanding shares of preferred and preference stock at Georgia Power and preference stock at Gulf Power.
See Note 6 the financial statements of Southern Company under "Redeemable Preferred Stock of Subsidiaries" in Item 8 of the Form 10-K under "Southern Power" for additional information.
In the first quarter 2019, net loss attributable to noncontrolling interests was $29 million compared to $6 million for the corresponding period in 2018. The increase was primarily related to tax equity partnerships entered into in 2018.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Southern Company's future earnings potential. Future earnings will be impacted by the recently completed and additional pending disposition activities described herein, in Note (K) to the Condensed Financial Statements herein, and in Note 15 to the financial statements in Item 8 of the Form 10-K. The level of Southern Company's future earnings depends on numerous factors that affect the opportunities, challenges, and risks of the Southern Company system's primary businesses of selling electricity and distributing natural gas. These factors include the traditional electric operating companies' and the natural gas distribution utilities' ability to maintain a constructive regulatory environmentenvironments that allowsallow for the timely recovery of prudently-incurred costs during a time of increasing costs, continued customer growth, and, limited projected demandfor the traditional electric operating companies, the weak pace of growth over the next several years.in electricity use per customer, especially in residential and commercial markets. Plant Vogtle Units 3 and 4 construction and rate recovery and the profitability of Southern Power's competitive wholesale business and successful additional investments in renewable and other energy projects are also major factors.
Future earnings for the electricity and natural gas businesses will be driven primarily by customer growth. 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, increasing volumes of electronic
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
commerce transactions, and highermore multi-family home construction, all of which could contribute to a net reduction in customer usage. Earnings for both the electricity and natural gas businesses are subject to a variety of other factors. These factors include weather, competition, new energy contracts with other utilities and other wholesale customers, energy conservation practiced by customers, the use of alternative energy sources by customers, the prices of electricity and natural gas, the price elasticity of demand, and the rate of economic growth or decline in the service territory. In addition, the level of future earnings for the wholesale electric business also depends on numerous factors including regulatory matters, creditworthiness of customers, total electric generating capacity available and related costs, future acquisitionsthe development or acquisition of renewable facilities and construction of electric generating facilities, the impact of tax credits from renewableother energy projects, and the successful remarketing of capacity as current contracts expire. Demand for electricity and natural gas is primarily driven by the pace of economic growth that may be affected by changes in regional and global economic conditions, which may impact future earnings. In addition, the volatility of natural gas prices has a significant impact on the natural gas distribution utilities' customer rates, long-term competitive position against
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
other energy sources, and the ability of Southern Company Gas' gas marketing services and wholesale gas services businesses to capture value from locational and seasonal spreads. Additionally, changes in commodity prices subject a significant portion of Southern Company Gas' operations to earnings variability.
As part of its ongoing effort to adapt to changing market conditions, Southern Company continues to evaluate and consider a wide array of potential business strategies. These strategies may include business combinations, partnerships, and acquisitions involving other utility or non-utility businesses or properties, disposition of certain assets or businesses, internal restructuring, or some combination thereof. Furthermore, Southern Company may engage in new business ventures that arise from competitive and regulatory changes in the utility industry. Pursuit of any of the above strategies, or any combination thereof, may significantly affect the business operations, risks, and financial condition of Southern Company.
In October 2017, a wholly-owned subsidiary ofNovember 2018, Southern Company GasPower entered into agreements for the sale of the assets of twoan agreement to sell all of its natural gas distribution utilities, Elizabethtown Gas and Elkton Gas, to South Jersey Industries, Inc.equity interests in Plant Mankato (including the 385-MW expansion currently under construction) for a total cashan aggregate purchase price of $1.7 billion. As of March 31, 2018, the net book value of the assets to be disposed of in the sale was approximately $1.5 billion, which includes approximately $0.5 billion of goodwill.$650 million. The goodwill is not deductible for tax purposes and, as a result, a deferred tax liability has not yet been provided. Through the completion of the asset sales, Southern Company Gas intends to invest approximately $0.1 billion in capital additions required for ordinary business operations of these assets. The completion of each asset saledisposition is subject to the satisfaction or waiverexpansion unit reaching commercial operation as well as various other customary conditions to closing, including FERC and state commission approvals. On April 17, 2019, Southern Power entered into an agreement to sell all of certain conditions, including, among otherits equity interests in the Nacogdoches biomass-fueled facility to Austin Energy for an aggregate purchase price of $460 million, subject to customary closing conditions the receiptand working capital adjustments. Each of required regulatory approvals, including the FERC, the New Jersey BPU, and, with respect to the sale of Elkton Gas, the Maryland PSC. Southern Company Gas and South Jersey Industries, Inc. made joint filings in December 2017 and on January 16, 2018 with the New Jersey BPU and the Maryland PSC, respectively, requesting regulatory approval. The assetthese sales are expected to be completed by the end of the third quarter 2018.
On April 11, 2018, Southern Company Gas and its subsidiary Pivotal Home Solutions entered into a stock purchase agreement with American Water Enterprises LLC for the sale of Pivotal Home Solutions for a purchase price of approximately $365 million, including estimated working capital. In contemplation of the transaction, a goodwill impairment charge of $42 million was recorded as of March 31, 2018. The remaining goodwill of $242 million is not deductible for tax purposes and, as a result, a deferred tax liability has not been provided. The completion of this transaction is subject to the satisfaction or waiver of certain conditions, including, among other customary closing conditions, approval from the Florida Office of Insurance Regulation and the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The transaction is expected to be completed by the end of the second quarter 2018.
In addition, Southern Power is pursuing the sale of a 33% equity interest in a newly-formed holding company owning substantially all of Southern Power's solar facilities, including certain subsidiaries owned in partnership with various third parties. If successful, the sale is expected to close in mid-2018.
Themid-2019; however, the ultimate outcome of these matters cannot be determined at this time.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Company in Item 7 of the Form 10-K.
Environmental Matters
The Southern Company system's operations are regulated by state and federal environmental agencies through a variety of laws and regulations governing air, water, land, and protection of other natural resources. The Southern Company system maintains comprehensive environmental compliance and greenhouse gas (GHG)GHG strategies to assess upcoming requirements and compliance costs associated with these environmental laws and regulations. The costs, including capital expenditures, and operations and maintenance costs, and costs reflected in ARO liabilities, required to comply with environmental laws and regulations and to achieve stated goals may impact future electric generating unit retirement and replacement decisions, results of operations, cash flows, andand/or financial condition. Related costs may result from the installation of additional environmental controls, closure and monitoring of CCR facilities, unit retirements, and adding or changing fuel sources for certain existing units, as well as related upgrades to the Southern Company system's transmission system.and distribution (electric and natural gas) systems. A major portion of these costs areis expected to be recovered through existing ratemaking provisions.retail and wholesale rates. The ultimate impact of environmental laws and regulations and the GHG goals discussed below will depend on various factors, such as state adoption and implementation of requirements, the availability and cost of any deployed control technology, fuel prices, and the outcome of pending and/or future legal challenges.
New or revised environmental laws and regulations could affect many areas of the traditional electric operating companies', Southern Power's, and the natural gas distribution utilities' operations. The impact of any such changes cannot be determined at this time. Environmental compliance costs could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis for the traditional electric operating companies and the natural gas distribution utilities or through long-term wholesale agreements for the traditional electric operating companies and Southern Power. Further, increased costs that are recovered through regulated rates could contribute to reduced demand for electricity and natural gas, which could negatively affect results of operations, cash flows, andand/or financial condition. Additionally, many commercial and industrial customers may also be affected by existing and future environmental requirements, which for some may have the potential to ultimately affect their demand for electricity and natural gas. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under "Environmental Matters" in Item 8 of the Form 10-K for additional information.
Environmental Laws and Regulations
Coal Combustion Residuals
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Environmental Laws and Regulations – Coal Combustion Residuals" of Southern Company in Item 7 of the Form 10-K for additional information regarding the Disposal of Coal Combustion Residuals from Electric Utilities rule (CCR Rule).
Consistent with the EPA's announced plans to reconsider certain portions of the CCR Rule, on March 15, 2018, the EPA published the first of two proposed coal ash rules it plans to finalize by no later than December 2019. The impact of any changes to the CCR Rule will depend on the content of the final rule and the outcome of any legal challenges and cannot be determined at this time.
Global Climate Issues
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Global Climate Issues" of Southern Company in Item 7 of the Form 10-K for additional information regarding domestic GHG policies.
Through 2017, the Southern Company system has achieved an estimated GHG emission reduction of 36% since 2007. In April 2018, Southern Company established an intermediate goal of a 50% reduction in carbon emissions
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
from 2007 levels by 2030 and a long-term goal of low- to no-carbon operations by 2050. To achieve these goals, the Southern Company system expects to continue growing its renewable energy portfolio, optimize technology advancements to modernize its transmission and distribution systems, increase the use of natural gas for generation, complete construction of Plant Vogtle Units 3 and 4, invest in energy efficiency, and continue research and development efforts focused on technologies to lower GHG emissions. The Southern Company system's ability to achieve these goals also will be dependent on many external factors, including supportive national energy policies, low natural gas prices, and the development, deployment, and advancement of relevant energy technologies. The ultimate outcome of this matter cannot be determined at this time.
Regulatory Matters
Fuel Cost Recovery
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Fuel Cost Recovery" of Southern Company in Item 7 and Note 32 to the financial statements of Southern Company under "Regulatory Matters – Alabama Power – Rate ECR" and "Regulatory Matters – Georgia Power – Fuel Cost Recovery" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein for additional information regarding fuel cost recovery for the traditional electric operating companies.information.
Fuel Cost Recovery
The traditional electric operating companies each have established fuel cost recovery rates approved by their respective state PSCs. Fuel cost recovery revenues are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes in the billing factor will not have a significant effect on Southern Company's revenues or net income, but will affect cash flow. The traditional electric operating companies continuously monitor their under or over recovered fuel cost balances and make appropriate filings with their state PSCs to adjust fuel cost recovery rates as necessary.
Alabama Power
Alabama Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Alabama PSC. Alabama Power currently recovers its costs from the regulated retail business primarily through Rate RSE, Rate CNP, Rate ECR, and Rate NDR. In addition, the Alabama PSC issues accounting orders to address current events impacting Alabama Power.
Environmental Accounting Order
In connection with management's decision to retire Plant Gorgas, in February 2019, Alabama Power reclassified approximately $1.3 billion for Plant Gorgas Unit 10 from plant in service, net of depreciation to other utility plant, net and continued to depreciate the asset according to the original depreciation rates. On April 15, 2019, Alabama Power retired Plant Gorgas Units 8, 9, and 10 and reclassified approximately $740 million of the remaining net investment costs of the units to a regulatory asset to be recovered over the units' remaining useful lives as established prior to the decision to retire. Additionally, approximately $700 million of net capitalized asset retirement costs will be reclassified to a regulatory asset and recovered in accordance with accounting guidance provided by the Alabama PSC. See Note 32 to the financial statements of Southern Company under "Regulatory Matters"Alabama Power – Alabama Power" in Item 8 of the Form 10-KEnvironmental Accounting Order" and Note (B) to the Condensed Financial Statements herein for additional information regarding Alabama Power's rate mechanisms, accounting orders, and the recovery balance of each regulatory clause for Alabama Power.
On May 1, 2018, the Alabama PSC approved modifications to Rate RSE and other commitments designed to position Alabama Power to address the growing pressure on its credit quality resulting from the Tax Reform Legislation, without increasing retail rates under Rate RSE in the near term. Alabama Power plans to reduce growth in total debt by increasing equity, with corresponding reductions in debt issuances, thereby de-leveraging its capital structure. Alabama Power's goal is to achieve an equity ratio of approximately 55% by the end of 2025. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters – Federal Tax Reform Legislation" of Southern Company in Item 7 of the Form 10-K for additional information.
Rate RSE
The approved modifications to Rate RSE are effective June 2018 and applicable for January 2019 billings and thereafter. The modifications include reducing the top of the allowed weighted common equity return (WCER) range from 6.21% to 6.15% and modifications to the refund mechanism applicable to prior year actual results. The modifications to the refund mechanism allow Alabama Power to retain a portion of the revenue that causes the actual WCER for a given year to exceed the allowed range.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In conjunction with these modifications to Rate RSE, Alabama Power committed to a moratorium on any upward adjustments under Rate RSE for 2019 and 2020. Additionally, Alabama Power will return $50 million to customers through bill credits in 2019. The ultimate outcome of this matter cannot be determined at this time.
In accordance with an established retail tariff that provides for an interim adjustment to customer billings to recognize the impact of a change in the statutory income tax rate, Alabama Power will also return approximately $257 million to retail customers through bill credits in the second half of 2018 as a result of the change in the federal income tax rate under the Tax Reform Legislation.
Rate ECR
On May 1, 2018, the Alabama PSC approved an increase to Rate ECR from 2.015 cents per KWH to 2.353 cents per KWH effective July 2018 which is expected to result in additional collections of approximately $100 million through December 31, 2018. The approved increase in the Rate ECR factor will have no significant effect on Southern Company's net income, but will increase operating cash flows related to fuel cost recovery in 2018. The rate will return to 5.910 cents per KWH in 2019, absent a further order from the Alabama PSC. The ultimate outcome of this matter cannot be determined at this time.
Accounting Order
On May 1, 2018, the Alabama PSC approved an accounting order that authorizes Alabama Power to defer the benefits of federal excess deferred income taxes associated with the Tax Reform Legislation for the year ending December 31, 2018 as a regulatory liability. Up to $30 million of such deferrals may be used to offset under-recovered amounts under Rate ECR, with any remaining amounts to be used for the benefit of customers as determined by the Alabama PSC. Alabama Power expects the benefits deferred to total approximately $30 million to $50 million. The ultimate outcome of this matter cannot be determined at this time. See Note 5 to the financial statements of Southern Company under "Federal Tax Reform Legislation"6 in Item 8 of the Form 10-K for additional information.
Georgia Power
Georgia Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Georgia PSC. Georgia Power currently recovers its costs from the regulated retail business through the 2013 ARP, which includes traditional base tariff rates, Demand-Side Management tariffs, Environmental Compliance Cost Recovery tariffs, and Municipal Franchise Fee tariffs. Georgia Power is scheduled to file a base rate case by July 1, 2019, which may continue or modify these tariffs. In addition, financing costs related to certified construction costs of Plant Vogtle Units 3 and 4 are being collected through the NCCR tariff and fuel costs are collected through a separate fuel cost recovery tariff.
Mississippi Power
Kemper County Energy Facility
As the mining permit holder, Liberty Fuels Company, LLC has a legal obligation to perform mine reclamation, and Mississippi Power has a contractual obligation to fund all reclamation activities. As a result of the abandonment of the Kemper IGCC, final mine reclamation began in 2018 and is expected to be substantially completed in 2020, with monitoring expected to continue through 2027. See Note (B) to the Condensed Financial Statements under "Nuclear Construction" herein and Note 36 to the financial statements of Southern Company under "Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding Georgia Power's NCCR tariff. Also see Note (B)information.
During the first quarter 2019, Mississippi Power recorded pre-tax charges to the Condensed Financial Statements under "Regulatory Matters – Georgia Power – Fuel Cost Recovery" herein for additional information regarding Georgia Power's fuel cost recovery.
Rate Plans
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Georgia Power – Rate Plans"income of Southern Company in Item 7 of the Form 10-K for additional information regarding Georgia Power's 2013 ARP and the Georgia PSC's 2018 order related to the Tax Reform Legislation.
On April 3, 2018, the Georgia PSC approved a settlement agreement between Georgia Power and the staff of the Georgia PSC regarding the retail rate impact of the Tax Reform Legislation (Georgia Power Tax Reform Settlement Agreement). Pursuant to the Georgia Power Tax Reform Settlement Agreement, to reflect the federal income tax rate reduction impact of the Tax Reform Legislation, Georgia Power will refund to customers a total of $330$2 million through bill credits of $131($1 million in October 2018, $96 million in June 2019, and $103 million in February 2020. In addition, Georgia Power is deferring as a regulatory liability (i) the revenue equivalent of the tax expense reductionafter tax), primarily resulting from legislation lowering the Georgia state income tax rate from 6.00% to 5.75% in 2019abandonment and
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(ii) the entire benefit of approximately $700 million in federal and state excess accumulated deferred income taxes. The amortization of these regulatory liabilities is expected to be addressed in Georgia Power's next base rate case, which is scheduled to be filed by July 1, 2019. If there is not a base rate case in 2019, customers will receive $185 million in annual bill credits beginning in 2020, with any additional federal and state income tax savings deferred as a regulatory liability, until Georgia Power's next base rate case.
To address the negative cash flow and credit metric impacts of the Tax Reform Legislation, the Georgia PSC also approved an increase in Georgia Power's retail equity ratio to the lower of (i) Georgia Power's actual common equity weight in its capital structure or (ii) 55%, until Georgia Power's next base rate case. Benefits from reduced federal income tax rates in excess of the amounts refunded to customers will be retained by Georgia Power to cover the carrying costs of the incremental equity in 2018 and 2019.
Gulf Power
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Gulf Power" of Southern Company in Item 7 of the Form 10-K for additional information.
As a continuation of the 2017 Gulf Power Rate Case Settlement Agreement, on March 26, 2018, the Florida PSC approved a stipulation and settlement agreement among Gulf Power and three intervenors addressing the retail revenue requirement effects of the Tax Reform Legislation (Gulf Power Tax Reform Settlement Agreement).
The Gulf Power Tax Reform Settlement Agreement results in annual reductions to Gulf Power's revenues of $18.2 million from base rates and $15.6 million from environmental cost recovery rates, implemented April 1, 2018, and also provides for a one-time refund of $69.4 millionsales proceeds, for the retail portion of unprotected (not subject to normalization) deferred tax liabilities through Gulf Power's fuel cost recovery rate overmine and gasifier-related assets at the remainder of 2018. As a result of the Gulf Power Tax Reform Settlement Agreement, the Florida PSC also approved an increase in Gulf Power's maximum equity ratio from 52.5% to 53.5%Kemper County energy facility. Additional closure costs for all retail regulatory purposes.
As part of the Gulf Power Tax Reform Settlement Agreement, a limited scope proceeding to address protected deferred tax liabilities consistent with IRS normalization principles was initiated on April 30, 2018. Pending resolution of this proceeding, Gulf Power is deferring the related amounts for 2018 as a regulatory liability. Unless otherwise agreed to by the parties to the Gulf Power Tax Reform Settlement Agreement, amounts recorded in this regulatory liability will be refunded to retail customers in 2019 through Gulf Power's fuel cost recovery rates. The ultimate outcome of this matter cannot be determined at this time.
Mississippi Power
On February 7, 2018, Mississippi Power revised its annual projected PEP filing for 2018 to reflect the impacts of the Tax Reform Legislation. The revised filing requests an increase of $26 million in annual revenues, based on a performance adjusted ROE of 9.33% and an increased equity ratio of 55%. The Mississippi PSC is expected to rule on this request in mid-2018. The ultimate outcome of this matter cannot be determined at this time.
Southern Company Gas
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Southern Company Gas" of Southern Company in Item 7 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Regulatory Matters – Southern Company Gas" herein for additional information.
In December 2017, Atlanta Gas Light filed its 2018 annual rate adjustment with the Georgia PSC, which, if approved, would have increased annual base rate revenues by $22 million, effective June 1, 2018. On February 23, 2018, Atlanta Gas Light revised its filing to reflect the impacts of the Tax Reform Legislation. The revised request replaced the $22 million rate increase with a $16 million rate reduction for customers in 2018. The revised request maintains the previously authorized earnings band based on a return on equity between 10.55% and 10.95% and proposes to increase the equity ratio by 3% to an equity ratio of 54% to address the negative cash flow and credit metric impacts of the Tax Reform Legislation. Atlanta Gas Light also notified the Georgia PSC that it intends to
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
seek a further equity ratio increase of 2% to an equity ratio of 56% in its 2019 filing. The Georgia PSC is expected to rule on the revised request in the second quarter 2018.
In accordance with an Illinois Commission order and pursuant to its rehearing request, on April 13, 2018, Nicor Gas filed for revised base rates with the Illinois Commission, which would result in a decrease of approximately $44 million in annual base rate revenues effective in the second quarter 2018 to incorporate the reduction in the federal income tax rate as a result of the Tax Reform Legislation. Nicor Gas' previously-authorized capital structure and ROE of 9.8% were not addressed in the rehearing and remain unchanged. The Illinois Commission is expected to rule on the request on May 2, 2018.
The ultimate outcome of these matters cannot be determined at this time.
Kemper County Energy Facility
For additional information on the Kemper County energy facility, see Note 3 to the financial statements of Southern Company under "Kemper County Energy Facility" in Item 8 of the Form 10-K.
As the mining permit holder for the Kemper County energy facility, Liberty Fuels Company, LLC has a legal obligation to perform mine reclamation, and Mississippi Power has a contractual obligation to fund all reclamation activities. Mine reclamation began in the first quarter 2018. See Note 1 to the financial statements of Southern Company under "Asset Retirement Obligations and Other Costs of Removal" in Item 8 of the Form 10-K for additional information.
During the first quarter 2018, Mississippi Power recorded charges to income of $44 million ($33 million after tax), primarily resulting from the abandonment and related closure activities for the mine and gasifier-related assets, at the Kemper County energy facility. Additional closure costs for the mine and gasifier-related assets, including ash disposal, currently estimated to costat up to $50$10 million pre-tax (excluding salvage)salvage, net of dismantlement costs), are expected tomay be incurred duringthrough the remainderfirst half of 2018 and 2019.2020. In addition, period costs, including, but not limited to, costs for compliance and safety, ARO accretion, and property taxes for the mine and gasifier-related assets, are estimated at $4$11 million for the remainder of 2018, $4 million in 2019 and $1$2 million to $6 million annually beginning in 2020.2020 through 2023.
In addition, Mississippi Power constructed the CO2 pipeline for the planned transport of captured CO2 for use in enhanced oil recovery and is currently evaluating its options regarding the final disposition of the CO2 pipeline, including removal of the pipeline. This evaluation is expected to be complete later in 2019. If Mississippi Power ultimately decides to remove the CO2 pipeline, the cost of removal could have a material impact on Southern Company's financial statements.
In December 2018, Mississippi Power filed with the DOE its request for property closeout certification under the contract related to the $387 million of grants received. Mississippi Power and the DOE are currently in discussions regarding the requested closeout and property disposition, which may require payment to the DOE for a portion of certain property that is to be retained by Mississippi Power. In connection with the DOE closeout discussions, on April 29, 2019, the Civil Division of the Department of Justice informed Southern Company and Mississippi Power of an investigation related to the Kemper County energy facility. The ultimate outcome of these matters cannot be determined at this mattertime; however, they could have a material impact on Southern Company's financial statements.
Southern Company Gas
The natural gas distribution utilities are subject to regulation and oversight by their respective state regulatory agencies for the rates charged to their customers and other matters. With the exception of Atlanta Gas Light, which does not sell natural gas to end-use customers, the natural gas distribution utilities are authorized by the relevant regulatory agencies in the states in which they serve to use natural gas cost recovery mechanisms that adjust rates to reflect changes in the wholesale cost of natural gas and ensure recovery of all costs prudently incurred in purchasing natural gas for customers. Natural gas cost recovery revenues are adjusted for differences in actual recoverable natural gas costs and amounts billed in current regulated rates. Changes in the billing factor will not have a significant effect on revenues or net income, but will affect cash flows. In addition to natural gas cost recovery mechanisms, there are other cost recovery mechanisms, such as regulatory riders, which vary by utility but allow recovery of certain costs, such as those related to infrastructure replacement programs, as well as environmental remediation and energy efficiency plans.
In November 2018, Nicor Gas filed a general base rate case with the Illinois Commission requesting a $230 million increase in annual base rate revenues. The requested increase is based on a projected test year for the 12-month period ending September 30, 2020, a ROE of 10.6%, and an increase in the equity ratio from 52% to 54% to address the negative cash flow and credit metric impacts of the Tax Reform Legislation.
On April 16, 2019, Nicor Gas entered into a stipulation agreement to resolve all related issues with the Staff of the Illinois Commission, including a ROE of 9.86% and an equity ratio of 54%. Also on April 16, 2019, Nicor Gas filed its rebuttal testimony with the Illinois Commission incorporating the stipulation agreement and addressing the remaining items outstanding with the other two intervenors. As a result of the stipulation agreement and rebuttal testimony, the revised requested annual revenue increase is $180 million.
The Illinois Commission is expected to rule on the requested increase within the statutory time limit of 11 months from the filing of the rate case, after which rate adjustments will be effective.
Atlanta Gas Light is required to file a traditional base rate case no later than June 3, 2019 for rates effective January 1, 2020.
The ultimate outcome of these matters cannot be determined at this time.
The combined cycle and associated common facilities portions
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Construction Program
Overview
The subsidiary companies of Southern Company are engaged in continuous construction programs to accommodate existing and estimated future loads on their respective systems. The Southern Company system intends to continue its strategy of developing and constructing new electric generating facilities, adding environmental modifications to certain existing units, expanding and improving the electric transmission and distribution systems, and updating and expanding the natural gas distribution systems. For the traditional electric operating companies, major generation construction projects are subject to state PSC approval in order to be included in retail rates. While Southern Power generally constructs and acquires generation assets covered by long-term PPAs, any uncontracted capacity could negatively affect future earnings. Southern Company Gas is engaged in various infrastructure improvement programs designed to update or expand the natural gas distribution systems of the natural gas distribution utilities to improve reliability and meet operational flexibility and growth. The natural gas distribution utilities recover their investment and a return associated with these infrastructure programs through their regulated rates. See Notes 32 and 1215 to the financial statements of Southern Company under "Regulatory Matters – Southern"Southern Company Gas – Regulatory Infrastructure Programs"Replacement Programs and Capital Projects" and "Southern Power, – Construction Projects in Progress," respectively, in Item 8 of the Form 10-K and Note (J)(K) to the Condensed Financial Statements under "Southern Power" herein for additional information.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The largest construction project currently underway in the Southern Company system is Plant Vogtle Units 3 and 4 (45.7% ownership interest by Georgia Power in the two units, each with approximately 1,100 MWs). See Note 32 to the financial statements of Southern Company under "Nuclear"Georgia Power – Nuclear Construction" in Item 8 of the Form 10-K and "Nuclear Construction""Nuclear Construction" herein for additional information.
Also see FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" herein for additional information regarding Southern Company's capital requirements for its subsidiaries' construction programs.
Nuclear Construction
See Note 32 to the financial statements of Southern Company under "Nuclear"Georgia Power – Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding the construction of Plant Vogtle Units 3 and 4, the joint ownership agreements and related funding agreement, VCM reports, and the NCCR tariff.
In 2009, the Georgia PSC certified construction of Plant Vogtle Units 3 and 4. Georgia Power holds a 45.7% ownership interest in Plant Vogtle Units 3 and 4. In 2012, the NRC issued the related combined construction and operating licenses, which allowed full construction of the two AP1000 nuclear units (with electric generating capacity of approximately 1,100 MWs each) and related facilities to begin. Until March 2017, construction on Plant Vogtle Units 3 and 4 continued under the Vogtle 3 and 4 Contracts
Effective inAgreement, which was a substantially fixed price agreement. In March 2017, the EPC Contractor filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. In connection with the EPC Contractor's bankruptcy filing, Georgia Power, acting for itself and as agent for the other Vogtle Owners, entered into several transitional arrangements to allow construction to continue. In July 2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners, and the EPC Contractor entered into the Vogtle Services Agreement, whereby Westinghouse will provideprovides facility design and engineering services, procurement and technical support, and staff augmentation on a time and materials cost basis. The Vogtle Services Agreement provides that it will continue until the start-up and testing of Plant Vogtle Units 3 and 4 are complete and electricity is generated and sold from both units. The Vogtle Services Agreement is terminable by the Vogtle Owners upon 30 days' written notice.
In October 2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners, entered into a construction completion agreement withexecuted the Bechtel whereby Bechtel will serve as the primary contractor for the remaining construction activities for Plant Vogtle Units 3 and 4 (Bechtel Agreement). The Bechtel Agreement, is a cost reimbursable plus fee arrangement, whereby Bechtel is reimbursed for actual costs plus a base fee and an at-risk fee, which is subject to adjustment based on Bechtel's performance against cost and schedule targets. Each Vogtle Owner is severally (not jointly) liable for its proportionate share, based on its ownership interest, of all amounts owed to Bechtel under the Bechtel Agreement. The Vogtle Owners may terminate the Bechtel Agreement at any time for their convenience, provided that the Vogtle Owners will be required to pay
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
amounts related to work performed prior to the termination (including the applicable portion of the base fee), certain termination-related costs, and, at certain stages of the work, the applicable portion of the at-risk fee. Bechtel may terminate the Bechtel Agreement under certain circumstances, including certain Vogtle Owner suspensions of work, certain breaches of the Bechtel Agreement by the Vogtle Owners, Vogtle Owner insolvency, and certain other events. Pursuant
Cost and Schedule
Georgia Power's approximate proportionate share of the remaining estimated capital cost to complete Plant Vogtle Units 3 and 4 by the expected in-service dates of November 2021 and November 2022, respectively, is as follows:
|
| | | |
| | (in billions) |
Base project capital cost forecast(a)(b) | $ | 8.0 |
|
| Construction contingency estimate | 0.4 |
|
Total project capital cost forecast(a)(b) | 8.4 |
|
Net investment as of March 31, 2019(b) | (4.9 | ) |
Remaining estimate to complete(a) | $ | 3.5 |
|
| |
| (a) | Excludes financing costs expected to be capitalized through AFUDC of approximately $325 million. |
| |
| (b) | Net of $1.7 billion received from Toshiba under the Guarantee Settlement Agreement and approximately $188 million in related Customer Refunds. |
Georgia Power estimates that its financing costs for construction of Plant Vogtle Units 3 and 4 will total approximately $3.1 billion, of which $1.9 billion had been incurred through March 31, 2019.
In April 2019, Southern Nuclear completed a cost and schedule validation process to verify and update quantities of commodities remaining to install, labor hours to install remaining quantities and related productivity, testing and system turnover requirements, and forecasted staffing needs and related costs. This process confirmed the total estimated project capital cost forecast for Plant Vogtle Units 3 and 4. The expected in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4, as previously approved by the Georgia PSC, remain unchanged.
As construction continues, challenges with management of contractors, subcontractors, and vendors; supervision of craft labor and related craft labor productivity, ability to attract and retain craft labor, and/or related cost escalation; procurement, fabrication, delivery, assembly, and/or installation and the initial testing and start-up, including any required engineering changes, of plant systems, structures, or components (some of which are based on new technology that only recently began initial operation in the global nuclear industry at this scale), any of which may require additional labor and/or materials; or other issues could arise and change the projected schedule and estimated cost. Monthly construction production targets established as part of a strategy to maintain and build margin to the Loan Guarantee Agreement between Georgia Powerapproved in-service dates will continue to increase significantly throughout 2019. To meet these increasing monthly targets, existing craft construction productivity must improve and additional craft laborers must be retained and deployed.
There have been technical and procedural challenges to the construction and licensing of Plant Vogtle Units 3 and 4 at the federal and state level and additional challenges may arise. Processes are in place that are designed to assure compliance with the requirements specified in the Westinghouse Design Control Document and the DOE,combined construction and operating licenses, including inspections by Southern Nuclear and the NRC that occur throughout construction. As a result of such compliance processes, certain license amendment requests have been filed and approved or are pending before the NRC. Various design and other licensing-based compliance matters, including the timely resolution of ITAAC and the related approvals by the NRC, may arise, which may result in additional license amendments or require other resolution. If any license amendment requests or other licensing-based compliance issues are not resolved in a timely manner, there may be delays in the project schedule that could result in increased costs.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The ultimate outcome of these matters cannot be determined at this time. However, any extension of the regulatory-approved project schedule is currently estimated to result in additional base capital costs of approximately $50 million per month, based on Georgia Power's ownership interests, and AFUDC of approximately $12 million per month. While Georgia Power is not precluded from seeking recovery of any future capital cost forecast increase, management will ultimately determine whether or not to seek recovery. Any further changes to the capital cost forecast that are not expected to be recoverable through regulated rates will be required to obtain the DOE's approval of the Bechtel Agreement priorbe charged to obtaining any further advances under the Loan Guarantee Agreement.income and such charges could be material.
Joint Owner Contracts
In November 2017, the Vogtle Owners entered into an amendment to their joint ownership agreements for Plant Vogtle Units 3 and 4 (as amended, Vogtle Joint Ownership Agreements) to provide for, among other conditions, additional Vogtle Owner approval requirements. Pursuant toEffective in August 2018, the Vogtle Joint Ownership Agreements,Owners further amended the joint ownership agreements to clarify and provide procedures for certain provisions of the joint ownership agreements related to adverse events that require the vote of the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 must vote to continue construction if certain adverse events occur, including (i)(as amended, and together with the bankruptcy of Toshiba; (ii) termination or rejection in bankruptcy of certain agreements, including the Vogtle Services Agreement or the Bechtel Agreement; (iii) the Georgia PSC or Georgia Power determines that any of Georgia Power's costs relating to the construction of Plant Vogtle Units 3 and 4 will not be recovered in retail rates because such costs are deemed unreasonable or imprudent; or (iv) an increase in the construction budget contained in the seventeenth VCM report of more than $1 billion or extension of the project schedule contained in the seventeenth VCM report of more than one year. In addition, pursuant toNovember 2017 amendment, the Vogtle Joint Ownership Agreements, the required approval of holders of ownership interests in Plant Vogtle Units 3 and 4 is at least (i) 90% for a change of the primary construction contractor and (ii) 67% for material amendments to the Vogtle Services Agreement or agreements with Southern Nuclear or the primary construction contractor, including the Bechtel Agreement.Agreements). The Vogtle Joint Ownership Agreements also confirm that the Vogtle Owners' sole recourse against Georgia Power or Southern Nuclear for any action or inaction in connection with their performance as agent
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
for the Vogtle Owners is limited to removal of Georgia Power and/or Southern Nuclear as agent, except in cases of willful misconduct.
As a result of the increase in the total project capital cost forecast and Georgia Power's decision not to seek rate recovery of the increase in the base capital costs in conjunction with the nineteenth VCM report, the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 were required to vote to continue construction. In September 2018, the Vogtle Owners unanimously voted to continue construction of Plant Vogtle Units 3 and 4.
Amendments to the Vogtle Joint Ownership Agreements
In connection with the vote to continue construction, Georgia Power entered into (i) the Vogtle Owner Term Sheet with the other Vogtle Owners and MEAG's wholly-owned subsidiaries MEAG SPVJ, MEAG Power SPVM, LLC (MEAG SPVM), and MEAG Power SPVP, LLC (MEAG SPVP) to take certain actions which partially mitigate potential financial exposure for the other Vogtle Owners, including additional amendments to the Vogtle Joint Ownership Agreements and the purchase of PTCs from the other Vogtle Owners at pre-established prices, and (ii) the MEAG Term Sheet with MEAG and MEAG SPVJ to provide funding with respect to MEAG SPVJ's ownership interest in Plant Vogtle Units 3 and 4 under certain circumstances. On January 14, 2019, Georgia Power, MEAG, and MEAG SPVJ entered into an agreement to implement the provisions of the MEAG Term Sheet. On February 18, 2019, Georgia Power, the other Vogtle Owners, and MEAG's wholly-owned subsidiaries MEAG SPVJ, MEAG SPVM, and MEAG SPVP entered into certain amendments to the Vogtle Joint Ownership Agreements to implement the provisions of the Vogtle Owner Term Sheet.
The ultimate outcome of these matters cannot be determined at this time.
Regulatory Matters
In 2009, the Georgia PSC voted to certify construction of Plant Vogtle Units 3 and 4 with a certified capital cost of $4.418 billion. In addition, in 2009 the Georgia PSC approved inclusion of the Plant Vogtle Units 3 and 4 related CWIP accounts in rate base, and the State of Georgia enacted the Georgia Nuclear Energy Financing Act, which allows Georgia Power to recover financing costs for Plant Vogtle Units 3 and 4. Financing costs are recovered on all applicable certified costs through annual adjustments to the NCCR tariff up to the certified capital cost of $4.418 billion. As ofAt March 31, 2018,2019, Georgia Power had recovered approximately $1.6$1.9 billion of financing costs. On March 20,Financing costs related to capital costs above $4.418 billion will be recovered through AFUDC; however, Georgia Power will not record AFUDC related to any capital costs in excess of the total deemed reasonable by the Georgia PSC (currently $7.3 billion) and not requested for rate recovery. In December 2018, the Georgia PSC approved a decreaseGeorgia Power's request to increase the NCCR tariff by $88 million annually, effective January 1, 2019.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Georgia Power is required to file semi-annual VCM reports with the Georgia PSC by February 28 and August 31 of each year. In 2013, in connection with the eighth VCM report, the Georgia PSC approved a stipulation between Georgia Power and the staff of the Georgia PSC to waive the requirement to amend the Plant Vogtle Units 3 and 4 certificate in accordance with the 2009 certification order until the completion of Plant Vogtle Unit 3, or earlier if deemed appropriate by the Georgia PSC and Georgia Power.
In 2016, the Georgia PSC voted to approve a settlement agreement (Vogtle Cost Settlement Agreement) resolving certain prudency matters in connection with the fifteenth VCM report. In December 2017, the Georgia PSC voted to approve (and issued its related order on January 11, 2018) certain recommendations made by Georgia Power in thePower's seventeenth VCM report and modifyingmodified the Vogtle Cost Settlement Agreement. The Vogtle Cost Settlement Agreement, as modified by the January 11, 2018 order, resolved the following regulatory matters related to Plant Vogtle Units 3 and 4: (i) none of the $3.3 billion of costs incurred through December 31, 2015 and reflected in the fourteenth VCM report should be disallowed from rate base on the basis of imprudence; (ii) the Contractor Settlement Agreement was reasonable and prudent and none of the amounts paid pursuant to the Contractor Settlement Agreement should be disallowed from rate base on the basis of imprudence; (iii) (a) capital costs incurred up to $5.68 billion would be presumed to be reasonable and prudent with the burden of proof on any party challenging such costs, (b) Georgia Power would have the burden to show that any capital costs above $5.68 billion were prudent, and (c) a revised capital cost forecast of $7.3 billion (after reflecting the impact of payments received under the Guarantee Settlement Agreement and related Customer Refunds) was found reasonable; (iv) construction of Plant Vogtle Units 3 and 4 should be completed, with Southern Nuclear serving as project manager and Bechtel as primary contractor; (v) approved and deemed reasonable Georgia Power's revised schedule placing Plant Vogtle Units 3 and 4 in service in November 2021 and November 2022, respectively; (vi) confirmed that the revised cost forecast does not represent a cost cap and that prudence decisions on cost recovery will be made at a later date, consistent with applicable Georgia law; (vii) reduced the ROE used to calculate the NCCR tariff (a) from 10.95% (the ROE rate setting point authorized by the Georgia PSC in the 2013 ARP) to 10.00% effective January 1, 2016, (b) from 10.00% to 8.30%, effective January 1, 2020, and (c) from 8.30% to 5.30%, effective January 1, 2021 (provided that the ROE in no case will be less than Georgia Power's average cost of long-term debt); (viii) reduced the ROE used for AFUDC equity for Plant Vogtle Units 3 and 4 from 10.00% to Georgia Power's average cost of long-term debt, effective January 1, 2018; and (ix) agreed that upon Unit 3 reaching commercial operation, retail base rates would be adjusted to include carrying costs on those capital costs deemed prudent in the Vogtle Cost Settlement Agreement. The January 11, 2018 order also stated that if Plant Vogtle Units 3 and 4 are not commercially operational by June 1, 2021 and June 1, 2022, respectively, the ROE used to calculate the NCCR tariff will be further reduced by 10 basis points each month (but not lower than Georgia Power's average cost of long-term debt) until the respective unitUnit is commercially operational. The ROE reductions negatively impacted earnings by approximately $25$100 million in 20172018 and are estimated to have negative earnings impacts of approximately $100$75 million in 20182019 and an aggregate of $585approximately $635 million from 20192020 to 2022.
In its January 11, 2018 order, the Georgia PSC also stated if other certain conditions change and assumptions upon which Georgia Power's seventeenth VCM report are based do not materialize, both Georgia Power and the Georgia PSC reservereserved the right to reconsider the decision to continue construction.
In February 2018, Georgia Interfaith Power & Light, Inc. (GIPL) and Partnership for Southern Equity, Inc. (PSE) filed a petition appealing the Georgia PSC's January 11, 2018 order with the Fulton County Superior Court. In March 2018, Georgia Watch filed a similar appeal to the Fulton County Superior Court for judicial review of the Georgia PSC's decision and denial of Georgia Watch's motion for reconsideration. In December 2018, the Fulton County Superior Court granted Georgia Power's motion to dismiss the two appeals. On January 9, 2019, GIPL, PSE, and Georgia Watch filed an appeal of this decision with the Georgia Court of Appeals. Georgia Power believes the appeal has no merit; however, an adverse outcome in the appeal combined with subsequent adverse action by the Georgia PSC could have a material impact on Southern Company's results of operations, financial condition, and liquidity.
In August 2018, Georgia Power filed its nineteenth VCM report with the Georgia PSC, which requested approval of $578 million of construction capital costs incurred from January 1, 2018 through June 30, 2018. On February 19, 2019, the Georgia PSC approved the nineteenth VCM, but deferred approval of $51.6 million of expenditures
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On February 12, 2018, Georgia Interfaith Power & Light, Inc. and Partnership for Southern Equity, Inc. filed a petition appealing the Georgia PSC's January 11, 2018 order with the Fulton County Superior Court. On March 8, 2018, Georgia Watch filed a similar appealrelated to the Fulton County Superior Court for judicial review of the Georgia PSC's final decision and denial of Georgia Watch's motion for reconsideration. Georgia Power believes the two appeals have no merit; however, an adverse outcome in either appeal could have a material impact on Southern Company's results of operations, financial condition, and liquidity.
The IRS has allocated PTCs to each of Plant Vogtle Units 3 and 4. The nominal value of Georgia Power's portion of an administrative claim filed in the PTCs is approximately $500 million per unit.
TheWestinghouse bankruptcy proceedings. Through the nineteenth VCM, the Georgia PSC has approved seventeen VCM reports covering the periods through June 30, 2017, including total construction capital costs incurred through that dateJune 30, 2018 of $4.4 billion. Georgia Power filed its eighteenth VCM report on February 28, 2018 requesting approval of $448 million of construction capital costs (excluding the$5.4 billion (before $1.7 billion of payments received from Toshiba under the Guarantee Settlement Agreement and theapproximately $188 million in related Customer Refunds recognized as a regulatory liability) incurred from July 1, 2017 through December 31, 2017.
The ultimate outcome of these matters cannot be determined at this time.
Cost and Schedule
Georgia Power's approximate proportionate shareRefunds). In addition, the staff of the remaining estimated capital cost to complete Plant Vogtle Units 3Georgia PSC requested, and 4 with in-service dates of November 2021 and November 2022, respectively, is as follows:
|
| | | |
| | (in billions) |
| Project capital cost forecast | $ | 7.3 |
|
| Net investment as of March 31, 2018 | (3.7 | ) |
| Remaining estimate to complete | $ | 3.6 |
|
Note: Excludes financing costs capitalized through AFUDC and is net of $1.7 billion received from Toshiba in 2017 under the Guarantee Settlement Agreement and $188 million in Customer Refunds recognized as a regulatory liability in 2017.
Georgia Power estimates that its financing costs for constructionagreed, to report the results of Plant Vogtle Units 3the cost and 4 will total approximately $3.1 billion, of which $1.6 billion had been incurred through March 31, 2018.
Subsequentschedule validation process to the EPC Contractor bankruptcy filing, a number of subcontractorsGeorgia PSC (which is expected to the EPC Contractor alleged non-paymentoccur by the EPC Contractor for amounts owed for work performed on Plant Vogtle Units 3May 1, 2019) and 4. Georgia Power, acting for itself and as agent for the Vogtle Owners, has taken actions to remove liens filed by these subcontractors through the posting of surety bonds. Related to such liens, certain subcontractors have filed, and additional subcontractors may file lawsuits against the EPC Contractor and the Vogtle Owners to preserve their payment rights with respect to such claims. All amounts associatedits twentieth VCM report concurrently with the removal of subcontractor liens and other EPC Contractor pre-petition accounts payable have been paid or accrued as of Marchtwenty-first VCM report by August 31, 2018.
As construction continues, challenges with management of contractors, subcontractors, and vendors, labor productivity and availability, fabrication, delivery, assembly, and installation of plant systems, structures, and components (some of which are based on new technology and have not yet operated in the global nuclear industry at this scale), or other issues could arise and change the projected schedule and estimated cost.
There have been technical and procedural challenges to the construction and licensing of Plant Vogtle Units 3 and 4 at the federal and state level and additional challenges may arise. Processes are in place that are designed to assure compliance with the requirements specified in the Westinghouse Design Control Document and the combined construction and operating licenses, including inspections by Southern Nuclear and the NRC that occur throughout construction. As a result of such compliance processes, certain license amendment requests have been filed and approved or are pending before the NRC. Various design and other licensing-based compliance matters, including the timely resolution of Inspections, Tests, Analyses, and Acceptance Criteria and the related approvals by the NRC, may arise, which may result in additional license amendments or require other resolution. If any license amendment
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
requests or other licensing-based compliance issues are not resolved in a timely manner, there may be delays in the project schedule that could result in increased costs.2019.
The ultimate outcome of these matters cannot be determined at this time.
See RISK FACTORS of Southern Company in Item 1A of the Form 10-K for a discussion of certain risks associated with the licensing, construction, and operation of nuclear generating units, including potential impacts that could result from a major incident at a nuclear facility anywhere in the world.
DOE Financing
As ofAt March 31, 2018,2019, Georgia Power had borrowed $2.6$3.46 billion related to Plant Vogtle Units 3 and 4 costs as provided through the Amended and Restated Loan Guarantee Agreement and arelated multi-advance credit facilityfacilities among Georgia Power, the DOE, and the FFB, which providesprovide for borrowings of up to $3.46approximately $5.130 billion, subject to the satisfaction of certain conditions. In September 2017, the DOE issued a conditional commitment to Georgia Power for up to approximately $1.67 billion in additional guaranteed loans under the Loan Guarantee Agreement. This conditional commitment expires on June 30, 2018, subject to any further extension approved by the DOE. Final approval and issuance of these additional loan guarantees by the DOE cannot be assured and are subject to the negotiation of definitive agreements, completion of due diligence by the DOE, receipt of any necessary regulatory approvals, and satisfaction of other conditions. See Note 68 to the financial statements of Southern Company under "DOE"Long-term Debt – DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under "DOE Loan Guarantee Borrowings" herein for additional information, including applicable covenants, events of default, mandatory prepayment events, and conditions to borrowing.
The ultimate outcome of these matters cannot be determined at this time.
Income TaxOther Matters
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax "Other Matters" of Southern Company in Item 7 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk," Note (B) to the Condensed Financial Statements under "Regulatory Matters," and Note (H) to the Condensed Financial Statements herein for information regarding the Tax Reform Legislation and related regulatory actions.
Southern Power
In March 2018, Southern Power substantially completed a legal entity reorganization of various direct and indirect subsidiaries that own and operate substantially all of its solar facilities, including certain subsidiaries owned in partnership with various third parties. The reorganization resulted in net state tax benefits related to certain changes in apportionment rates totaling approximately $50 million, which were recorded in the first quarter 2018. In April 2018, Southern Power completed the final stage of the reorganization resulting in additional net state tax benefits of approximately $4 million. Southern Power is pursuing the sale of a 33% equity interest in the newly-formed holding company owning these solar facilities. If successful, the sale is expected to close in mid-2018. The ultimate outcome of this matter cannot be determined at this time.
Other Mattersinformation.
Southern Company and its subsidiaries are involved in various other matters being litigated and regulatory matters that could affect future earnings.earnings, including matters being litigated, as well as other regulatory matters and matters that could result in asset impairments. In addition, Southern Company and its subsidiaries are subject to certain claims and legal actions arising in the ordinary course of business. The business activities of Southern Company's subsidiaries are subject to extensive governmental regulation related to public health and the environment, such as regulationlaws and regulations governing air, water, land, and protection of air emissions and water discharges.other natural resources. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements, such as standards for air, water, land,laws and protection of other natural resources,regulations, has occurred throughout the U.S. This litigation has included claims for damages alleged to have been caused by CO2 and other emissions, CCR, and alleged exposure to hazardous materials, and/or requests for injunctive relief in connection with such matters.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The ultimate outcome of such pending or potential litigation, or regulatory matters, or potential asset impairments cannot be predicted at this time; however, for current proceedings not specifically reported in NoteNotes (B) and (C) to the Condensed Financial Statements herein, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Southern Company's financial statements. See NoteNotes (B) and (C) to the Condensed Financial Statements herein for a discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
Litigation
In 2016, a complaint against Mississippi Power was filed in Harrison County Circuit Court (Circuit Court) by Biloxi Freezing & Processing Inc., Gulfside Casino Partnership, and John Carlton Dean, which was amended and refiled to include, among other things, Southern Company as a defendant. The individual plaintiff alleges that Mississippi Power and Southern Company violated the Mississippi Unfair Trade Practices Act. All plaintiffs have alleged that Mississippi Power and Southern Company concealed, falsely represented, and failed to fully disclose important facts concerning the cost and schedule of the Kemper County energy facility and that these alleged breaches have unjustly enriched Mississippi Power and Southern Company. The plaintiffs seek unspecified actual damages and punitive damages; ask the Circuit Court to appoint a receiver to oversee, operate, manage, and otherwise control all affairs relating to the Kemper County energy facility; ask the Circuit Court to revoke any licenses or certificates authorizing Mississippi Power or Southern Company to engage in any business related to the Kemper County energy facility in Mississippi; and seek attorney's fees, costs, and interest. The plaintiffs also seek an injunction to prevent any Kemper County energy facility costs from being charged to customers through electric rates. In June 2017, the Circuit Court ruled in favor of motions by Southern Company and Mississippi Power and dismissed the case. In July 2017, the plaintiffs filed notice of an appeal.
In January 2017, a purportedputative securities class action complaint was filed against Southern Company, certain of its officers, and certain former Mississippi Power officers in the U.S. District Court for the Northern District of Georgia Atlanta Division, by Monroe County Employees' Retirement System on behalf of all persons who purchased shares of Southern Company's common stock between April 25, 2012 and October 29, 2013. The complaint alleges that Southern Company, certain of its officers, and certain former Mississippi Power officers made materially false and
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
misleading statements regarding the Kemper County energy facility in violation of certain provisions under the Securities Exchange Act of 1934, as amended. The complaint seeks, among other things, compensatory damages and litigation costs and attorneys' fees. In June 2017, the plaintiffs filed an amended complaint that provided additional detail about their claims, increased the purported class period by one day, and added certain other former Mississippi Power officers as defendants. In JulyAlso in 2017, the defendants filed a motion to dismiss the plaintiffs' amended complaint with prejudice, to which the plaintiffs filed an opposition in September 2017. Onopposition. In March 29, 2018, the U.S. District Court for the Northern District of Georgia, Atlanta Division,court issued an order granting, in part, the defendants' motion to dismiss. The court dismissed certain claims against certain officers of Southern Company and Mississippi Power and dismissed the allegations related to a number of the statements that plaintiffs challenged as being false or misleading. OnIn April 26, 2018, the defendants filed a motion for reconsideration of the court's order, seeking the dismissal of the remaining claims in the lawsuit. In August 2018, the court denied the motion for reconsideration and denied a motion to certify the issue for interlocutory appeal.
In February 2017, Jean Vineyard and Judy Mesirov each filed a shareholder derivative lawsuit and, in May 2017, Judy Mesirov filed a shareholder derivative lawsuit, each in the U.S. District Court for the Northern District of Georgia. Each of these lawsuits names as defendants Southern Company, certain of its directors, certain of its officers, and certain former Mississippi Power officers. In August 2017, these two shareholder derivative lawsuits were consolidated in the U.S. District Court for the Northern District of Georgia and the court has deferred the consolidated case until after certain further action in the purported securities class action complaint discussed above.Georgia. The complaints allege that the defendants caused Southern Company to make false or misleading statements regarding the Kemper County energy facility cost and schedule. Further, the complaints allege that the defendants were unjustly enriched and caused the waste of corporate assets and also allege that the individual defendants violated their fiduciary duties. Each plaintiff seeks to recover, on behalf of Southern Company, unspecified actual damages and, on each plaintiff's own behalf, attorneys' fees and costs in bringing the lawsuit. Each plaintiff also seeks certain changes to Southern Company's corporate governance and internal processes.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
any dispositive motions or any settlement, whichever is earlier, in the putative securities class action.
In May 2017, Helen E. Piper Survivor's Trust filed a shareholder derivative lawsuit in the Superior Court of Gwinnett County, State of Georgia that names as defendants Southern Company, certain of its directors, certain of its officers, and certain former Mississippi Power officers. The complaint alleges that the individual defendants, among other things, breached their fiduciary duties in connection with schedule delays and cost overruns associated with the construction of the Kemper County energy facility. The complaint further alleges that the individual defendants authorized or failed to correct false and misleading statements regarding the Kemper County energy facility schedule and cost and failed to implement necessary internal controls to prevent harm to Southern Company. The plaintiff seeks to recover, on behalf of Southern Company, unspecified actual damages and disgorgement of profits and, on its behalf, attorneys' fees and costs in bringing the lawsuit. The plaintiff also seeks certain unspecified changes to Southern Company's corporate governance and internal processes. TheIn May 2018, the court has deferred theentered an order staying this lawsuit until 30 days after certain further actionthe resolution of any dispositive motions or any settlement, whichever is earlier, in the purportedputative securities class action complaint discussed above.action.
In May 2018, Southern Company and Mississippi Power received a notice of dispute and arbitration demand filed by Martin Product Sales, LLC (Martin) based on two agreements, both related to Kemper IGCC byproducts for which Mississippi Power provided termination notices in 2017. Martin alleges breach of contract, breach of good faith and fair dealing, fraud and misrepresentation, and civil conspiracy and makes a claim for damages in the amount of approximately $143 million, as well as additional unspecified damages, attorney's fees, costs, and interest. In the first quarter 2019, Mississippi Power and Southern Company filed motions to dismiss.
Southern Company believes these legal challenges have no merit; however, an adverse outcome in any of these proceedings could have an impact on Southern Company's results of operations, financial condition, and liquidity. Southern Company will vigorously defend itself in these matters, theThe ultimate outcome of whichthese matters cannot be determined at this time.
InvestmentsMississippi Power
In conjunction with Southern Company's sale of Gulf Power, Mississippi Power and Gulf Power have committed to seek a restructuring of their 50% undivided ownership interests in Leveraged LeasesPlant Daniel such that each of them would, after the restructuring, own 100% of a generating unit. On January 15, 2019, Gulf Power provided notice to Mississippi
See
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Other Matters – Investments in Leveraged Leases" of Southern Company in Item 7 and Note 1 to the financial statements of Southern Company under "Leveraged Leases" in Item 8OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Power that Gulf Power will retire its share of the Form 10-Kgenerating capacity of Plant Daniel on January 15, 2024. Mississippi Power has the option to purchase Gulf Power's ownership interest for additional information regarding a Southern Company Holdings Inc. (Southern Holdings) subsidiary's leveraged lease agreements$1 on January 15, 2024, provided that Mississippi Power exercises the option no later than 120 days prior to that date. Mississippi Power is assessing the potential operational and concerns about the financial and operational performanceeconomic effects of one of the lessees and the associated generation assets.
The ability of the lessees to make required payments to the Southern Holdings subsidiary is dependent on the operational performance of the assets. As a result of operational improvements in the first quarter 2018, the June 2018 lease payment is currently expected to be paid in full. However, operational issues and resulting cash liquidity challenges persist and significant concerns continue regarding the lessee's ability to make the remaining semi-annual lease payments, including the lease payment due in December 2018. These operational challenges may also impact the expected residual value of the assets at the end of the lease term in 2047. If any future lease payment is not paid in full, the Southern Holdings subsidiary may be unable to make its corresponding payment to the holders of the underlying non-recourse debt related to the generation assets. Failure to make the required payment to the debtholders would represent an event of default that would give the debtholders the right to foreclose on, and take ownership of, the generation assets from the Southern Holdings subsidiary, in effect terminating the lease and resulting in the write-off of the related lease receivable which had a balance of approximately $86 million as of March 31, 2018. Southern Company has evaluated the recoverability of the lease receivable and the expected residual value of the generation assets at the end of the lease under various scenarios and has concluded that its investment in the leveraged lease is not impaired as of March 31, 2018. Southern Company will continue to monitor the operational performance of the underlying assets and evaluate the ability of the lessee to continue to make the required lease payments.Gulf Power's notice. The ultimate outcome of this matterthese matters remains subject to completion of Mississippi Power's evaluations and applicable regulatory approvals, including by the FERC and the Mississippi PSC, and cannot be determined at this time. See Note (K) to the Condensed Financial Statements under "Southern Company" herein for information regarding the sale of Gulf Power.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Southern Company prepares its consolidated financial statements in accordance with GAAP. Significant accounting policies are described in NoteNotes 1, 5, and 6 to the financial statements of Southern Company 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 Southern Company's results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of Southern Company in Item 7 of the Form 10-K for a complete discussion of Southern Company's critical accounting policies and estimates.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Recently Issued Accounting Standards
See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Recently Issued Accounting Standards" of Southern Company in Item 7 of the Form 10-K for additional information regarding ASU No. 2016-02, Leases (Topic 842). See Note (A) to the Condensed Financial Statements herein for information regarding Southern Company's recently adopted accounting standards.
FINANCIAL CONDITION AND LIQUIDITY
Overview
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Southern Company in Item 7 of the Form 10-K for additional information. Southern Company's financial condition remained stable at March 31, 2018.2019. Southern Company intends to continue to monitor its access to short-term and long-term capital markets as well as bank credit agreements to meet future capital and liquidity needs. See "Capital Requirements and Contractual Obligations," "Sources of Capital," and "Financing Activities" herein for additional information.
Net cash provided from operating activities totaled $1.5$0.7 billion for the first three months of 2018, an increase2019, a decrease of $0.6$0.8 billion from the corresponding period in 2017.2018. The increasedecrease in net cash provided from operating activities was primarily due to the timing of vendor payments and an increase in fuel cost recovery.the impacts of the Gulf Power disposition and the Southern Company Gas Dispositions. Net cash used forprovided from investing activities totaled $2.0$2.5 billion for the first three months of 20182019 primarily due to proceeds from the sale of Gulf Power, partially offset by the traditional electric operating companies' installation of equipment to comply with environmental standards and construction of electric generation, transmission, and distribution facilities and capital expenditures for Southern Company Gas' infrastructure replacement programs. Net cash provided fromused for financing activities totaled $0.6$3.4 billion for the first three months of 20182019 primarily due to repayments of short-term bank debt, net issuancesredemptions and repurchases of long-term and short-term debt, and an increase in commercial paper borrowings, partially offset by common stock dividend payments. Cash flows from financing activities vary from period to period based on capital needs and the maturity or redemption of securities. See Notes (F) and (K) to the Condensed Financial Statements herein for additional information.
Significant balance sheet changes for the first three months of 20182019 include an increasedecreases in assets and liabilities held for sale of $1.8$4.9 billion and $3.2 billion, respectively, primarily related to the sale of Gulf Power; the recording of $1.9 billion in operating lease right-of-use assets, net of amortization and operating lease obligations related to the adoption of FASB ASC Topic 842, Leases; a decrease of $1.7 billion in notes payable related to the repayment of short-term bank debt; an increase of $1.6 billion in total stockholders' equity primarily related to increased commercial paper borrowings and issuancesthe gain on the sale
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of Gulf Power; an increase of $1.1$1.4 billion in accumulated deferred income taxes primarily related to the expected utilization of tax credit carryforwards in the 2019 tax year as a result of increased taxable income from the sale of Gulf Power; a decrease of $1.2 billion in long-term debt (including amounts due within one year) resulting from net repayments of long-term debt; and an increase of $0.8 billion in total property, plant, and equipment primarily related to the traditional electric operating companies' installation of equipment to comply with environmental standards and construction of electric generation, transmission, and distribution facilities, Southern Company Gas' infrastructure replacement programs,facilities. See Notes (F), (K), and Southern Power's construction projects and acquisition of a solar facility; a decrease of $0.7 billion in securities due within one year related(L) to the repayment of long-term debt; an increase of $0.5 billion in total common stockholders' equity primarily related to earningsCondensed Financial Statements herein for the three months ended March 31, 2018, partially offset by common stock dividend payments; a decrease of $0.5 billion in accrued compensation due to the timing of payments; and a decrease of $0.4 billion in natural gas for sale primarily related to the use of stored natural gas.additional information.
At the end of the first quarter 2018,2019, the market price of Southern Company's common stock was $44.66$51.68 per share (based on the closing price as reported on the New York Stock Exchange) and the book value was $24.39$25.41 per share, representing a market-to-book ratio of 183%203%, compared to $48.09, $23.99,$43.92, $23.91, and 201%184%, respectively, at the end of 2017.2018. Southern Company's common stock dividend for the first quarter 20182019 was $0.58$0.60 per share compared to $0.56$0.58 per share in the first quarter 2017.2018.
Capital Requirements and Contractual Obligations
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Southern Company in Item 7 of the Form 10-K for a description of Southern Company's capital requirements and contractual obligations. Subsequent to March 31, 2018, Georgia Power redeemed all $250 million aggregate principal amount of its Series 2008B 5.40% Senior Notes due June 1, 2018. An additional $3.1Approximately $2.3 billion will be required through March 31, 20192020 to fund announced redemptions and maturities of long-term debt. See "Sources of Capital" herein for additional information.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Southern Company system's construction program is currently estimated to total approximately $8.6 billion for 2018, $7.8 billion for 2019, $7.2 billion for 2020, $6.8 billion for 2021, and $6.4 billion for 2022. These amounts include expenditures of approximately $1.2 billion, $1.0 billion, $0.9 billion, $0.7 billion, and $0.4 billion for the construction of Plant Vogtle Units 3 and 4 in 2018, 2019, 2020, 2021, and 2022, respectively, and an average of approximately $0.5 billion per year for 2018 through 2022 for Southern Power's planned expenditures for plant acquisitions and placeholder growth, as revised post-tax reform. These amounts also include capital expenditures related to contractual purchase commitments for nuclear fuel and capital expenditures covered under LTSAs. Estimated capital expenditures to comply with environmental laws and regulations included in these amounts are $1.1 billion, $0.3 billion, $0.4 billion, $0.5 billion, and $0.5 billion for 2018, 2019, 2020, 2021, and 2022, respectively. These estimated expenditures do not include any potential compliance costs associated with the regulation of CO2 emissions from fossil fuel-fired electric generating units.
The traditional electric operating companies also anticipate costs associated with closure and monitoring of ash ponds in accordance with the CCR Rule, which are reflected in Southern Company's ARO liabilities. These costs, which could change as the Southern Company system continues to refine its assumptions underlying the cost estimates and evaluate the method and timing of compliance activities, are estimated to be approximately $0.3 billion, $0.3 billion, $0.4 billion, $0.5 billion, and $0.4 billion for 2018, 2019, 2020, 2021, and 2022, respectively. See Note 1 to the financial statements of Southern Company under "Asset Retirement Obligations and Other Costs of Removal" in Item 8 of the Form 10-K 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 sources at existing electric generating units, to meet regulatory requirements; changes in FERC rules and regulations; state regulatory agency approvals; changes in the expected environmental compliance program; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; storm impacts; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered. Additionally, planned expenditures for plant acquisitions may vary due to market opportunities and Southern Power's ability to execute its growth strategy. See Note 1215 to the financial statements of Southern Company under "Southern Power" in Item 8 of the Form 10-K and Note (J)(K) to the Condensed Financial Statements under "Southern Power" herein for additional information regarding Southern Power's plant acquisitions.acquisitions and construction projects.
In addition, theThe construction program also includes Plant Vogtle Units 3 and 4, which includes components based on new technology that only recently began initial operation in the developmentglobal nuclear industry at this scale and construction of new electric generating facilities with designs that have not been previously constructed, which may result inbe subject to additional revised cost estimates during construction. The ability to control costs and avoid cost and schedule overruns during the development, construction, and operation of new facilities is subject to a number of factors, including, but not limited to, changes in labor costs, availability, and productivity,productivity; challenges with management of contractors, subcontractors, or vendors; adverse weather conditions,conditions; shortages, andincreased costs, or inconsistent quality of equipment, materials, and labor,labor; contractor or supplier delay,delay; non-performance under construction, operating, or other agreements,agreements; operational readiness, including specialized operator training and required site safety programs, unforeseenprograms; engineering or design problems,problems; design and other licensing-based compliance matters, including the timely resolution of ITAAC and the related approvals by the NRC; challenges with start-up activities, (includingincluding major equipment failure and system integration),integration; and/or operational performance. See Note 32 to the financial statements of Southern Company under "Nuclear"Georgia Power – Nuclear Construction" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Georgia Power – Nuclear Construction" herein for information regarding Plant Vogtle Units 3 and 4 and additional factors that may impact construction expenditures.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Sources of Capital
Southern Company intends to meet its future capital needs through operating cash flows, borrowings from financial institutions, and debt and equity issuances in the capital markets. Equity capital can be provided from any combination of Southern Company's stock plans, private placements, or public offerings. The amount and timing of additional equity and debt issuances in 2018,2019, as well as in subsequent years, will be contingent on Southern Company's investment opportunities and the Southern Company system's capital requirements and will depend
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
upon prevailing market conditions and other factors. See "Capital Requirements and Contractual Obligations" herein for additional information.
Except as described herein, the traditional electric operating companies, Southern Power, and Southern Company Gas plan to obtain the funds required for construction and other purposes from operating cash flows, external security issuances, borrowings from financial institutions, and equity contributions or loans from Southern Company. Southern Power also plans to utilize tax equity partnership contributions, as well as funds resulting from any potential sale of a 33% equity interest in a newly-formed holding company that owns substantially all of its solar assets, if completed. Southern Company Gas also plans to utilize the proceeds from the pending sales of Elizabethtown Gas, Elkton Gas, and Pivotal Home Solutions.asset sales. However, the amount, type, and timing of any future financings, if needed, will depend upon prevailing market conditions, regulatory approval, and other factors. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" of Southern Company in Item 7 of the Form 10-K for additional information. Also see Note (K) to the Condensed Financial Statements under "Southern Power" herein for additional information regarding the pending sales of Plants Mankato and Nacogdoches.
In addition, in 2014, Georgia Power entered into a loan guarantee agreement with the DOE and, in March 2019, entered into the Amended and Restated Loan Guarantee Agreement, with the DOE, under which the proceeds of borrowings may be used to reimburse Georgia Power for Eligible Project Costs incurred in connection with its construction of Plant Vogtle Units 3 and 4.
Under the Amended and Restated Loan Guarantee Agreement, the DOE has agreed to guarantee the obligations of Georgia Power under note purchase agreements among the DOE, Georgia Power, and the FFB and related promissory notes which provide for two multi-advance term loan facilities (FFB Credit Facilities). Under the FFB Credit Facilities, Georgia Power may make term loan borrowings ofthrough the FFB in an amount up to $3.46approximately $5.130 billion, (not toprovided that total aggregate borrowings under the FFB Credit Facilities may not exceed 70% of (i) Eligible Project Costs) to be madeCosts minus (ii) approximately $1.492 billion (reflecting the amounts received by Georgia Power under a multi-advance credit facility (FFB Credit Facility) among Georgia Power, the DOE, andGuarantee Settlement Agreement less the FFB. As ofCustomer Refunds). At March 31, 2018,2019, Georgia Power had borrowed $2.6$3.46 billion under the FFB Credit Facility. In July 2017, Georgia Power entered into an amendmentFacilities.
See Note (F) to the Condensed Financial Statements under "DOE Loan Guarantee Agreement, which provides that further advances are conditioned upon the DOE's approval of any agreements entered into in replacement of the Vogtle 3 and 4 Agreement and satisfaction of certain other conditions.
BorrowingsIn September 2017, the DOE issued a conditional commitment to Georgia Power for up to approximately $1.67 billion of additional guaranteed loans under the Loan Guarantee Agreement. This conditional commitment expires on June 30, 2018, subject to any further extension approved by the DOE. Final approval and issuance of these additional loan guarantees by the DOE cannot be assured and are subject to the negotiation of definitive agreements, completion of due diligence by the DOE, receipt of any necessary regulatory approvals, and satisfaction of other conditions. See Note 6 to the financial statements of Southern Company under "DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K" herein for additional information regarding the Amended and Restated Loan Guarantee Agreement, including applicable covenants, events of default, mandatory prepayment events, and additional conditions to borrowing. Also see Note (B) to the Condensed Financial Statements under "Georgia Power – Nuclear Construction" herein for additional information regarding Plant Vogtle Units 3 and 4.
Southern Company's current liabilities frequently exceed current assets because of scheduled maturities of long-term debt and the periodic use of short-term debt as a funding source, as well as significant seasonal fluctuations in cash needs. As of March 31, 2018,2019, Southern Company's current liabilities exceeded current assets by $4.1$1.2 billion, primarily due to long-term debt that is due within one year of $3.2$2.3 billion (comprised of(including approximately $1.0 billion at the parent company, $0.2 billion at Alabama Power, $0.8 billion at Georgia Power, $0.2$0.3 billion at Mississippi Power, $0.8$0.6 billion at Southern Power, and $0.2$0.4 billion at Southern Company Gas) and notes payable of $4.3$1.3 billion (comprised of(including approximately $2.5$0.5 billion at the parent company, $0.2 billion at Alabama Power, $0.1 billion at Gulf Power, $0.3 billion at MississippiGeorgia Power, $0.1 billion at Southern Power, and $1.0$0.4 billion at Southern Company Gas)., partially offset by $1.4 billion of cash and cash equivalents. To meet short-term cash needs and contingencies, the Southern Company system has substantial cash flow from operating activities and access to capital markets and financial institutions. Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas intend to utilize operating cash flows, as well as commercial paper, lines of credit, bank notes, and securities issuances, as market conditions permit, as well as, under certain circumstances for the traditional electric operating companies, Southern Power, and Southern Company Gas, equity contributions and/or loans from Southern Company to meet their short-term capital needs.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
operating companies, Southern Power, and Southern Company Gas, equity contributions and/or loans from Southern Company to meet their short-term capital needs.
At March 31, 2018,2019, Southern Company and its subsidiaries had approximately $2.3$1.4 billion of cash and cash equivalents. Committed credit arrangements with banks at March 31, 20182019 were as follows:
| | | | Expires | | | | Executable Term Loans | | Expires Within One Year | Expires | | |
| Company | 2018 | 2019 | 2020 | 2022 | | Total | | Unused | | One Year | | Two Years | | Term Out | | No Term Out | 2019 | 2020 | 2022 | | Total | | Unused(d) |
| | (in millions) | (in millions) |
Southern Company(a) | $ | — |
| $ | — |
| $ | — |
| $ | 2,000 |
| | $ | 2,000 |
| | $ | 1,999 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | 2,000 |
| | $ | 2,000 |
| | $ | 1,999 |
|
| Alabama Power | 35 |
| — |
| 500 |
| 800 |
| | 1,335 |
| | 1,335 |
| | — |
| | — |
| | — |
| | 35 |
| 33 |
| 500 |
| 800 |
| | 1,333 |
| | 1,333 |
|
| Georgia Power | — |
| — |
| — |
| 1,750 |
| | 1,750 |
| | 1,736 |
| | — |
| | — |
| | — |
| | — |
| — |
| — |
| 1,750 |
| | 1,750 |
| | 1,736 |
|
| Gulf Power | 20 |
| 25 |
| 235 |
| — |
| | 280 |
| | 280 |
| | 45 |
| | — |
| | 20 |
| | — |
| |
| Mississippi Power | 100 |
| — |
| — |
| — |
| | 100 |
| | 100 |
| | — |
| | — |
| | — |
| | 100 |
| 100 |
| — |
| — |
| | 100 |
| | 100 |
|
Southern Power Company(b) | — |
| — |
| — |
| 750 |
| | 750 |
| | 728 |
| | — |
| | — |
| | — |
| | — |
| |
Southern Power(b) | | — |
| — |
| 750 |
| | 750 |
| | 741 |
|
Southern Company Gas(c) | — |
| — |
| — |
| 1,900 |
| | 1,900 |
| | 1,890 |
| | — |
| | — |
| | — |
| | — |
| — |
| — |
| 1,900 |
| | 1,900 |
| | 1,895 |
|
| Other | 30 |
| — |
| — |
| — |
| | 30 |
| | 30 |
| | 20 |
| | — |
| | 20 |
| | 10 |
| 30 |
| — |
| — |
| | 30 |
| | 30 |
|
| Southern Company Consolidated | $ | 185 |
| $ | 25 |
| $ | 735 |
| $ | 7,200 |
| | $ | 8,145 |
| | $ | 8,098 |
| | $ | 65 |
| | $ | — |
| | $ | 40 |
| | $ | 145 |
| $ | 163 |
| $ | 500 |
| $ | 7,200 |
| | $ | 7,863 |
| | $ | 7,834 |
|
| |
| (a) | Represents the Southern Company parent entity. |
| |
| (b) | Does not include Southern Power'sPower Company's $120 million continuing letter of credit facility for standby letters of credit expiring in 2019,2021, of which $2124 million remainswas unused at March 31, 20182019. Southern Power's subsidiaries are not parties to its bank credit arrangement. |
| |
| (c) | Southern Company Gas, as the parent entity, guarantees the obligations of Southern Company Gas Capital, which is the borrower of $1.4 billion of these arrangements.this arrangement. Southern Company Gas' committed credit arrangementsarrangement also includeincludes $500 million for which Nicor Gas is the borrower and which is restricted for working capital needs of Nicor Gas. Pursuant to this multi-year credit arrangement, the allocations between Southern Company Gas Capital and Nicor Gas may be adjusted. |
| |
| (d) | Amounts used are for letters of credit. |
See Note 68 to the financial statements of Southern Company under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.
Most of these bank credit arrangements, as well as the term loan arrangements of Southern Company, Alabama Power, Mississippi Power, Southern Power Company, and Pivotal Utility HoldingsSEGCO, contain covenants that limit debt levels and contain cross-acceleration or cross-default provisions to other indebtedness (including guarantee obligations) that are restricted only to the indebtedness of the individual company. Such cross-default provisions to other indebtedness would trigger an event of default if the applicable borrower defaulted on indebtedness or guarantee obligations over a specified threshold. Such cross-acceleration provisions to other indebtedness would trigger an event of default if the applicable borrower defaulted on indebtedness, the payment of which was then accelerated. At March 31, 2018,2019, Southern Company, the traditional electric operating companies, Southern Power Company, Southern Company Gas, and Nicor Gas, and SEGCO were in compliance with all such covenants. All but $40 millionNone of the bank credit arrangements do not contain material adverse change clauses at the time of borrowings.
Subject to applicable market conditions, Southern Company and its subsidiaries expect to renew or replace their bank credit arrangements as needed, prior to expiration. In connection therewith, Southern Company and its subsidiaries may extend the maturity dates and/or increase or decrease the lending commitments thereunder.
A portion of the unused credit with banks is allocated to provide liquidity support to the revenue bonds of the traditional electric operating companies and the commercial paper programs of Southern Company, the traditional electric operating companies, Southern Power Company, Southern Company Gas, Nicor Gas, and Nicor Gas.SEGCO. The amount of variable rate revenue bonds of the traditional electric operating companies outstanding requiring liquidity support as of March 31, 20182019 was approximately $1.5$1.4 billion. In addition, at March 31, 2018,2019, the traditional electric operating companies had approximately $437$432 million of revenue bonds outstanding that wereare required to be remarketed within the next 12 months. Subsequent to March 31, 2019, Georgia Power purchased and held approximately $115 million of outstanding pollution control revenue bonds required to be remarketed.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Southern Company, the traditional electric operating companies (other than Mississippi Power),Alabama Power, Georgia Power, Southern Power Company, Southern Company Gas, and 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. Short-term borrowings are included in notes payable in the balance sheets.
Details of short-term borrowings were as follows:
| | | | | Short-term Debt at March 31, 2018 | | Short-term Debt During the Period(*) | | Short-term Debt at March 31, 2019 | | Short-term Debt During the Period(*) |
| | | Amount Outstanding | | Weighted Average Interest Rate | | Average Amount Outstanding | | Weighted Average Interest Rate | | Maximum Amount Outstanding | | Amount Outstanding | | Weighted Average Interest Rate | | Average Amount Outstanding | | Weighted Average Interest Rate | | Maximum Amount Outstanding |
| | | (in millions) | | | | (in millions) | | | | (in millions) | | (in millions) | | | | (in millions) | | | | (in millions) |
| Commercial paper | | $ | 2,618 |
| | 2.4 | % | | $ | 2,232 |
| | 2.0 | % | | $ | 2,746 |
| | $ | 1,151 |
| | 2.9 | % | | $ | 1,248 |
| | 2.9 | % | | $ | 2,293 |
|
| Short-term bank debt | | 1,653 |
| | 3.1 | % | | 563 |
| | 2.5 | % | | 1,653 |
| | 100 |
| | 3.1 | % | | 208 |
| | 3.2 | % | | 1,850 |
|
| Total | | $ | 4,271 |
| | 2.6 | % | | $ | 2,795 |
| | 2.1 | % | | | | $ | 1,251 |
| | 2.9 | % | | $ | 1,456 |
| | 2.9 | % | | |
| |
| (*) | Average and maximum amounts are based upon daily balances during the three-month period ended March 31, 2018.2019. |
Southern Company believes the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, bank term loans, and operating cash flows.
Credit Rating Risk
At March 31, 2018,2019, Southern Company and its subsidiaries 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 subsidiaries to BBB and/or Baa2 or below. These contracts are for physical electricity and natural gas purchases and sales, fuel purchases, fuel transportation and storage, energy price risk management, transmission, interest rate management, and construction of new generation at Plant Vogtle Units 3 and 4.
The maximum potential collateral requirements under these contracts at March 31, 20182019 were as follows:
| | | Credit Ratings | Maximum Potential
Collateral
Requirements | Maximum Potential
Collateral
Requirements |
| | (in millions) | (in millions) |
| At BBB and/or Baa2 | $ | 38 |
| $ | 30 |
|
| At BBB- and/or Baa3 | $ | 601 |
| $ | 433 |
|
At BB+ and/or Ba1(*) | $ | 2,201 |
| $ | 1,988 |
|
| |
| (*) | Any additional credit rating downgrades at or below BB- and/or Ba3 could increase collateral requirements up to an additional $38 million. |
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 Southern Company and its subsidiaries to access capital markets, and would be likely to impact the cost at which they do so.
On February 26, 2018, Moody's revised its rating outlook for Mississippi Power from stable to positive.
On February 28, 2018, Fitch downgraded the senior unsecured long-term debt ratingAs a result of Southern Company to BBB+ from A- with a stable outlook and of Georgia Power to A from A+ with a negative outlook.
On March 14, 2018, S&P upgraded the senior unsecured long-term debt rating of Mississippi Power to A- from BBB+ with a negative outlook.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
While it is unclear how the credit rating agencies, the FERC, and certain of the relevant state regulatory bodies may respond to the Tax Reform Legislation, certain financial metrics, such as the funds from operations to debt percentage, used by the credit rating agencies to assess Southern Company and its subsidiaries may be negatively impacted. Absent actions by Southern Company and most of its regulated subsidiaries have taken actions to mitigate the resulting impacts, which, among other alternatives, could include adjusting capital structure and/or monetizing regulatory assets,structure. Absent actions by Southern Company and its subsidiaries that fully mitigate the impacts, the credit ratings of Southern Company and certain of its subsidiaries could be negatively affected. See Note 32 to the financial statements of Southern Company in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein for
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
additional information related to state PSC or other regulatory agency actions related to the Tax Reform Legislation, including recent approvals of capital structure adjustments for Alabama Power, Georgia Power, and Gulf PowerAtlanta Gas Light by their respective state PSCs and a similar request by Nicor Gas currently pending Illinois Commission approval, which are expected to help mitigate the potential adverse impacts to certain of their credit metrics.
Financing Activities
During the first three months of 2018,2019, Southern Company issued approximately 4.16.5 million shares of common stock primarily through employee equity compensation plans and received proceeds of approximately $113$224 million.
The following table outlines the long-term debt financing activities for Southern Company and its subsidiaries for the first three months of 2018:2019:
| | | Company | Senior Note Issuances | | Revenue Bond Maturities, Redemptions, and Repurchases | | Other Long-Term Debt Redemptions and Maturities(*) | Senior Note Maturities, Redemptions, and Repurchases | | Revenue Bond Issuances and Reofferings of Purchased Bonds | | Revenue Bond Maturities, Redemptions, and Repurchases | | Other Long-Term Debt Issuances | | Other Long-Term Debt Redemptions and Maturities(a) |
| | (in millions) | (in millions) |
Southern Company(b) | | $ | 2,100 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Alabama Power | | 200 |
| | — |
| | — |
| | — |
| | — |
|
| Georgia Power | $ | — |
| | $ | 278 |
| | $ | 102 |
| — |
| | 343 |
| | 108 |
| | 835 |
| | 2 |
|
| Mississippi Power | 600 |
| | — |
| | 900 |
| — |
| | 43 |
| | — |
| | — |
| | — |
|
| Other | — |
| | — |
| | 3 |
| — |
| | — |
| | — |
| | — |
| | 19 |
|
| Southern Company Consolidated | $ | 600 |
| | $ | 278 |
| | $ | 1,005 |
| $ | 2,300 |
| | $ | 386 |
| | $ | 108 |
| | $ | 835 |
| | $ | 21 |
|
| |
(*)(a) | Includes reductions in capitalfinance lease obligations resulting from cash payments under capitalfinance leases. |
| |
| (b) | Represents the Southern Company parent entity. |
In March 2018,Except as otherwise described herein, Southern Company entered into a $900 millionand its subsidiaries used the proceeds of debt issuances for their redemptions and maturities shown in the table above, to repay short-term floating rate bank loan bearing interest based on one-month LIBOR. The proceeds were usedindebtedness, and for working capital and other general corporate purposes.purposes, including working capital. The subsidiaries also used the proceeds for their construction programs.
Subsequent to March 31, 2018,In January 2019, Southern Company borrowedrepaid a $250 million pursuant to a short-term uncommitted bank credit arrangement which bears interest atand a rate agreed upon by Southern Company and the bank from time to time and is payable on no less than 30 days' demand by the bank.
In January 2018, Georgia Power repaid its outstanding $150 million$1.5 billion short-term floating rate bank loanloan.
Also in January 2019, through cash tender offers, Southern Company repurchased and retired approximately $522 million of the $1.0 billion aggregate principal amount outstanding of its 1.85% Senior Notes due May 31, 2018.
In March 2018, Mississippi Power entered into a $300July 1, 2019 (1.85% Notes), approximately $180 million short-term floating rate bank loan bearing interest based on one-month LIBOR, of which $125 million was repaid subsequent to March 31, 2018. The proceeds of this loan, together with the proceeds of Mississippi Power's $600 million senior notes issuances, were used to repay Mississippi Power's entire $900 million unsecured floating rate term loan.
Subsequent to March 31, 2018, Georgia Power redeemed all $250$350 million aggregate principal amount outstanding of its Series 2008B 5.40%2014B 2.15% Senior Notes due JuneSeptember 1, 2018.
At March 31, 2018, Pivotal Utility Holdings had $200 million of gas facility revenue bonds issued for its benefit outstanding. The Elizabethtown Gas asset sale agreement requires that bonds representing $1802019 (Series 2014B Notes), and approximately $504 million of the total that are currently eligible for redemption at par be redeemed on or prior to consummation of the sale. Subsequent to March 31, 2018, Pivotal Utility Holdings caused $20$750 million aggregate principal amount of gas facility revenue bonds to be redeemed and provided noticeoutstanding of its intent to cause, on May 23, 2018,Series 2018A Floating Rate Notes due February 14, 2020 (Series 2018A Notes), for an aggregate purchase price, excluding accrued and unpaid interest, of approximately $1.2 billion. In addition, following the completion of the cash tender offers, in February 2019, Southern Company completed the redemption of all of the Series 2018A Notes, 1.85% Notes, and Series 2014B Notes remaining $180 millionoutstanding.
As reflected in the table above, in March 2019, Georgia Power made additional borrowings under the FFB Credit Facilities in an aggregate principal amount of gas facility revenue bonds issued$835 million at an interest rate of 3.213% through the final maturity date of February 20, 2044. The proceeds were used to reimburse Georgia Power for its benefitEligible Project Costs relating to be redeemed. Subsequent to Marchthe construction of Plant Vogtle Units 3 and 4.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Subsequent to March 31, 2018, Pivotal Utility Holdings, as borrower,2019, Georgia Power purchased and Southern Company Gas, as guarantor, entered into a $181 million short-term delayed draw floating rate bank term loan agreement. Pivotal Utility Holdings hasheld the right to borrow up to $181 million on or before May 31, 2018, upon satisfaction of certain customary conditions. Pivotal Utility Holdings expects the proceeds tofollowing pollution control revenue bonds, which may be used to repay the remaining $180 million of gas facility revenue bonds. See Note 6reoffered to the financial statementspublic at a later date:
$55 million aggregate principal amount of SouthernDevelopment Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company under "Gas FacilityPlant Vogtle Project), Fourth Series 1994;
$30 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds" in Item 8Bonds (Georgia Power Company Plant Vogtle Project), Fourth Series 1995;
$20 million aggregate principal amount of the Form 10-KDevelopment Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Ninth Series 1994; and Note (J) to the Condensed Financial Statements under "Southern
$10 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Gas – Proposed Sale of Elizabethtown Gas and Elkton Gas" herein for additional information.Plant Vogtle Project), Second Series 1994.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Southern Company and its subsidiaries 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.
PART I
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
During the three months ended March 31, 2018,2019, there were no material changes to Southern Company's, Alabama Power's, Georgia Power's, Gulf Power's, Mississippi Power's, and Southern Power's disclosures about market risk. For additional market risk disclosures relating to Southern Company Gas, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" of Southern Company Gas herein. For an in-depth discussion of each registrant's market risks, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" of each registrant in Item 7 of the Form 10-K and Note 1 to the financial statements of each registrant under "Financial Instruments," Note 11Instruments" and Notes 13 and 14 to the financial statements of Southern Company, Alabama Power, and Georgia Power, Note 10 to the financial statements of Gulf Power, Mississippi Power, and Southern Company Gas, and Note 9 to the financial statements of Southern Power in Item 8 of the Form 10-K. Also see Note (D)Notes (I) and Note (I)(J) to the Condensed Financial Statements herein for information relating to derivative instruments.
Item 4. Controls and Procedures.
| |
| (a) | Evaluation of disclosure controls and procedures. |
As of the end of the period covered by this Quarterly Report on Form 10-Q, Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Southern Power, and Southern Company Gas conducted separate evaluations under the supervision and with the participation of each company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based upon these evaluations, the Chief Executive Officer and the Chief Financial Officer, in each case, concluded that the disclosure controls and procedures are effective.
| |
| (b) | Changes in internal controls over financial reporting. |
There have been no changes in Southern Company's, Alabama Power's, Georgia Power's, Gulf Power's, Mississippi Power's, Southern Power's, or Southern Company Gas' internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the first quarter 20182019 that have materially affected or are reasonably likely to materially affect Southern Company's, Alabama Power's, Georgia Power's, Gulf Power's, Mississippi Power's, Southern Power's, or Southern Company Gas' internal control over financial reporting.
ALABAMA POWER COMPANY
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
| | | | For the Three Months
Ended March 31, | For the Three Months
Ended March 31, |
| | 2018 | | 2017 | 2019 | | 2018 |
| | (in millions) | (in millions) |
| Operating Revenues: | | | | | | |
| Retail revenues | $ | 1,285 |
| | $ | 1,227 |
| $ | 1,213 |
| | $ | 1,285 |
|
| Wholesale revenues, non-affiliates | 74 |
| | 66 |
| 61 |
| | 74 |
|
| Wholesale revenues, affiliates | 51 |
| | 33 |
| 60 |
| | 51 |
|
| Other revenues | 63 |
| | 56 |
| 74 |
| | 63 |
|
| Total operating revenues | 1,473 |
| | 1,382 |
| 1,408 |
| | 1,473 |
|
| Operating Expenses: | | | | | | |
| Fuel | 326 |
| | 298 |
| 301 |
| | 326 |
|
| Purchased power, non-affiliates | 64 |
| | 34 |
| 37 |
| | 64 |
|
| Purchased power, affiliates | 37 |
| | 28 |
| 21 |
| | 37 |
|
| Other operations and maintenance | 387 |
| | 384 |
| 409 |
| | 387 |
|
| Depreciation and amortization | 189 |
| | 181 |
| 199 |
| | 189 |
|
| Taxes other than income taxes | 98 |
| | 96 |
| 103 |
| | 98 |
|
| Total operating expenses | 1,101 |
| | 1,021 |
| 1,070 |
| | 1,101 |
|
| Operating Income | 372 |
| | 361 |
| 338 |
| | 372 |
|
| Other Income and (Expense): | | | | | | |
| Allowance for equity funds used during construction | 13 |
| | 8 |
| 14 |
| | 13 |
|
| Interest expense, net of amounts capitalized | (79 | ) | | (75 | ) | (83 | ) | | (79 | ) |
| Other income (expense), net | 5 |
| | 10 |
| 14 |
| | 5 |
|
| Total other income and (expense) | (61 | ) | | (57 | ) | (55 | ) | | (61 | ) |
| Earnings Before Income Taxes | 311 |
| | 304 |
| 283 |
| | 311 |
|
| Income taxes | 82 |
| | 126 |
| 62 |
| | 82 |
|
| Net Income | 229 |
| | 178 |
| 221 |
| | 229 |
|
| Dividends on Preferred and Preference Stock | 4 |
| | 4 |
| |
| Net Income After Dividends on Preferred and Preference Stock | $ | 225 |
| | $ | 174 |
| |
| Dividends on Preferred Stock | | 4 |
| | 4 |
|
| Net Income After Dividends on Preferred Stock | | $ | 217 |
| | $ | 225 |
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
| | | | For the Three Months
Ended March 31, | For the Three Months
Ended March 31, |
| | 2018 | | 2017 | 2019 | | 2018 |
| | (in millions) | (in millions) |
| Net Income | $ | 229 |
| | $ | 178 |
| $ | 221 |
| | $ | 229 |
|
| Other comprehensive income (loss): | | | | | | |
| Qualifying hedges: | | | | | | |
Reclassification adjustment for amounts included in net income,
net of tax of $1 and $1, respectively | 1 |
| | 1 |
| |
Reclassification adjustment for amounts included in net income,
net of tax of $- and $1, respectively | | 1 |
| | 1 |
|
| Total other comprehensive income (loss) | 1 |
| | 1 |
| 1 |
| | 1 |
|
| Comprehensive Income | $ | 230 |
| | $ | 179 |
| $ | 222 |
| | $ | 230 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
| | | | For the Three Months
Ended March 31, | For the Three Months
Ended March 31, |
| | 2018 | | 2017 | 2019 | | 2018 |
| | (in millions) | (in millions) |
| Operating Activities: | | | | | | |
| Net income | $ | 229 |
| | $ | 178 |
| $ | 221 |
| | $ | 229 |
|
| Adjustments to reconcile net income to net cash provided from operating activities — | | | | | | |
| Depreciation and amortization, total | 228 |
| | 219 |
| 244 |
| | 228 |
|
| Deferred income taxes | 32 |
| | 59 |
| — |
| | 32 |
|
| Other, net | (22 | ) | | (3 | ) | (24 | ) | | (21 | ) |
| Changes in certain current assets and liabilities — | | | | | | |
| -Receivables | | 105 |
| | (1 | ) |
| -Prepayments | (82 | ) | | (76 | ) | (78 | ) | | (82 | ) |
| -Materials and supplies | (27 | ) | | (10 | ) | (4 | ) | | (27 | ) |
| -Other current assets | 19 |
| | 39 |
| 19 |
| | 19 |
|
| -Accounts payable | (216 | ) | | (214 | ) | (286 | ) | | (216 | ) |
| -Accrued taxes | 57 |
| | 77 |
| 80 |
| | 57 |
|
| -Accrued compensation | (108 | ) | | (96 | ) | (122 | ) | | (108 | ) |
| -Retail fuel cost over recovery | — |
| | (36 | ) | |
| -Other current liabilities | 45 |
| | (9 | ) | (9 | ) | | 45 |
|
| Net cash provided from operating activities | 155 |
| | 128 |
| 146 |
| | 155 |
|
| Investing Activities: | | | | | | |
| Property additions | (490 | ) | | (306 | ) | (390 | ) | | (490 | ) |
| Nuclear decommissioning trust fund purchases | (50 | ) | | (63 | ) | (68 | ) | | (50 | ) |
| Nuclear decommissioning trust fund sales | 51 |
| | 63 |
| 68 |
| | 51 |
|
| Cost of removal, net of salvage | (19 | ) | | (26 | ) | (16 | ) | | (19 | ) |
| Change in construction payables | (50 | ) | | 5 |
| (95 | ) | | (50 | ) |
| Other investing activities | (6 | ) | | (2 | ) | (10 | ) | | (6 | ) |
| Net cash used for investing activities | (564 | ) | | (329 | ) | (511 | ) | | (564 | ) |
| Financing Activities: | | | | | | |
| Increase in notes payable, net | 245 |
| | — |
| — |
| | 245 |
|
| Proceeds — | | | | |
| Senior notes | — |
| | 550 |
| |
| Capital contributions from parent company | 484 |
| | 314 |
| |
| Proceeds — Capital contributions from parent company | | 1,232 |
| | 484 |
|
| Redemptions — Senior notes | — |
| | (200 | ) | (200 | ) | | — |
|
| Payment of common stock dividends | (202 | ) | | (179 | ) | (211 | ) | | (202 | ) |
| Other financing activities | (9 | ) | | (8 | ) | (10 | ) | | (9 | ) |
| Net cash provided from financing activities | 518 |
| | 477 |
| 811 |
| | 518 |
|
| Net Change in Cash, Cash Equivalents, and Restricted Cash | 109 |
| | 276 |
| 446 |
| | 109 |
|
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 544 |
| | 420 |
| 313 |
| | 544 |
|
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 653 |
| | $ | 696 |
| $ | 759 |
| | $ | 653 |
|
| Supplemental Cash Flow Information: | | | | | | |
| Cash paid during the period for — | | | | | | |
| Interest (net of $5 and $3 capitalized for 2018 and 2017, respectively) | $ | 84 |
| | $ | 84 |
| |
| Interest (net of $5 and $5 capitalized for 2019 and 2018, respectively) | | $ | 89 |
| | $ | 84 |
|
| Income taxes, net | 9 |
| | — |
| — |
| | 9 |
|
| Noncash transactions — Accrued property additions at end of period | 195 |
| | 90 |
| 176 |
| | 195 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
| | | Assets | | At March 31, 2018 | | At December 31, 2017 | | At March 31, 2019 | | At December 31, 2018 |
| | | (in millions) | | (in millions) |
| Current Assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 653 |
| | $ | 544 |
| | $ | 759 |
| | $ | 313 |
|
| Receivables — | | | | | | | | |
| Customer accounts receivable | | 345 |
| | 355 |
| | 382 |
| | 403 |
|
| Unbilled revenues | | 131 |
| | 162 |
| | 126 |
| | 150 |
|
| Affiliated | | 57 |
| | 43 |
| | 45 |
| | 94 |
|
| Other accounts and notes receivable | | 36 |
| | 55 |
| | 58 |
| | 51 |
|
| Accumulated provision for uncollectible accounts | | (10 | ) | | (9 | ) | | (10 | ) | | (10 | ) |
| Fossil fuel stock | | 165 |
| | 184 |
| | 120 |
| | 141 |
|
| Materials and supplies | | 492 |
| | 458 |
| | 558 |
| | 546 |
|
| Prepaid expenses | | 133 |
| | 85 |
| | 113 |
| | 66 |
|
| Other regulatory assets, current | | 131 |
| | 124 |
| |
| Other regulatory assets | | | 125 |
| | 137 |
|
| Other current assets | | 3 |
| | 5 |
| | 21 |
| | 18 |
|
| Total current assets | | 2,136 |
| | 2,006 |
| | 2,297 |
| | 1,909 |
|
| Property, Plant, and Equipment: | | | | | | | | |
| In service | | 27,520 |
| | 27,326 |
| | 28,810 |
| | 30,402 |
|
| Less: Accumulated provision for depreciation | | 9,693 |
| | 9,563 |
| | 9,447 |
| | 9,988 |
|
| Plant in service, net of depreciation | | 17,827 |
| | 17,763 |
| | 19,363 |
| | 20,414 |
|
| Other utility plant, net | | | 1,315 |
| | — |
|
| Nuclear fuel, at amortized cost | | 358 |
| | 339 |
| | 320 |
| | 324 |
|
| Construction work in progress | | 1,126 |
| | 908 |
| | 1,023 |
| | 1,113 |
|
| Total property, plant, and equipment | | 19,311 |
| | 19,010 |
| | 22,021 |
| | 21,851 |
|
| Other Property and Investments: | | | | | | | | |
| Equity investments in unconsolidated subsidiaries | | 66 |
| | 67 |
| | 64 |
| | 65 |
|
| Nuclear decommissioning trusts, at fair value | | 897 |
| | 903 |
| | 933 |
| | 847 |
|
| Miscellaneous property and investments | | 123 |
| | 124 |
| | 129 |
| | 127 |
|
| Total other property and investments | | 1,086 |
| | 1,094 |
| | 1,126 |
| | 1,039 |
|
| Deferred Charges and Other Assets: | | | | | | | | |
| Operating lease right-of-use assets, net of amortization | | | 160 |
| | — |
|
| Deferred charges related to income taxes | | 233 |
| | 239 |
| | 239 |
| | 240 |
|
| Deferred under recovered regulatory clause revenues | | 101 |
| | 54 |
| | 21 |
| | 116 |
|
| Other regulatory assets, deferred | | 1,257 |
| | 1,272 |
| | 1,350 |
| | 1,386 |
|
| Other deferred charges and assets | | 193 |
| | 189 |
| | 193 |
| | 189 |
|
| Total deferred charges and other assets | | 1,784 |
| | 1,754 |
| | 1,963 |
| | 1,931 |
|
| Total Assets | | $ | 24,317 |
| | $ | 23,864 |
| | $ | 27,407 |
| | $ | 26,730 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
| | | Liabilities and Stockholder's Equity | | At March 31, 2018 | | At December 31, 2017 | | At March 31, 2019 | | At December 31, 2018 |
| | | (in millions) | | (in millions) |
| Current Liabilities: | | | | | | | | |
| Securities due within one year | | $ | 200 |
| | $ | — |
| | $ | 1 |
| | $ | 201 |
|
| Notes payable | | 248 |
| | 3 |
| |
| Accounts payable — | | | | | | | | |
| Affiliated | | 251 |
| | 327 |
| | 262 |
| | 364 |
|
| Other | | 398 |
| | 585 |
| | 346 |
| | 614 |
|
| Customer deposits | | 94 |
| | 92 |
| | 97 |
| | 96 |
|
| Accrued taxes | | 77 |
| | 54 |
| | 97 |
| | 44 |
|
| Accrued interest | | 65 |
| | 77 |
| | 77 |
| | 89 |
|
| Accrued compensation | | 96 |
| | 205 |
| | 102 |
| | 227 |
|
| Other regulatory liabilities, current | | 59 |
| | 1 |
| |
| Asset retirement obligations | | | 163 |
| | 163 |
|
| Other current liabilities | | 57 |
| | 56 |
| | 97 |
| | 161 |
|
| Total current liabilities | | 1,545 |
| | 1,400 |
| | 1,242 |
| | 1,959 |
|
| Long-term Debt | | 7,429 |
| | 7,628 |
| | 7,924 |
| | 7,923 |
|
| Deferred Credits and Other Liabilities: | | | | | | | | |
| Accumulated deferred income taxes | | 2,792 |
| | 2,760 |
| | 2,971 |
| | 2,962 |
|
| Deferred credits related to income taxes | | 2,067 |
| | 2,082 |
| | 2,015 |
| | 2,027 |
|
| Accumulated deferred ITCs | | 111 |
| | 112 |
| | 105 |
| | 106 |
|
| Employee benefit obligations | | 297 |
| | 304 |
| | 302 |
| | 314 |
|
| Asset retirement obligations | | 1,709 |
| | 1,702 |
| |
| Operating lease obligations | | | 147 |
| | — |
|
| Asset retirement obligations, deferred | | | 3,064 |
| | 3,047 |
|
| Other cost of removal obligations | | 596 |
| | 609 |
| | 489 |
| | 497 |
|
| Other regulatory liabilities, deferred | | 75 |
| | 84 |
| |
| Other regulatory liabilities | | | 107 |
| | 69 |
|
| Other deferred credits and liabilities | | 70 |
| | 63 |
| | 30 |
| | 58 |
|
| Total deferred credits and other liabilities | | 7,717 |
| | 7,716 |
| | 9,230 |
| | 9,080 |
|
| Total Liabilities | | 16,691 |
| | 16,744 |
| | 18,396 |
| | 18,962 |
|
| Redeemable Preferred Stock | | 291 |
| | 291 |
| | 291 |
| | 291 |
|
| Common Stockholder's Equity: | | | | | |
| Common stock, par value $40 per share — | | | | | |
| Authorized — 40,000,000 shares | | | | | |
| Outstanding — 30,537,500 shares | | 1,222 |
| | 1,222 |
| |
| Paid-in capital | | 3,474 |
| | 2,986 |
| |
| Retained earnings | | 2,670 |
| | 2,647 |
| |
| Accumulated other comprehensive loss | | (31 | ) | | (26 | ) | |
| Total common stockholder's equity | | 7,335 |
| | 6,829 |
| |
Common Stockholder's Equity (See accompanying statements) | | | 8,720 |
| | 7,477 |
|
| Total Liabilities and Stockholder's Equity | | $ | 24,317 |
| | $ | 23,864 |
| | $ | 27,407 |
| | $ | 26,730 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY (UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Number of
Common
Shares
Issued | | Common
Stock | | Paid-In
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Total |
| | (in millions) |
| Balance at December 31, 2017 | 31 |
| | $ | 1,222 |
| | $ | 2,986 |
| | $ | 2,647 |
| | $ | (26 | ) | | $ | 6,829 |
|
Net income after dividends on
preferred stock | — |
| | — |
| | — |
| | 225 |
| | — |
| | 225 |
|
| Capital contributions from parent company | — |
| | — |
| | 488 |
| | — |
| | — |
| | 488 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Cash dividends on common stock | — |
| | — |
| | — |
| | (202 | ) | | — |
| | (202 | ) |
| Other | — |
| | — |
| | — |
| | — |
| | (6 | ) | | (6 | ) |
| Balance at March 31, 2018 | 31 |
| | $ | 1,222 |
| | $ | 3,474 |
| | $ | 2,670 |
| | $ | (31 | ) | | $ | 7,335 |
|
| | | | | | | | | | | | |
| Balance at December 31, 2018 | 31 |
| | $ | 1,222 |
| | $ | 3,508 |
| | $ | 2,775 |
| | $ | (28 | ) | | $ | 7,477 |
|
Net income after dividends on
preferred stock | — |
| | — |
| | — |
| | 217 |
| | — |
| | 217 |
|
| Capital contributions from parent company | — |
| | — |
| | 1,236 |
| | — |
| | — |
| | 1,236 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Cash dividends on common stock | — |
| | — |
| | — |
| | (211 | ) | | — |
| | (211 | ) |
| Balance at March 31, 2019 | 31 |
| | $ | 1,222 |
| | $ | 4,744 |
| | $ | 2,781 |
| | $ | (27 | ) | | $ | 8,720 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 20182019 vs. FIRST QUARTER 20172018
OVERVIEW
Alabama Power operates as a vertically integrated utility providing electric service to retail and wholesale customers within its traditional service territory located in the State of Alabama in addition to wholesale customers in the Southeast.
Many factors affect the opportunities, challenges, and risks of Alabama Power's business of providing electric service. These factors include the ability to maintain a constructive regulatory environment, to maintain and grow energy sales and customers, and to effectively manage and secure timely recovery of costs. These costs include those related to projected long-term demand growth, stringent environmental standards, including CCR rules, reliability, fuel, capital expenditures, including improving the electric transmission and distribution systems, and restoration following major storms. Alabama Power has various regulatory mechanisms that operate to address cost recovery. Effectively operating pursuant to these regulatory mechanisms and appropriately balancing required costs and capital expenditures with customer prices will continue to challenge Alabama Power for the foreseeable future. On May 1, 2018, the Alabama PSC approved modifications to Rate RSE and other commitments designed to position Alabama Power to address the retail rate impact and the growing pressure on its credit quality resulting from the Tax Reform Legislation. See FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters" and FINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk" herein for additional information and Note 3 to the financial statements of Alabama Power under "Retail Regulatory Matters – Rate RSE" in Item 8 of the Form 10-K for additional information on Alabama Power's established retail tariff.
Alabama Power continues to focus on several key performance indicators including, but not limited to, customer satisfaction, plant availability, system reliability, and net income after dividends on preferred stock.
RESULTS OF OPERATIONS
Net Income
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) |
| (% change) |
| $51 | | 29.3 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) |
| (% change) |
| $(8) | | (3.6) |
Alabama Power's net income after dividends on preferred and preference stock for the first quarter 20182019 was $225$217 million compared to $174$225 million for the corresponding period in 2017. The increase2018. This decrease was primarily related to a decrease in retail revenues associated with milder weather and lower customer usage and an increase in non-fuel operations and maintenance expenses. These decreases to income were partially offset by an increase in retail revenues under Rate CNP Compliance associated with colder weather experiencedincreases in Alabama Power's service territory in the first quarter 2018 compared to the corresponding period in 2017average net investments and a decrease in income tax expense partially offsetassociated with the application in 2018 of the accounting order approved by revenues deferred as a regulatory liability for an expected adjustment to customer billingsthe Alabama PSC in May 2018 related to the Tax Reform Legislation.Legislation (Tax Reform Accounting Order). See FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters" herein and Note 32 to the financial statements of Alabamaunder "Alabama Power under "Retail Regulatory Matters – Rate RSE"Tax Reform Accounting Order" in Item 8 of the Form 10-K for additional information.
Retail Revenues
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $58 | | 4.7 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(72) | | (5.6) |
In the first quarter 2018,2019, retail revenues were $1.29$1.21 billion compared to $1.23$1.29 billion for the corresponding period in 2017.2018.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of the changes in retail revenues were as follows:
| | | | First Quarter 2018 | First Quarter 2019 |
| | (in millions) |
| (% change) | (in millions) |
| (% change) |
| Retail – prior year | $ | 1,227 |
| | | $ | 1,285 |
| | |
| Estimated change resulting from – | | | | | | |
| Rates and pricing | (52 | ) | | (4.2 | ) | 34 |
| | 2.6 |
|
| Sales growth | 2 |
| | 0.1 |
| |
| Sales decline | | (17 | ) | | (1.3 | ) |
| Weather | 64 |
| | 5.2 |
| (25 | ) | | (1.9 | ) |
| Fuel and other cost recovery | 44 |
| | 3.6 |
| (64 | ) | | (5.0 | ) |
| Retail – current year | $ | 1,285 |
| | 4.7 | % | $ | 1,213 |
| | (5.6 | )% |
Revenues associated with changes in rates and pricing decreasedincreased in the first quarter 20182019 when compared to the corresponding period in 20172018 primarily due to increased revenues deferred as a regulatory liability for an expected adjustment to customer billings related to the Tax Reform Legislation.under Rate CNP Compliance associated with increases in average net investments. See Note (B) to the Condensed Financial Statements under "Regulatory Matters – Alabama Power" herein and Note 32 to the financial statements of Alabama Power under "Retail Regulatory Matters""Alabama Power" in Item 8 of the Form 10-K for additional information.
Revenues attributable to changes in sales increaseddecreased in the first quarter 20182019 when compared to the corresponding period in 2017.2018. Weather-adjusted commercial KWH sales decreased 3.5% in the first quarter 2019 and weather-adjusted residential KWH sales decreased 2.3% in the first quarter 2019 when compared to the corresponding period in 2018 primarily due to lower customer usage resulting from customer initiatives in energy savings for commercial customers and lower usage due to more energy-efficient residential appliances. Industrial KWH sales increased 4.5% fordecreased 3.0% in the first quarter 2019 when compared to the corresponding period in 2018 as a result of an increasea decrease in demand resulting from changes in production levels primarily in the chemicals, pipelines, and primary metals, chemicals, and paper sectors, partially offset by a decrease inincreased demand in the paperpipeline sector. Weather-adjusted commercial and residential KWH sales decreased 0.8% and 0.5%, respectively, for the first quarter 2018 primarily due to lower customer usage.
Revenues resulting from changes in weather increaseddecreased in the first quarter 20182019 due to colder weather experienced in Alabama Power's service territory compared to the corresponding period in 2017. Formilder weather. In the first quarter 2018,2019, the resulting increasesdecreases were 10.3%3.3% and 3.2%1.7% for residential and commercial sales revenues, respectively.
Fuel and other cost recovery revenues increaseddecreased in the first quarter 20182019 when compared to the corresponding period in 20172018 primarily due to increasesa decrease in KWH generation and the average cost of fuel.generation.
Electric rates include provisions to recognize the full recovery of fuel costs, purchased power costs, PPAs certificated by the Alabama PSC, and costs associated with the natural disaster reserve. 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 32 to the financial statements of Alabama Power under "Retail Regulatory Matters""Alabama Power" in Item 8 of the Form 10-K for additional information.
Wholesale Revenues – Non-Affiliates
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $8 | | 12.1 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(13) | | (17.6) |
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 service territory, and the availability of the Southern Company system's generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not affect net income. Short-term opportunity energy sales are also included in wholesale energy sales to non-affiliates. These opportunity sales are made at market-based rates that generally provide a margin above Alabama Power's variable cost to produce the energy.
In the first quarter 2018, wholesale revenues from sales to non-affiliates were $74 million compared to $66 million for the corresponding period in 2017. The increase was primarily due to a 12.4% increase in the price of energy and
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the first quarter 2019, wholesale revenues from sales to non-affiliates were $61 million compared to $74 million for the corresponding period in 2018. The decrease was primarily due to a 1.2% increase10.1% decrease in the price of energy due to lower natural gas prices and a 9.4% decrease in KWH sales as a result of increasedlower demand due to colder weather in the first quarter 20182019 compared to the corresponding period in 2017.2018.
Wholesale Revenues – Affiliates
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $18 | | 54.5 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $9 | | 17.6 |
Wholesale revenues from sales to affiliated companies will vary depending on demand and the availability and cost of generating resources at each company. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost and energy purchases are generally offset by energy revenues through Alabama Power's energy cost recovery clause.
In the first quarter 2018,2019, wholesale revenues from sales to affiliates were $51$60 million compared to $33$51 million for the corresponding period in 2017.2018. The increase was primarily due to a 29.8%33.4% increase in KWH sales and an 18.8% increasepartially offset by a 12.6% decrease in the price of energy due to increased demand as a result of colder weatherhydro generation in the first quarter 20182019 as compared to the corresponding period in 2017.2018.
Other Revenues
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $7 | | 12.5 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $11 | | 17.5 |
In the first quarter 2018,2019, other revenues were $63$74 million compared to $56$63 million for the corresponding period in 2017. The2018. This increase was primarily due to an increase in OATT revenues related to unregulatedand opportunity sales of products and services that were reclassified as other revenues as a result of the adoption of ASC 606, Revenue from Contracts with Customers (ASC 606). In prior periods, these revenues were included in other income (expense), net. See Note (A) to the Condensed Financial Statements herein for additional information regarding Alabama Power's adoption of ASC 606. The increase was partially offset by decreases in open access transmission tariff revenues.natural gas.
Fuel and Purchased Power Expenses
| | | | First Quarter 2018 vs. First Quarter 2017 | First Quarter 2019 vs. First Quarter 2018 |
| | (change in millions) | | (% change) | (change in millions) | | (% change) |
| Fuel | $ | 28 |
| | 9.4 | $ | (25 | ) | | (7.7 | ) |
| Purchased power – non-affiliates | 30 |
| | 88.2 | (27 | ) | | (42.2 | ) |
| Purchased power – affiliates | 9 |
| | 32.1 | (16 | ) | | (43.2 | ) |
| Total fuel and purchased power expenses | $ | 67 |
| | $ | (68 | ) | | |
In the first quarter 2018,2019, fuel and purchased power expenses were $427$359 million compared to $360$427 million for the corresponding period in 2017.2018. The increasedecrease was primarily due to a $35$53 million increasedecrease related to the volume of KWHs generated (excluding hydro) and purchased and a $22$14 million increasedecrease in the average cost of purchased power, and a $10 million increase related to the average cost of fuel.power.
Fuel and purchased power energy transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Alabama Power's energy cost recovery clause. See Note 32 to the financial statements of Alabamaunder "Alabama Power under "Retail Regulatory Matters – Rate ECR" in Item 8 of the Form 10-K for additional information.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of Alabama Power's generation and purchased power were as follows:
| | | | First Quarter 2018 |
| First Quarter 2017 | First Quarter 2019 |
| First Quarter 2018 |
Total generation (in billions of KWHs) | 16 | | 15 | 16 | | 16 |
Total purchased power (in billions of KWHs) | 1 | | 1 | 1 | | 1 |
Sources of generation (percent) — | | |
| Coal | 50 | | 49 | 43 | | 50 |
| Nuclear | 23 | | 26 | 23 | | 23 |
| Gas | 18 | | 20 | 19 | | 18 |
| Hydro | 9 | | 5 | 15 | | 9 |
Cost of fuel, generated (in cents per net KWH) — | | |
| Coal | 2.69 | | 2.60 | 2.78 | | 2.69 |
| Nuclear | 0.75 | | 0.74 | 0.78 | | 0.75 |
| Gas | 2.87 | | 2.77 | 2.57 | | 2.87 |
Average cost of fuel, generated (in cents per net KWH)(a) | 2.23 | | 2.13 | 2.19 | | 2.23 |
Average cost of purchased power (in cents per net KWH)(b) | 7.10 | | 5.59 | 5.75 | | 7.10 |
| |
(a) | KWHs generated by hydro are excluded from the average cost of fuel, generated. |
| |
(b) | Average cost of purchased power includes fuel, energy, and transmission purchased by Alabama Power for tolling agreements where power is generated by the provider. |
Fuel
In the first quarter 2018,2019, fuel expense was $326$301 million compared to $298$326 million for the corresponding period in 2017.2018. The increasedecrease was primarily due to a 10.9%79.7% increase in the volume of KWHs generated by hydro, a 12.7% decrease in the volume of KWHs generated by coal, and a 3.6% increase10.5% decrease in the average cost of natural gas per KWH generated, which excludes fuel associated with tolling agreements,agreements. The decrease was partially offset by a 3.5%4.6% increase in the volume of KWHs generated by natural gas and a 3.4% increase in the average cost of coal per KWH generated, and a 1.3% increase in the average cost of nuclear per KWH generated. These increases were partially offset by a 77.3% increase in the volume of KWHs generated by hydro facilities and a 3.4% decrease in the volume of KWHs generated by nuclear facilities.
Purchased Power – Non-Affiliates
In the first quarter 2018,2019, purchased power expense from non-affiliates was $64$37 million compared to $34$64 million for the corresponding period in 2017.2018. The increasedecrease was primarily related to a 38.3% increase28.3% decrease in the average cost of purchased power per KWH due to lower natural gas prices and a 34.8% increase19.7% decrease in the amount of energy purchased due to meet the demand as a result of coldermilder weather in the first quarter 20182019 compared to the corresponding period in 2017.2018.
Energy purchases from non-affiliates will vary depending on the market prices of wholesale energy as compared to the cost of the Southern Company system's generation, demand for energy within the Southern Company system's service territory, and the availability of the Southern Company system's generation.
Purchased Power – Affiliates
In the first quarter 2018,2019, purchased power expense from affiliates was $37$21 million compared to $28$37 million for the corresponding period in 2017.2018. The increasedecrease was primarily related to a 16.6% increase48.6% decrease in the amount of energy purchased and a 14.4%due to increased hydro generation, partially offset by an 11.4% increase in the average cost of purchased power per KWH due to an increase in demand as a result of colder weather in the first quarter 2018 compared to the corresponding period in 2017.firm transportation costs.
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.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Operations and Maintenance Expenses
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $22 | | 5.7 |
In the first quarter 2019, other operations and maintenance expenses were $409 million compared to $387 million for the corresponding period in 2018. This increase was primarily due to increases of $8 million in environmental expenses, $6 million in certain compensation and benefit expenses, and $4 million in nuclear generation expenses primarily due to plant improvement projects.
Depreciation and Amortization
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $10 | | 5.3 |
In the first quarter 2019, depreciation and amortization was $199 million compared to $189 million for the corresponding period in 2018. This increase was primarily due to additional plant in service associated with compliance-related steam, distribution, and transmission.
Other Income (Expense), Net
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $(5) | | (50.0) |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $9 | | 180.0 |
In the first quarter 2018,2019, other income (expense), net was $5$14 million compared to $10$5 million for the corresponding period in 2017. The decrease2018. This increase was primarily due to the reclassification of revenuesan increase in interest income from temporary cash investments and expenses associated with unregulatedadditional sales of products and services to other revenues and operations and maintenance expense, respectively, as a result of the adoption of ASC 606. See Note (A) to the Condensed Financial Statements herein for additional information regarding Alabama Power's adoption of ASC 606.non-utility property in 2019.
Income Taxes
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $(44) | | (34.9) |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(20) | | (24.4) |
In the first quarter 2018,2019, income taxes were $82$62 million compared to $126$82 million for the corresponding period in 2017. The2018. This decrease was primarily due to the reductionlower pre-tax earnings in the federal income tax rate as a resultfirst quarter 2019 compared to the corresponding period in 2018 and the application of the Tax Reform Legislation.Accounting Order in 2018. See Note (H)2 to the Condensed Financial Statementsfinancial statements under "Effective"Alabama Power – Tax Rate" hereinReform Accounting Order" in Item 8 of the Form 10-K for additional information.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Alabama Power's future earnings potential. The level of Alabama Power's future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Alabama Power's primary business of providing electric service. These factors include Alabama Power's ability to maintain a constructive regulatory environment that continues to allow for the timely recovery of prudently-incurred costs during a time of increasing costs and limited projected demandthe weak pace of growth over the next several years. Future earnings will be impacted byin new customers and electricity use per customer, growth.especially in residential and commercial markets. Earnings 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, both of
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
which could contribute to a net reduction in customer usage. Earnings are subject to a variety of other factors. These factors include weather, competition, new energy contracts with other utilities, energy conservation practiced by customers, the use of alternative energy sources by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth or decline in Alabama Power's service territory. Demand for electricity is primarily driven by the pace of economic growth that may be affected by changes in regional and global economic conditions, which may impact future earnings. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Alabama Power in Item 7 of the Form 10-K.
Environmental Matters
Alabama Power's operations are regulated by state and federal environmental agencies through a variety of laws and regulations governing air, water, land, and protection of other natural resources. Alabama Power maintains comprehensive environmental compliance and greenhouse gas (GHG)GHG strategies to assess upcoming requirements and compliance costs associated with these environmental laws and regulations. The costs, including capital expenditures, and operations and maintenance costs, and costs reflected in ARO liabilities, required to comply with environmental laws and regulations and to achieve stated goals may impact future electric generating unit retirement and replacement decisions, results of operations, cash flows, andand/or financial condition. Related costs may result from the installation of additional environmental controls, closure and monitoring of CCR facilities, unit retirements, and adding or changing fuel sources for certain existing units, as well as related upgrades to theAlabama Power's transmission system.and distribution systems. A major portion of these costs areis expected to be
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
recovered through existing ratemaking provisions. The ultimate impact of environmental laws and regulations and the GHG goals discussed below will depend on various factors, such as state adoption and implementation of requirements, the availability and cost of any deployed control technology, fuel prices, and the outcome of pending and/or future legal challenges.
New or revised environmental laws and regulations could affect many areas of Alabama Power's operations. The impact of any such changes cannot be determined at this time. Environmental compliance costs could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis. Environmental compliance costs are recovered through Rate CNP Compliance. Further, increased costs that are recovered through regulated rates could contribute to reduced demand for electricity, which could negatively affect results of operations, cash flows, andand/or financial condition. Additionally, many commercial and industrial customers may also be affected by existing and future environmental requirements, which for some may have the potential to ultimately affect their demand for electricity. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" of Alabama Power in Item 7 of the Form 10-K and Note 2 to the financial statements under "Alabama Power – Rate CNP Compliance" and Note 3 to the financial statements of Alabama Power under "Environmental Matters" and "Retail Regulatory Matters – Rate CNP Compliance"Remediation" in Item 8 of the Form 10-K for additional information.
Environmental Laws and RegulationsFERC Matters
Coal Combustion Residuals
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "EnvironmentalNote 2 to the financial statements under "FERC Matters – Environmental Laws and Regulations – Coal Combustion Residuals" of Alabama PowerOpen Access Transmission Tariff" in Item 78 of the Form 10-K for additional information regardinginformation.
On March 25, 2019, the Disposal of Coal Combustion Residuals fromAlabama Municipal Electric Utilities rule (CCR Rule).
ConsistentAuthority and Cooperative Energy and SCS and the traditional electric operating companies (including Alabama Power) filed a formal settlement agreement with the EPA's announced plansFERC agreeing to reconsider certain portionsa rate reduction based on a 10.6% ROE, with a retroactive effective date of the CCR Rule,May 10, 2018, and a five-year moratorium on March 15, 2018, the EPA published the first of two proposed coal ash rules it plans to finalize by no later than December 2019. The impact of anythese parties seeking changes to the CCR Rule will depend on the content of the final rule and the outcome of any legal challenges and cannot be determined at this time.
On April 20, 2018, the Alabama Environmental Management Commission approved a state CCR rule that will be provided to the EPA for a six-month review period. This state CCR rule is generally consistent with the federal CCR Rule.OATT formula rate. The ultimate outcome of this matter cannot be determined at this time.
Global Climate Issues
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Global Climate Issues"time; however, if approved by the FERC as filed, the OATT settlement would not have a material impact on the financial statements of Alabama Power in Item 7 of the Form 10-K for additional information.
Through 2017, the Southern Company system has achieved an estimated GHG emission reduction of 36% since 2007. In April 2018, Southern Company established an intermediate goal of a 50% reduction in carbon emissions from 2007 levels by 2030 and a long-term goal of low- to no-carbon operations by 2050. To achieve these goals, the Southern Company system expects to continue growing its renewable energy portfolio, optimize technology advancements to modernize its transmission and distribution systems, increase the use of natural gas for generation, invest in energy efficiency, and continue research and development efforts focused on technologies to lower GHG emissions. The Southern Company system's ability to achieve these goals also will be dependent on many external factors, including supportive national energy policies, low natural gas prices, and the development, deployment, and advancement of relevant energy technologies. The ultimate outcome of this matter cannot be determined at this time.Power.
Retail Regulatory Matters
Alabama Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Alabama PSC. Alabama Power currently recovers its costs from the regulated retail business primarily through Rate RSE, Rate CNP, Rate ECR, and Rate NDR. In addition, the Alabama PSC issues accounting
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
orders to address current events impacting Alabama Power. See Notes 1 and 3Note 2 to the financial statements of Alabama Power under "Nuclear Outage Accounting Order" and "Retail Regulatory Matters," respectively,"Alabama Power" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein for additional information regarding Alabama Power's rate mechanisms, accounting orders, and the recovery balance of each regulatory clause for Alabama Power.
On May 1, 2018, the Alabama PSC approved modificationsEnvironmental Accounting Order
In connection with management's decision to Rate RSE and other commitments designed to positionretire Plant Gorgas, in February 2019, Alabama Power reclassified approximately $1.3 billion for Plant Gorgas Unit 10 from plant in service, net of depreciation to addressother utility plant, net and continued to depreciate the growing pressure on its credit quality resulting fromasset according to the Tax Reform Legislation, without increasing retail rates under Rate RSE in the near term.original depreciation rates. On April 15, 2019, Alabama Power plans to reduce growth in total debt by increasing equity, with corresponding reductions in debt issuances, thereby de-leveraging its capital structure. Alabama Power's goal is to achieve an equity ratio ofretired Plant Gorgas Units 8, 9, and 10 and reclassified approximately 55% by the end of 2025. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters – Federal Tax Reform Legislation" of Alabama Power in Item 7$740 million of the Form 10-K for additional information.
Rate RSE
The approved modifications to Rate RSE are effective June 2018 and applicable for January 2019 billings and thereafter. The modifications include reducing the topremaining net investment costs of the allowed weighted common equity return (WCER) range from 6.21%units to 6.15% and modificationsa regulatory asset to be recovered over the units' remaining useful lives as established prior to the refund mechanism applicabledecision to prior year actual results. The modifications to the refund mechanism allow Alabama Power to retain a portionretire. Additionally, approximately $700 million of the revenue that causes the actual WCER for a given year to exceed the allowed range.
In conjunction with these modifications to Rate RSE, Alabama Power committednet capitalized asset retirement costs will be reclassified to a moratorium on any upward adjustments under Rate RSE for 2019regulatory asset and 2020. Additionally, Alabama Power will return $50 million to customers through bill creditsrecovered in 2019. The ultimate outcome of this matter cannot be determined at this time.
In accordance with an established retail tariff that provides for an interim adjustment to customer billings to recognize the impact of a change in the statutory income tax rate, Alabama Power will also return approximately $257 million to retail customers through bill credits in the second half of 2018 as a result of the change in the federal income tax rate under the Tax Reform Legislation.
Rate ECR
On May 1, 2018, the Alabama PSC approved an increase to Rate ECR from 2.015 cents per KWH to 2.353 cents per KWH effective July 2018 which is expected to result in additional collections of approximately $100 million through December 31, 2018. The approved increase in the Rate ECR factor will have no significant effect on Alabama Power's net income, but will increase operating cash flows related to fuel cost recovery in 2018. The rate will return to 5.910 cents per KWH in 2019, absent a further order from the Alabama PSC. The ultimate outcome of this matter cannot be determined at this time.
Accounting Order
On May 1, 2018, the Alabama PSC approved an accounting order that authorizes Alabama Power to defer the benefits of federal excess deferred income taxes associated with the Tax Reform Legislation for the year ending December 31, 2018 as a regulatory liability. Up to $30 million of such deferrals may be used to offset under-recovered amounts under Rate ECR, with any remaining amounts to be used for the benefit of customers as determinedguidance provided by the Alabama PSC. Alabama Power expects the benefits deferred to total approximately $30 million to $50 million. The ultimate outcome of this matter cannot be determined at this time. See Note 52 to the financial statements of Alabamaunder "Alabama Power under "Federal Tax Reform Legislation"– Environmental Accounting Order" and "Current and Deferred Income Taxes"Note 6 in Item 8 of the Form 10-K for additional information.
Income Tax Matters
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters" of Alabama Power in Item 7 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY –
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"Credit Rating Risk," Note (B) to the Condensed Financial Statements under "Regulatory Matters – Alabama Power," and Note (H) to the Condensed Financial Statements herein for information regarding the Tax Reform Legislation and related regulatory actions.
Other Matters
Alabama Power is involved in various other matters that could affect future earnings, including matters being litigated and regulatory matters that could affect future earnings.matters. In addition, Alabama Power is subject to certain claims and legal actions arising in the ordinary course of business. Alabama Power's business activities are subject to extensive governmental regulation related to public health and the environment, such as regulationlaws and regulations governing air, water, land, and protection of air emissions and water discharges.other natural resources. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements, such as standards for air, water, land,laws and protection of other natural resources,regulations, has occurred throughout the U.S. This litigation has included claims for damages alleged to have been caused by CO2 and other emissions, CCR, and alleged exposure to hazardous materials, and/or requests for injunctive relief in connection with such matters.
The ultimate outcome of such pending or potential litigation or regulatory matters cannot be predicted at this time; however, for current proceedings not specifically reported in NoteNotes (B) and (C) to the Condensed Financial Statements herein, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Alabama Power's financial statements. See NoteNotes (B) and (C) to the Condensed Financial Statements herein for a discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
On March 2, 2018, the Alabama Department of Environmental Management (ADEM) issued proposed administrative orders assessing a penalty of $1.25 million to Alabama Power for unpermitted discharge of fluids and/or pollutants to groundwater at five electric generating plants. The proposed orders also require the submission to the ADEM of a plan with a schedule for implementation of a comprehensive groundwater investigation, including an assessment of corrective measures, a report evaluating any deficiencies at the facilities that may have led to the unpermitted discharges, and quarterly progress reports. Alabama Power is awaiting finalization of the orders. The ultimate outcome of this matter cannot be determined at this time.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Alabama Power prepares its financial statements in accordance with GAAP. Significant accounting policies are described in NoteNotes 1, 5, and 6 to the financial statements of Alabama Power 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 Alabama Power's results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of Alabama Power in Item 7 of the Form 10-K for a complete discussion of Alabama Power's critical accounting policies and estimates.
Recently Issued Accounting Standards
See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Recently Issued Accounting Standards" of Alabama Power in Item 7 of the Form 10-K for additional information regarding ASU No. 2016-02, Leases (Topic 842). See Note (A) to the Condensed Financial Statements herein for information regarding Alabama Power's recently adopted accounting standards.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
Overview
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Alabama Power in Item 7 of the Form 10-K for additional information. Alabama Power's financial
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
condition remained stable at March 31, 2018.2019. Alabama Power intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements to meet future capital and liquidity needs. See "Capital Requirements and Contractual Obligations," "Sources of Capital," and "Financing Activities" herein for additional information.
Net cash provided from operating activities totaled $155$146 million for the first three months of 2018, an increase2019, a decrease of $27$9 million as compared to the first three months of 2017.2018. The increasedecrease in net cash provided from operating activities was primarily due to higher retail revenues associated with colder weather and the timing of the expected reduction to customer billings related to the Tax Reform Legislation.vendor payments and other current liabilities, partially offset by increased fuel cost recovery. Net cash used for investing activities totaled $564$511 million for the first three months of 20182019 primarily duerelated to gross property additions related toadditional capital expenditures for distribution, environmental, and transmission assets. Net cash provided from financing activities totaled $518$811 million for the first three months of 20182019 primarily due to additional capital contributions from Southern Company, and net issuances of short-term debt included in notes payable, partially offset by a payment of common stock dividend payment.dividends and a long-term debt maturity. Fluctuations in cash flows from financing activities vary from period to period based on capital needs and the maturity or redemption of securities.
Significant balance sheet changes for the first three months of 20182019 include increases of $488 million$1.2 billion in additional paid-in capitaltotal common stockholder's equity, primarily due to a $1.225 billion capital contributionscontribution from Southern Company, $301 million in property, plant, and equipment primarily due to additions to environmental, distribution, and transmission assets, $245 million in notes payable primarily due to additional short-term borrowings, $200 million in securities due within one year reclassified from long-term debt, and $109$446 million in cash and cash equivalents. Other significant changes include a decreasedecreases of $187$268 million in other accounts payable primarily due to the timing of vendor payments.payments and $200 million in securities due within one year due to the maturity of long-term debt.
Capital Requirements and Contractual Obligations
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Alabama Power in Item 7 of the Form 10-K for a description of Alabama Power's capital requirements and contractual obligations. Approximately $200 million will be requiredThere are no scheduled maturities of long-term debt through March 31, 2019 to fund maturities of long-term debt.2020.
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" of Alabama Power in Item 7 of the Form 10-K for additional information on Alabama Power's environmental compliance strategy.
The construction program is 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 generating plants, including unit retirements and replacements and adding or changing fuel sources at existing generating units, to meet regulatory requirements; changes in the expected environmental compliance program; changes in FERC rules and regulations; Alabama PSC approvals; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; storm impacts; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.
Sources of Capital
Alabama Power plans to obtain the funds to meet its future capital needs from sources similar to those used in the past, which were primarily from operating cash flows, external security issuances, borrowings from financial institutions, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon prevailing market conditions, regulatory approval, and other factors. In January 2019, Alabama Power received a capital contribution totaling $1.225 billion from Southern Company. See
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" of Alabama Power in Item 7 of the Form 10-K for additional information.
Alabama Power's current liabilities sometimes exceed 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.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At March 31, 2018,2019, Alabama Power had approximately $653$759 million of cash and cash equivalents. Committed credit arrangements with banks at March 31, 20182019 were as follows:
| | | Expires | Expires | | | | | | Expires Within One Year | Expires | | | | |
| 2018 | | 2020 | | 2022 | | Total | | Unused | | Term Out | | No Term Out | |
| 2019 | | 2019 | | 2020 | | 2022 | | Total | | Unused |
(in millions) | | $ | 35 |
| | $ | 500 |
| | $ | 800 |
| | $ | 1,335 |
| | $ | 1,335 |
| | $ | — |
| | $ | 35 |
| 33 |
| | $ | 500 |
| | $ | 800 |
| | $ | 1,333 |
| | $ | 1,333 |
|
See Note 68 to the financial statements of Alabama Power under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.
Most of these bank credit arrangements, as well as Alabama Power's term loan arrangements, contain covenants that limit debt levels and contain cross-acceleration provisions to other indebtedness (including guarantee obligations) of Alabama Power. Such cross-acceleration provisions to other indebtedness would trigger an event of default if Alabama Power defaulted on indebtedness, the payment of which was then accelerated. At March 31, 2018,2019, Alabama Power was in compliance with all such covenants. None of the bank credit arrangements contain material adverse change clauses at the time of borrowings.
Subject to applicable market conditions, Alabama Power expects to renew or replace its bank credit arrangements as needed prior to expiration. In connection therewith, Alabama Power 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 Alabama Power's pollution control revenue bonds and commercial paper programs. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support was approximately $854 million as of March 31, 2018.2019. At March 31, 2018,2019, Alabama Power had $120$87 million of fixed rate pollution control revenue bonds outstanding that were required to be reoffered within the next 12 months.
Alabama Power also has substantial cash flow from operating activities and access to the capital markets, including a commercial paper program, to meet liquidity needs. Alabama Power may meet short-term cash needs through its commercial paper program. Alabama Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper at the request and for the benefit of Alabama Power and the other traditional electric operating companies. Proceeds from such issuances for the benefit of Alabama Power are loaned directly to Alabama Power. The obligations of each traditional electric operating company under these arrangements are several and there is no cross-affiliate credit support. Short-term borrowings are included in notes payable in the balance sheets.
Details of short-term borrowings were as follows:
|
| | | | | | | | | | | | | | | | | |
| | Short-term Debt at March 31, 2018 | | 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) |
| Commercial paper | $ | 245 |
| | 2.3 | % | | $ | 37 |
| | 1.9 | % | | $ | 255 |
|
| Short-term bank loan | 3 |
| | 3.7 | % | | 3 |
| | 3.7 | % | | 3 |
|
| Total | $ | 248 |
| | 2.4 | % | | $ | 40 |
| | 2.1 | % | | |
|
| | | | | | | | | | |
| | Short-term Debt During the Period(*) |
| | Average
Amount Outstanding | | Weighted
Average
Interest
Rate | | Maximum
Amount
Outstanding |
| | (in millions) | | | | (in millions) |
| Commercial paper | $ | 32 |
| | 2.7 | % | | $ | 185 |
|
| |
| (*) | Average and maximum amounts are based upon daily balances during the three-month period ended March 31, 2018.2019. No short-term debt was outstanding at March 31, 2019. |
Alabama Power believes the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, and operating cash flows.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Alabama Power believes the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, and operating cash flows.
Credit Rating Risk
At March 31, 2018,2019, Alabama Power 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 to BBB and/or Baa2 or below. These contracts are primarily for physical electricity purchases, fuel purchases, fuel transportation and storage, energy price risk management, and transmission.
The At March 31, 2019, the maximum potential collateral requirements under these contracts at March 31, 2018 were as follows:
|
| | | |
| Credit Ratings | Maximum Potential Collateral Requirements |
| | (in millions) |
| At BBB and/or Baa2 | $ | 1 |
|
| At BBB- and/or Baa3 | $ | 1 |
|
| Below BBB- and/or Baa3 | $ | 280 |
|
Included in these amounts are certain agreements that could require collateral in the event that either Alabama Power or Georgia Power (an affiliate of Alabama 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 Alabama Power to access capital markets and would be likely to impact the cost at which it does so.
While it is unclear how the credit rating agencies and the FERC may respond toAs a result of the Tax Reform Legislation, certain financial metrics, such as the funds from operations to debt percentage, used by the credit rating agencies to assess Southern Company and its subsidiaries, including Alabama Power, may be negatively impacted. The modifications to Rate RSE and other commitments approved by the Alabama PSC are expected to help mitigate these potential adverse impacts to certain credit metrics and will help Alabama Power meet its goal of achieving an equity ratio of approximately 55% by the end of 2025. See Note 32 to the financial statements of Alabamaunder "Alabama Power under "Retail Regulatory Matters – Rate RSE" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Regulatory Matters – Alabama Power – Rate RSE" herein for additional information.
Financing Activities
In February 2019, Alabama Power did not issue or redeem any securities during the three months ended March 31, 2018.repaid at maturity $200 million aggregate principal amount of Series Z 5.125% Senior Notes due February 15, 2019.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Alabama Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.
GEORGIA POWER COMPANYRegulatory Matters
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.
GEORGIA POWER COMPANYFuel Cost Recovery
CONDENSED STATEMENTS OF INCOME (UNAUDITED)The traditional electric operating companies each have established fuel cost recovery rates approved by their respective state PSCs. Fuel cost recovery revenues are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes in the billing factor will not have a significant effect on Southern Company's revenues or net income, but will affect cash flow. The traditional electric operating companies continuously monitor their under or over recovered fuel cost balances and make appropriate filings with their state PSCs to adjust fuel cost recovery rates as necessary.
Alabama Power
Alabama Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Alabama PSC. Alabama Power currently recovers its costs from the regulated retail business primarily through Rate RSE, Rate CNP, Rate ECR, and Rate NDR. In addition, the Alabama PSC issues accounting orders to address current events impacting Alabama Power.
Environmental Accounting Order
In connection with management's decision to retire Plant Gorgas, in February 2019, Alabama Power reclassified approximately $1.3 billion for Plant Gorgas Unit 10 from plant in service, net of depreciation to other utility plant, net and continued to depreciate the asset according to the original depreciation rates. On April 15, 2019, Alabama Power retired Plant Gorgas Units 8, 9, and 10 and reclassified approximately $740 million of the remaining net investment costs of the units to a regulatory asset to be recovered over the units' remaining useful lives as established prior to the decision to retire. Additionally, approximately $700 million of net capitalized asset retirement costs will be reclassified to a regulatory asset and recovered in accordance with accounting guidance provided by the Alabama PSC. See Note 2 to the financial statements under "Alabama Power – Environmental Accounting Order" and Note 6 in Item 8 of the Form 10-K for additional information.
Georgia Power
Georgia Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Georgia PSC. Georgia Power currently recovers its costs from the regulated retail business through the 2013 ARP, which includes traditional base tariff rates, Demand-Side Management tariffs, Environmental Compliance Cost Recovery tariffs, and Municipal Franchise Fee tariffs. Georgia Power is scheduled to file a base rate case by July 1, 2019, which may continue or modify these tariffs. In addition, financing costs related to certified construction costs of Plant Vogtle Units 3 and 4 are being collected through the NCCR tariff and fuel costs are collected through a separate fuel cost recovery tariff.
Mississippi Power
Kemper County Energy Facility
As the mining permit holder, Liberty Fuels Company, LLC has a legal obligation to perform mine reclamation, and Mississippi Power has a contractual obligation to fund all reclamation activities. As a result of the abandonment of the Kemper IGCC, final mine reclamation began in 2018 and is expected to be substantially completed in 2020, with monitoring expected to continue through 2027. See Note 6 to the financial statements in Item 8 of the Form 10-K for additional information.
During the first quarter 2019, Mississippi Power recorded pre-tax charges to income of $2 million ($1 million after tax), primarily resulting from the abandonment and related closure activities and ongoing period costs, net of sales proceeds, for the mine and gasifier-related assets at the Kemper County energy facility. Additional closure costs for
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2018 | | 2017 |
| | (in millions) |
| Operating Revenues: | | | |
| Retail revenues | $ | 1,798 |
| | $ | 1,689 |
|
| Wholesale revenues, non-affiliates | 44 |
| | 39 |
|
| Wholesale revenues, affiliates | 10 |
| | 8 |
|
| Other revenues | 109 |
| | 96 |
|
| Total operating revenues | 1,961 |
| | 1,832 |
|
| Operating Expenses: | | | |
| Fuel | 412 |
| | 371 |
|
| Purchased power, non-affiliates | 121 |
| | 88 |
|
| Purchased power, affiliates | 171 |
| | 172 |
|
| Other operations and maintenance | 408 |
| | 399 |
|
| Depreciation and amortization | 228 |
| | 221 |
|
| Taxes other than income taxes | 108 |
| | 98 |
|
| Total operating expenses | 1,448 |
| | 1,349 |
|
| Operating Income | 513 |
| | 483 |
|
| Other Income and (Expense): | | | |
| Interest expense, net of amounts capitalized | (106 | ) | | (101 | ) |
| Other income (expense), net | 38 |
| | 38 |
|
| Total other income and (expense) | (68 | ) | | (63 | ) |
| Earnings Before Income Taxes | 445 |
| | 420 |
|
| Income taxes | 93 |
| | 156 |
|
| Net Income | 352 |
| | 264 |
|
| Dividends on Preferred and Preference Stock | — |
| | 4 |
|
| Net Income After Dividends on Preferred and Preference Stock | $ | 352 |
| | $ | 260 |
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2018 | | 2017 |
| | (in millions) |
| Net Income | $ | 352 |
| | $ | 264 |
|
| Other comprehensive income (loss): | | | |
| Qualifying hedges: | | | |
Reclassification adjustment for amounts included in net income,
net of tax of $- and $-, respectively | 1 |
| | 1 |
|
| Total other comprehensive income (loss) | 1 |
| | 1 |
|
| Comprehensive Income | $ | 353 |
| | $ | 265 |
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) |
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2018 | | 2017 |
| | (in millions) |
| Operating Activities: | | | |
| Net income | $ | 352 |
| | $ | 264 |
|
| Adjustments to reconcile net income to net cash provided from operating activities — | | | |
| Depreciation and amortization, total | 280 |
| | 271 |
|
| Deferred income taxes | (38 | ) | | 71 |
|
| Deferred expenses | 35 |
| | 38 |
|
| Pension, postretirement, and other employee benefits | (19 | ) | | (21 | ) |
| Settlement of asset retirement obligations | (23 | ) | | (22 | ) |
| Other, net | (7 | ) | | (42 | ) |
| Changes in certain current assets and liabilities — | | | |
| -Receivables | 135 |
| | 142 |
|
| -Fossil fuel stock | 24 |
| | (38 | ) |
| -Prepaid income taxes | 84 |
| | 5 |
|
| -Other current assets | 9 |
| | (16 | ) |
| -Accounts payable | (180 | ) | | (155 | ) |
| -Accrued taxes | (191 | ) | | (235 | ) |
| -Accrued compensation | (85 | ) | | (87 | ) |
| -Retail fuel cost over recovery | — |
| | (66 | ) |
| -Other current liabilities | (3 | ) | | 2 |
|
| Net cash provided from operating activities | 373 |
| | 111 |
|
| Investing Activities: | | | |
| Property additions | (681 | ) | | (556 | ) |
| Nuclear decommissioning trust fund purchases | (255 | ) | | (161 | ) |
| Nuclear decommissioning trust fund sales | 250 |
| | 155 |
|
| Cost of removal, net of salvage | (26 | ) | | (17 | ) |
| Change in construction payables, net of joint owner portion | (47 | ) | | (36 | ) |
| Payments pursuant to LTSAs | (43 | ) | | (22 | ) |
| Asset dispositions | 134 |
| | 63 |
|
| Other investing activities | — |
| | 8 |
|
| Net cash used for investing activities | (668 | ) | | (566 | ) |
| Financing Activities: | | | |
| Decrease in notes payable, net | — |
| | (391 | ) |
| Proceeds — | | | |
| Capital contributions from parent company | 1,474 |
| | 345 |
|
| Senior notes | — |
| | 850 |
|
| Redemptions and repurchases — | | | |
| Pollution control revenue bonds | (278 | ) | | — |
|
| Short-term borrowings | (150 | ) | | — |
|
| Other long-term debt | (100 | ) | | — |
|
| Payment of common stock dividends | (339 | ) | | (320 | ) |
| Other financing activities | (6 | ) | | (11 | ) |
| Net cash provided from financing activities | 601 |
| | 473 |
|
| Net Change in Cash, Cash Equivalents, and Restricted Cash | 306 |
| | 18 |
|
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 852 |
| | 3 |
|
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 1,158 |
| | $ | 21 |
|
| Supplemental Cash Flow Information: | | | |
| Cash paid (received) during the period for — | | | |
| Interest (net of $6 and $5 capitalized for 2018 and 2017, respectively) | $ | 115 |
| | $ | 88 |
|
| Income taxes, net | — |
| | (5 | ) |
| Noncash transactions — Accrued property additions at end of period | 525 |
| | 320 |
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Assets | | At March 31, 2018 | | At December 31, 2017 |
| | | (in millions) |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 1,158 |
| | $ | 852 |
|
| Receivables — | | | | |
| Customer accounts receivable | | 471 |
| | 544 |
|
| Unbilled revenues | | 189 |
| | 255 |
|
| Under recovered fuel clause revenues | | 156 |
| | 165 |
|
| Joint owner accounts receivable | | 226 |
| | 262 |
|
| Affiliated | | 24 |
| | 24 |
|
| Other accounts and notes receivable | | 77 |
| | 76 |
|
| Accumulated provision for uncollectible accounts | | (2 | ) | | (3 | ) |
| Fossil fuel stock | | 290 |
| | 314 |
|
| Materials and supplies | | 499 |
| | 504 |
|
| Prepaid expenses | | 117 |
| | 216 |
|
| Other regulatory assets, current | | 198 |
| | 205 |
|
| Other current assets | | 39 |
| | 14 |
|
| Total current assets | | 3,442 |
| | 3,428 |
|
| Property, Plant, and Equipment: | | | | |
| In service | | 35,177 |
| | 34,861 |
|
| Less: Accumulated provision for depreciation | | 11,818 |
| | 11,704 |
|
| Plant in service, net of depreciation | | 23,359 |
| | 23,157 |
|
| Nuclear fuel, at amortized cost | | 550 |
| | 544 |
|
| Construction work in progress | | 4,800 |
| | 4,613 |
|
| Total property, plant, and equipment | | 28,709 |
| | 28,314 |
|
| Other Property and Investments: | | | | |
| Equity investments in unconsolidated subsidiaries | | 52 |
| | 53 |
|
| Nuclear decommissioning trusts, at fair value | | 930 |
| | 929 |
|
| Miscellaneous property and investments | | 59 |
| | 59 |
|
| Total other property and investments | | 1,041 |
| | 1,041 |
|
| Deferred Charges and Other Assets: | | | | |
| Deferred charges related to income taxes | | 517 |
| | 516 |
|
| Other regulatory assets, deferred | | 2,940 |
| | 2,932 |
|
| Other deferred charges and assets | | 550 |
| | 548 |
|
| Total deferred charges and other assets | | 4,007 |
| | 3,996 |
|
| Total Assets | | $ | 37,199 |
| | $ | 36,779 |
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Liabilities and Stockholder's Equity | | At March 31, 2018 | | At December 31, 2017 |
| | | (in millions) |
| Current Liabilities: | | | | |
| Securities due within one year | | $ | 757 |
| | $ | 857 |
|
| Notes payable | | — |
| | 150 |
|
| Accounts payable — | | | | |
| Affiliated | | 349 |
| | 493 |
|
| Other | | 742 |
| | 834 |
|
| Customer deposits | | 273 |
| | 270 |
|
| Accrued taxes | | 129 |
| | 344 |
|
| Accrued interest | | 110 |
| | 123 |
|
| Accrued compensation | | 110 |
| | 219 |
|
| Asset retirement obligations, current | | 213 |
| | 270 |
|
| Other regulatory liabilities, current | | 232 |
| | 191 |
|
| Other current liabilities | | 215 |
| | 198 |
|
| Total current liabilities | | 3,130 |
| | 3,949 |
|
| Long-term Debt | | 10,797 |
| | 11,073 |
|
| Deferred Credits and Other Liabilities: | | | | |
| Accumulated deferred income taxes | | 3,140 |
| | 3,175 |
|
| Deferred credits related to income taxes | | 3,219 |
| | 3,248 |
|
| Accumulated deferred ITCs | | 269 |
| | 248 |
|
| Employee benefit obligations | | 651 |
| | 659 |
|
| Asset retirement obligations, deferred | | 2,425 |
| | 2,368 |
|
| Other deferred credits and liabilities | | 148 |
| | 128 |
|
| Total deferred credits and other liabilities | | 9,852 |
| | 9,826 |
|
| Total Liabilities | | 23,779 |
| | 24,848 |
|
| Common Stockholder's Equity: | | | | |
| Common stock, without par value — | | | | |
| Authorized — 20,000,000 shares | | | | |
| Outstanding — 9,261,500 shares | | 398 |
| | 398 |
|
| Paid-in capital | | 8,805 |
| | 7,328 |
|
| Retained earnings | | 4,228 |
| | 4,215 |
|
| Accumulated other comprehensive loss | | (11 | ) | | (10 | ) |
| Total common stockholder's equity | | 13,420 |
| | 11,931 |
|
| Total Liabilities and Stockholder's Equity | | $ | 37,199 |
| | $ | 36,779 |
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
GEORGIA POWERSOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2018 vs. FIRST QUARTER 2017
OVERVIEW
Georgia Power operates as a vertically integrated utility providing electric servicethe mine and gasifier-related assets, currently estimated at up to retail customers within its traditional service territory located within$10 million pre-tax (excluding salvage, net of dismantlement costs), may be incurred through the Statefirst half of Georgia2020. In addition, period costs, including, but not limited to, costs for compliance and to wholesale customers in the Southeast.
Many factors affect the opportunities, challenges,safety, ARO accretion, and risks of Georgia Power's business of providing electric service. These factors include the ability to maintain a constructive regulatory environment, to maintain and grow energy sales, and to effectively manage and secure timely recovery of costs. These costs include those related to projected long-term demand growth, stringent environmental standards, reliability, fuel, capital expenditures, and restoration following major storms. Georgia Power has various regulatory mechanisms that operate to address cost recovery. Effectively operating pursuant to these regulatory mechanisms and appropriately balancing required costs and capital expenditures with customer prices will continue to challenge Georgia Powerproperty taxes for the foreseeable future. On April 3, 2018,mine and gasifier-related assets, are estimated at $11 million for the Georgia PSC approved a settlement agreement between Georgiaremainder of 2019 and $2 million to $6 million annually in 2020 through 2023.
In addition, Mississippi Power constructed the CO2 pipeline for the planned transport of captured CO2 for use in enhanced oil recovery and is currently evaluating its options regarding the stafffinal disposition of the Georgia PSC regarding the retail rate impactCO2 pipeline, including removal of the Tax Reform Legislation (Tax Reform Settlement Agreement). The Tax Reform Settlement Agreement provides for $330 million in refunds to customers for 2018 and 2019 and the deferral of certain revenues and tax benefits to be addressed in Georgia Power's next base rate case, whichpipeline. This evaluation is expected to be complete later in 2019. If Mississippi Power ultimately decides to remove the CO2 pipeline, the cost of removal could have a material impact on Southern Company's financial statements.
In December 2018, Mississippi Power filed with the DOE its request for property closeout certification under the contract related to the $387 million of grants received. Mississippi Power and the DOE are currently in discussions regarding the requested closeout and property disposition, which may require payment to the DOE for a portion of certain property that is to be retained by July 1, 2019.Mississippi Power. In connection with the DOE closeout discussions, on April 29, 2019, the Civil Division of the Department of Justice informed Southern Company and Mississippi Power of an investigation related to the Kemper County energy facility. The Georgia PSC also approvedultimate outcome of these matters cannot be determined at this time; however, they could have a material impact on Southern Company's financial statements.
Southern Company Gas
The natural gas distribution utilities are subject to regulation and oversight by their respective state regulatory agencies for the rates charged to their customers and other matters. With the exception of Atlanta Gas Light, which does not sell natural gas to end-use customers, the natural gas distribution utilities are authorized by the relevant regulatory agencies in the states in which they serve to use natural gas cost recovery mechanisms that adjust rates to reflect changes in the wholesale cost of natural gas and ensure recovery of all costs prudently incurred in purchasing natural gas for customers. Natural gas cost recovery revenues are adjusted for differences in actual recoverable natural gas costs and amounts billed in current regulated rates. Changes in the billing factor will not have a significant effect on revenues or net income, but will affect cash flows. In addition to natural gas cost recovery mechanisms, there are other cost recovery mechanisms, such as regulatory riders, which vary by utility but allow recovery of certain costs, such as those related to infrastructure replacement programs, as well as environmental remediation and energy efficiency plans.
In November 2018, Nicor Gas filed a general base rate case with the Illinois Commission requesting a $230 million increase in annual base rate revenues. The requested increase is based on a projected test year for the 12-month period ending September 30, 2020, a ROE of 10.6%, and an increase to Georgia Power's retailin the equity ratio from 52% to 54% to address the negative cash flow and credit metric impacts of the Tax Reform Legislation.
On April 16, 2019, Nicor Gas entered into a stipulation agreement to resolve all related issues with the Staff of the Illinois Commission, including a ROE of 9.86% and an equity ratio of 54%. Also on April 16, 2019, Nicor Gas filed its rebuttal testimony with the Illinois Commission incorporating the stipulation agreement and addressing the remaining items outstanding with the other two intervenors. As a result of the stipulation agreement and rebuttal testimony, the revised requested annual revenue increase is $180 million.
The Illinois Commission is expected to rule on the requested increase within the statutory time limit of 11 months from the filing of the rate case, after which rate adjustments will be effective.
Atlanta Gas Light is required to file a traditional base rate case no later than June 3, 2019 for rates effective January 1, 2020.
The ultimate outcome of these matters cannot be determined at this time.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Construction Program
Overview
The subsidiary companies of Southern Company are engaged in continuous construction programs to accommodate existing and estimated future loads on their respective systems. The Southern Company system intends to continue its strategy of developing and constructing new electric generating facilities, adding environmental modifications to certain existing units, expanding and improving the electric transmission and distribution systems, and updating and expanding the natural gas distribution systems. For the traditional electric operating companies, major generation construction projects are subject to state PSC approval in order to be included in retail rates. While Southern Power generally constructs and acquires generation assets covered by long-term PPAs, any uncontracted capacity could negatively affect future earnings. Southern Company Gas is engaged in various infrastructure improvement programs designed to update or expand the natural gas distribution systems of the natural gas distribution utilities to improve reliability and meet operational flexibility and growth. The natural gas distribution utilities recover their investment and a return associated with these infrastructure programs through their regulated rates. See FUTURE EARNINGS POTENTIALNotes 2 and 15 to the financial statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects" and "Southern Power," respectively, in Item 8 of the Form 10-K and Note (K) to the Condensed Financial Statements under "Retail Regulatory MattersSouthern Power – Rate Plans"" herein for additional information oninformation.
The largest construction project currently underway in the Tax Reform Settlement Agreement.
Georgia Power continues to focus on several key performance indicators including, but not limited to, customer satisfaction, plant availability,Southern Company system reliability, the execution of major construction projects, and net income.
is Plant Vogtle Units 3 and 4 Status(45.7% ownership interest by Georgia Power in the two units, each with approximately 1,100 MWs). See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" in Item 8 of the Form 10-K and "Nuclear Construction" herein for additional information.
Also see FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" herein for additional information regarding Southern Company's capital requirements for its subsidiaries' construction programs.
Nuclear Construction
See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding the construction of Plant Vogtle Units 3 and 4, the joint ownership agreements and related funding agreement, VCM reports, and the NCCR tariff.
In 2009, the Georgia PSC certified construction of Plant Vogtle Units 3 and 4. Georgia Power holds a 45.7% ownership interest in Plant Vogtle Units 3 and 4. In 2012, the NRC issued the related combined construction and operating licenses, which allowed full construction of the two AP1000 nuclear units (with electric generating capacity of approximately 1,100 MWs each) and related facilities to begin. Until March 2017, construction on Plant Vogtle Units 3 and 4 continued under the Vogtle 3 and 4 Agreement, which was a substantially fixed price agreement. In March 2017, the EPC Contractor filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code.
In connection with the EPC Contractor's bankruptcy filing, Georgia Power, acting for itself and as agent for the other Vogtle Owners, entered into the Interim Assessment Agreement with the EPC Contractorseveral transitional arrangements to allow construction to continue. The Interim Assessment Agreement expired in July 2017 when the Vogtle Services Agreement became effective. In August 2017, following completion of comprehensive cost to complete and cancellation cost assessments, Georgia Power filed its seventeenth VCM report with the Georgia PSC, which included a recommendation to continue construction of Plant Vogtle Units 3 and 4, with Southern Nuclear serving as project manager and Bechtel serving as the primary construction contractor. In December 2017, the Georgia PSC approved Georgia Power's recommendation to continue construction.
Georgia Power expects Plant Vogtle Units 3 and 4 to be placed in service by November 2021 and November 2022, respectively. Georgia Power's capital cost forecast for its 45.7% proportionate share of Plant Vogtle Units 3 and 4 is $8.8 billion ($7.3 billion after reflecting $1.7 billion received from Toshiba in 2017 under the Guarantee Settlement Agreement and $188 million in Customer Refunds recognized as a regulatory liability in 2017). Georgia Power's CWIP balance for Plant Vogtle Units 3 and 4 was $3.6 billion at March 31, 2018, which is net of the Guarantee Settlement Agreement payments less the Customer Refunds. Georgia Power estimates that its financing costs for construction of Plant Vogtle Units 3 and 4 will total approximately $3.1 billion, of which $1.6 billion had been incurred through March 31, 2018.
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
See FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Nuclear Construction" herein for additional information on Plant Vogtle Units 3 and 4.
RESULTS OF OPERATIONS
Net Income
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $92 | | 35.4 |
Georgia Power's net income after dividends on preferred and preference stock for the first quarter 2018 was $352 million compared to $260 million for the corresponding period in 2017. The increase was primarily due to an increase in retail revenues associated with colder weather in the first quarter 2018 compared to the corresponding period in 2017 and a decrease in income tax expense due to a lower federal income tax rate as a result of the Tax Reform Legislation. The increase was partially offset by revenues deferred as a regulatory liability for future customer refunds related to the Tax Reform Legislation.
Retail Revenues
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $109 | | 6.5 |
In the first quarter 2018, retail revenues were $1.80 billion compared to $1.69 billion for the corresponding period in 2017.
Details of the changes in retail revenues were as follows:
|
| | | | | | |
| | First Quarter 2018 |
| | (in millions) | | (% change) |
| Retail – prior year | $ | 1,689 |
| | |
| Estimated change resulting from – | | | |
| Rates and pricing | (50 | ) | | (3.0 | ) |
| Sales growth | 22 |
| | 1.3 |
|
| Weather | 65 |
| | 3.9 |
|
| Fuel cost recovery | 72 |
| | 4.3 |
|
| Retail – current year | $ | 1,798 |
| | 6.5 | % |
Revenues associated with changes in rates and pricing decreased in the first quarter 2018 when compared to the corresponding period in 2017 primarily due to revenues deferred as a regulatory liability for future customer refunds related to the Tax Reform Legislation, the rate pricing effect of increased customer usage, and a decrease in revenues related to the recovery of Plant Vogtle Units 3 and 4 construction financing costs under the NCCR tariff, also primarily related to the reduction in the federal income tax rate under the Tax Reform Legislation. The decrease was partially offset by higher contributions from variable demand-driven pricing from commercial and industrial customers. See FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Rate Plans" herein for additional information on regulatory actions related to the Tax Reform Legislation. Also, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Nuclear Construction" of Georgia Power in Item 7 of the Form 10-K and FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Nuclear Construction – Regulatory Matters" herein for additional information related to the NCCR tariff.
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues attributable to changes in sales increased in the first quarter 2018 when compared to the corresponding period in 2017. Weather-adjusted residential and commercial KWH sales increased 2.1% and 2.4%, respectively, for the first quarter 2018 largely due to customer growth. Weather-adjusted industrial KWH sales increased 0.9% in the first quarter 2018 primarily due to increased demand in the utilities, stone, clay, and glass, and textiles sectors, partially offset by decreased demand in the paper sector. Despite a more stable dollar and improving global economy, the industrial sector remains constrained by economic policy uncertainty.
Fuel revenues and costs are allocated between retail and wholesale jurisdictions. In the first quarter 2018, retail fuel cost recovery revenues increased $72 million when compared to the corresponding period in 2017 primarily due to increased energy sales driven by colder weather, resulting in increased customer demand, and higher purchased power costs. Electric rates include provisions to periodically 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 MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Fuel Cost Recovery" of Georgia Power in Item 7 of the Form 10-K for additional information.
Other Revenues
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $13 | | 13.5 |
In the first quarter 2018, other revenues were $109 million compared to $96 million for the corresponding period in 2017. The increase was primarily due to $15 million of revenues primarily from unregulated sales of products and services that were reclassified as other revenues as a result of the adoption of ASC 606, Revenue from Contracts with Customers (ASC 606). In prior periods, these revenues were included in other income (expense), net. See Note (A) to the Condensed Financial Statements herein for additional information regarding Georgia Power's adoption of ASC 606.
Fuel and Purchased Power Expenses
|
| | | | | | |
| | First Quarter 2018 vs. First Quarter 2017 |
| | (change in millions) | | (% change) |
| Fuel | $ | 41 |
| | 11.1 |
|
| Purchased power – non-affiliates | 33 |
| | 37.5 |
|
| Purchased power – affiliates | (1 | ) | | (0.6 | ) |
| Total fuel and purchased power expenses | $ | 73 |
| | |
In the first quarter 2018, total fuel and purchased power expenses were $704 million compared to $631 million in the corresponding period in 2017. The increase was primarily due to a $55 million increase related to the average cost of purchased power and a net increase of $18 million related to the volume of KWHs generated and purchased due to colder weather resulting in higher customer demand.
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 MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Fuel Cost Recovery" of Georgia Power in Item 7 of the Form 10-K for additional information.
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of Georgia Power's generation and purchased power were as follows:
|
| | | |
| | First Quarter 2018 | | First Quarter 2017 |
Total generation (in billions of KWHs) | 16 | | 14 |
Total purchased power (in billions of KWHs) | 6 | | 7 |
Sources of generation (percent) — | | | |
| Gas | 44 | | 45 |
| Coal | 29 | | 27 |
| Nuclear | 24 | | 26 |
| Hydro | 3 | | 2 |
Cost of fuel, generated (in cents per net KWH) — | | | |
| Gas | 2.72 | | 2.77 |
| Coal | 3.36 | | 3.26 |
| Nuclear | 0.82 | | 0.85 |
Average cost of fuel, generated (in cents per net KWH) | 2.43 | | 2.39 |
Average cost of purchased power (in cents per net KWH)(*) | 5.38 | | 4.47 |
| |
(*) | Average cost of purchased power includes fuel purchased by Georgia Power for tolling agreements where power is generated by the provider. |
Fuel
In the first quarter 2018, fuel expense was $412 million compared to $371 million in the corresponding period in 2017. The increase was primarily due to a 15.1% increase in the volume of KWHs generated largely due to colder weather resulting in higher customer demand.
Purchased Power – Non-Affiliates
In the first quarter 2018, purchased power expense from non-affiliates was $121 million compared to $88 million in the corresponding period in 2017. The increase was primarily due to a 24.6% increase in the volume of KWHs purchased primarily due to colder weather, resulting in higher customer demand, and a 15.8% increase in the average cost per KWH purchased primarily due to higher 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.
Purchased Power – Affiliates
In the first quarter 2018, purchased power expense from affiliates was $171 million compared to $172 million in the corresponding period in 2017. The decrease was primarily due to a 20.8% decrease in the volume of KWHs purchased due to lower availability driven by colder weather, resulting in higher customer demand, within the Southern Company system, partially offset by a 14.0% increase in the average cost per KWH purchased primarily resulting from higher natural gas prices.
Energy purchases from affiliates will vary depending on 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.
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Operations and Maintenance Expenses
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $9 | | 2.3 |
In the first quarter 2018, other operations and maintenance expenses were $408 million compared to $399 million in the corresponding period in 2017. The increase was primarily due to a $19 million decrease in gains from sales of integrated transmission system assets and a $6 million increase in demand-side management costs, partially offset by decreases of $15 million in certain compensation and benefit costs, $6 million in scheduled generation outage costs, and $5 million in customer accounts and sales costs. Also contributing to the increase were $14 million of expenses from unregulated sales of products and services that were reclassified as other operations and maintenance expenses as a result of the adoption of ASC 606. In prior periods, these expenses were included in other income (expense), net. See Note (A) to the Condensed Financial Statements herein for additional information regarding Georgia Power's adoption of ASC 606.
Taxes Other Than Income Taxes
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $10 | | 10.2 |
In the first quarter 2018, taxes other than income taxes were $108 million compared to $98 million in the corresponding period in 2017. The increase was primarily due to increases of $6 million in municipal franchise fees largely related to higher retail revenues and $4 million in property taxes as a result of an increase in the assessed value of property.
Income Taxes
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $(63) | | (40.4) |
In the first quarter 2018, income taxes were $93 million compared to $156 million in the corresponding period in 2017. The decrease was primarily due to a lower federal income tax rate as a result of the Tax Reform Legislation. See Note (H) to the Condensed Financial Statements under "Effective Tax Rate" herein for additional information.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Georgia Power's future earnings potential. The level of Georgia Power's future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Georgia Power's business of providing electric service. These factors include Georgia Power's ability to maintain a constructive regulatory environment that continues to allow for the timely recovery of prudently-incurred costs during a time of increasing costs and limited projected demand growth over the next several years. Plant Vogtle Units 3 and 4 construction and rate recovery are also major factors. Future earnings will be driven primarily by customer growth. Earnings will also depend upon maintaining and growing sales, considering, among other things, the adoption and/or penetration rates of increasingly energy-efficient technologies, increasing volumes of electronic commerce transactions, and higher multi-family home construction, all of which could contribute to a net reduction in customer usage. Earnings are subject to a variety of other factors. These factors include weather, competition, new energy contracts with other utilities, energy conservation practiced by customers, the use of alternative energy sources by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth or decline in Georgia Power's service territory. Demand for electricity is primarily
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
driven by the pace of economic growth that may be affected by changes in regional and global economic conditions, which may impact future earnings.
For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Georgia Power in Item 7 of the Form 10-K.
Environmental Matters
Georgia Power's operations are regulated by state and federal environmental agencies through a variety of laws and regulations governing air, water, land, and protection of other natural resources. Georgia Power maintains comprehensive environmental compliance and greenhouse gas (GHG) strategies to assess upcoming requirements and compliance costs associated with these environmental laws and regulations. The costs, including capital expenditures and operations and maintenance costs, required to comply with environmental laws and regulations and to achieve stated goals may impact future unit retirement and replacement decisions, results of operations, cash flows, and financial condition. Related costs may result from the installation of additional environmental controls, closure and monitoring of CCR facilities, unit retirements, and adding or changing fuel sources for certain existing units, as well as related upgrades to the transmission system. A major portion of these costs are expected to be recovered through existing ratemaking provisions. The ultimate impact of environmental laws and regulations and the GHG goals discussed below will depend on various factors, such as state adoption and implementation of requirements, the availability and cost of any deployed control technology, and the outcome of pending and/or future legal challenges.
New or revised environmental laws and regulations could affect many areas of Georgia Power's operations. The impact of any such changes cannot be determined at this time. Environmental compliance costs could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis. Georgia Power's Environmental Compliance Cost Recovery (ECCR) tariff allows for the recovery of capital and operations and maintenance costs related to environmental controls mandated by state and federal regulations. Further, increased costs that are recovered through regulated rates could contribute to reduced demand for electricity, which could negatively affect results of operations, cash flows, and financial condition. Additionally, many commercial and industrial customers may also be affected by existing and future environmental requirements, which for some may have the potential to ultimately affect their demand for electricity. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under "Environmental Matters" in Item 8 of the Form 10-K for additional information.
Environmental Laws and Regulations
Coal Combustion Residuals
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Environmental Laws and Regulations – Coal Combustion Residuals" of Georgia Power in Item 7 of the Form 10-K for additional information regarding the Disposal of Coal Combustion Residuals from Electric Utilities rule (CCR Rule).
Consistent with the EPA's announced plans to reconsider certain portions of the CCR Rule, on March 15, 2018, the EPA published the first of two proposed coal ash rules it plans to finalize by no later than December 2019. The impact of any changes to the CCR Rule will depend on the content of the final rule and the outcome of any legal challenges and cannot be determined at this time.
Global Climate Issues
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Global Climate Issues" of Georgia Power in Item 7 of the Form 10-K for additional information.
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Through 2017, the Southern Company system has achieved an estimated GHG emission reduction of 36% since 2007. In April 2018, Southern Company established an intermediate goal of a 50% reduction in carbon emissions from 2007 levels by 2030 and a long-term goal of low- to no-carbon operations by 2050. To achieve these goals, the Southern Company system expects to continue growing its renewable energy portfolio, optimize technology advancements to modernize its transmission and distribution systems, increase the use of natural gas for generation, complete construction of Plant Vogtle Units 3 and 4, invest in energy efficiency, and continue research and development efforts focused on technologies to lower GHG emissions. The Southern Company system's ability to achieve these goals also will be dependent on many external factors, including supportive national energy policies, low natural gas prices, and the development, deployment, and advancement of relevant energy technologies. The ultimate outcome of this matter cannot be determined at this time.
Retail Regulatory Matters
Georgia Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Georgia PSC. Georgia Power currently recovers its costs from the regulated retail business through the 2013 ARP, which includes traditional base tariff rates, Demand-Side Management tariffs, ECCR tariffs, and Municipal Franchise Fee tariffs. In addition, financing costs related to certified construction costs of Plant Vogtle Units 3 and 4 are being collected through the NCCR tariff and fuel costs are collected through a separate fuel cost recovery tariff. See "Nuclear Construction" herein and Note 3 to the financial statements of Georgia Power under "Retail Regulatory Matters – Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding the NCCR tariff. Also see MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Fuel Cost Recovery" of Georgia Power in Item 7 of the Form 10-K for additional information regarding fuel cost recovery.
Rate Plans
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Rate Plans" of Georgia Power in Item 7 of the Form 10-K for additional information regarding Georgia Power's 2013 ARP and the Georgia PSC's 2018 order related to the Tax Reform Legislation.
On April 3, 2018, the Georgia PSC approved the Tax Reform Settlement Agreement. Pursuant to the Tax Reform Settlement Agreement, to reflect the federal income tax rate reduction impact of the Tax Reform Legislation, Georgia Power will refund to customers a total of $330 million through bill credits of $131 million in October 2018, $96 million in June 2019, and $103 million in February 2020. In addition, Georgia Power is deferring as a regulatory liability (i) the revenue equivalent of the tax expense reduction resulting from legislation lowering the Georgia state income tax rate from 6.00% to 5.75% in 2019 and (ii) the entire benefit of approximately $700 million in federal and state excess accumulated deferred income taxes. The amortization of these regulatory liabilities is expected to be addressed in Georgia Power's next base rate case, which is scheduled to be filed by July 1, 2019. If there is not a base rate case in 2019, customers will receive $185 million in annual bill credits beginning in 2020, with any additional federal and state income tax savings deferred as a regulatory liability, until Georgia Power's next base rate case.
To address the negative cash flow and credit metric impacts of the Tax Reform Legislation, the Georgia PSC also approved an increase in Georgia Power's retail equity ratio to the lower of (i) Georgia Power's actual common equity weight in its capital structure or (ii) 55%, until Georgia Power's next base rate case. Benefits from reduced federal income tax rates in excess of the amounts refunded to customers will be retained by Georgia Power to cover the carrying costs of the incremental equity in 2018 and 2019.
Nuclear Construction
See Note 3 to the financial statements of Georgia Power under "Retail Regulatory Matters – Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding the construction of Plant Vogtle Units 3 and 4, VCM reports, and the NCCR tariff.
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Vogtle 3 and 4 Contracts
Effective in July 2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners, and the EPC Contractor entered into the Vogtle Services Agreement, whereby Westinghouse will provideprovides facility design and engineering services, procurement and technical support, and staff augmentation on a time and materials cost basis. The Vogtle Services Agreement provides that it will continue until the start-up and testing of Plant Vogtle Units 3 and 4 are complete and electricity is generated and sold from both units. The Vogtle Services Agreement is terminable by the Vogtle Owners upon 30 days' written notice.
In October 2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners, entered into a construction completion agreement withexecuted the Bechtel whereby Bechtel will serve as the primary contractor for the remaining construction activities for Plant Vogtle Units 3 and 4 (Bechtel Agreement). The Bechtel Agreement, is a cost reimbursable plus fee arrangement, whereby Bechtel is reimbursed for actual costs plus a base fee and an at-risk fee, which is subject to adjustment based on Bechtel's performance against cost and schedule targets. Each Vogtle Owner is severally (not jointly) liable for its proportionate share, based on its ownership interest, of all amounts owed to Bechtel under the Bechtel Agreement. The Vogtle Owners may terminate the Bechtel Agreement at any time for their convenience, provided that the Vogtle Owners will be required to pay
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
amounts related to work performed prior to the termination (including the applicable portion of the base fee), certain termination-related costs, and, at certain stages of the work, the applicable portion of the at-risk fee. Bechtel may terminate the Bechtel Agreement under certain circumstances, including certain Vogtle Owner suspensions of work, certain breaches of the Bechtel Agreement by the Vogtle Owners, Vogtle Owner insolvency, and certain other events. Pursuant
Cost and Schedule
Georgia Power's approximate proportionate share of the remaining estimated capital cost to complete Plant Vogtle Units 3 and 4 by the expected in-service dates of November 2021 and November 2022, respectively, is as follows:
|
| | | |
| | (in billions) |
Base project capital cost forecast(a)(b) | $ | 8.0 |
|
| Construction contingency estimate | 0.4 |
|
Total project capital cost forecast(a)(b) | 8.4 |
|
Net investment as of March 31, 2019(b) | (4.9 | ) |
Remaining estimate to complete(a) | $ | 3.5 |
|
| |
| (a) | Excludes financing costs expected to be capitalized through AFUDC of approximately $325 million. |
| |
| (b) | Net of $1.7 billion received from Toshiba under the Guarantee Settlement Agreement and approximately $188 million in related Customer Refunds. |
Georgia Power estimates that its financing costs for construction of Plant Vogtle Units 3 and 4 will total approximately $3.1 billion, of which $1.9 billion had been incurred through March 31, 2019.
In April 2019, Southern Nuclear completed a cost and schedule validation process to verify and update quantities of commodities remaining to install, labor hours to install remaining quantities and related productivity, testing and system turnover requirements, and forecasted staffing needs and related costs. This process confirmed the total estimated project capital cost forecast for Plant Vogtle Units 3 and 4. The expected in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4, as previously approved by the Georgia PSC, remain unchanged.
As construction continues, challenges with management of contractors, subcontractors, and vendors; supervision of craft labor and related craft labor productivity, ability to attract and retain craft labor, and/or related cost escalation; procurement, fabrication, delivery, assembly, and/or installation and the initial testing and start-up, including any required engineering changes, of plant systems, structures, or components (some of which are based on new technology that only recently began initial operation in the global nuclear industry at this scale), any of which may require additional labor and/or materials; or other issues could arise and change the projected schedule and estimated cost. Monthly construction production targets established as part of a strategy to maintain and build margin to the Loan Guarantee Agreement between Georgia Powerapproved in-service dates will continue to increase significantly throughout 2019. To meet these increasing monthly targets, existing craft construction productivity must improve and additional craft laborers must be retained and deployed.
There have been technical and procedural challenges to the construction and licensing of Plant Vogtle Units 3 and 4 at the federal and state level and additional challenges may arise. Processes are in place that are designed to assure compliance with the requirements specified in the Westinghouse Design Control Document and the DOE,combined construction and operating licenses, including inspections by Southern Nuclear and the NRC that occur throughout construction. As a result of such compliance processes, certain license amendment requests have been filed and approved or are pending before the NRC. Various design and other licensing-based compliance matters, including the timely resolution of ITAAC and the related approvals by the NRC, may arise, which may result in additional license amendments or require other resolution. If any license amendment requests or other licensing-based compliance issues are not resolved in a timely manner, there may be delays in the project schedule that could result in increased costs.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The ultimate outcome of these matters cannot be determined at this time. However, any extension of the regulatory-approved project schedule is currently estimated to result in additional base capital costs of approximately $50 million per month, based on Georgia Power's ownership interests, and AFUDC of approximately $12 million per month. While Georgia Power is not precluded from seeking recovery of any future capital cost forecast increase, management will ultimately determine whether or not to seek recovery. Any further changes to the capital cost forecast that are not expected to be recoverable through regulated rates will be required to obtain the DOE's approval of the Bechtel Agreement priorbe charged to obtaining any further advances under the Loan Guarantee Agreement.income and such charges could be material.
Joint Owner Contracts
In November 2017, the Vogtle Owners entered into an amendment to their joint ownership agreements for Plant Vogtle Units 3 and 4 (as amended, Vogtle Joint Ownership Agreements) to provide for, among other conditions, additional Vogtle Owner approval requirements. Pursuant toEffective in August 2018, the Vogtle Joint Ownership Agreements,Owners further amended the joint ownership agreements to clarify and provide procedures for certain provisions of the joint ownership agreements related to adverse events that require the vote of the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 must vote to continue construction if certain adverse events occur, including (i)(as amended, and together with the bankruptcy of Toshiba; (ii) termination or rejection in bankruptcy of certain agreements, including the Vogtle Services Agreement or the Bechtel Agreement; (iii) the Georgia PSC or Georgia Power determines that any of Georgia Power's costs relating to the construction of Plant Vogtle Units 3 and 4 will not be recovered in retail rates because such costs are deemed unreasonable or imprudent; or (iv) an increase in the construction budget contained in the seventeenth VCM report of more than $1 billion or extension of the project schedule contained in the seventeenth VCM report of more than one year. In addition, pursuant toNovember 2017 amendment, the Vogtle Joint Ownership Agreements, the required approval of holders of ownership interests in Plant Vogtle Units 3 and 4 is at least (i) 90% for a change of the primary construction contractor and (ii) 67% for material amendments to the Vogtle Services Agreement or agreements with Southern Nuclear or the primary construction contractor, including the Bechtel Agreement.Agreements). The Vogtle Joint Ownership Agreements also confirm that the Vogtle Owners' sole recourse against Georgia Power or Southern Nuclear for any action or inaction in connection with their performance as agent for the Vogtle Owners is limited to removal of Georgia Power and/or Southern Nuclear as agent, except in cases of willful misconduct.
As a result of the increase in the total project capital cost forecast and Georgia Power's decision not to seek rate recovery of the increase in the base capital costs in conjunction with the nineteenth VCM report, the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 were required to vote to continue construction. In September 2018, the Vogtle Owners unanimously voted to continue construction of Plant Vogtle Units 3 and 4.
Amendments to the Vogtle Joint Ownership Agreements
In connection with the vote to continue construction, Georgia Power entered into (i) the Vogtle Owner Term Sheet with the other Vogtle Owners and MEAG's wholly-owned subsidiaries MEAG SPVJ, MEAG Power SPVM, LLC (MEAG SPVM), and MEAG Power SPVP, LLC (MEAG SPVP) to take certain actions which partially mitigate potential financial exposure for the other Vogtle Owners, including additional amendments to the Vogtle Joint Ownership Agreements and the purchase of PTCs from the other Vogtle Owners at pre-established prices, and (ii) the MEAG Term Sheet with MEAG and MEAG SPVJ to provide funding with respect to MEAG SPVJ's ownership interest in Plant Vogtle Units 3 and 4 under certain circumstances. On January 14, 2019, Georgia Power, MEAG, and MEAG SPVJ entered into an agreement to implement the provisions of the MEAG Term Sheet. On February 18, 2019, Georgia Power, the other Vogtle Owners, and MEAG's wholly-owned subsidiaries MEAG SPVJ, MEAG SPVM, and MEAG SPVP entered into certain amendments to the Vogtle Joint Ownership Agreements to implement the provisions of the Vogtle Owner Term Sheet.
The ultimate outcome of these matters cannot be determined at this time.
Regulatory Matters
In 2009, the Georgia PSC voted to certify construction of Plant Vogtle Units 3 and 4 with a certified capital cost of $4.418 billion. In addition, in 2009 the Georgia PSC approved inclusion of the Plant Vogtle Units 3 and 4 related CWIP accounts in rate base, and the State of Georgia enacted the Georgia Nuclear Energy Financing Act, which allows Georgia Power to recover financing costs for Plant Vogtle Units 3 and 4. Financing costs are recovered on all applicable certified costs through annual adjustments to the NCCR tariff up to the certified capital cost of $4.418 billion. At March 31, 2019, Georgia Power had recovered approximately $1.9 billion of financing costs. Financing costs related to capital costs above $4.418 billion will be recovered through AFUDC; however, Georgia Power will not record AFUDC related to any capital costs in excess of the total deemed reasonable by the Georgia PSC (currently $7.3 billion) and not requested for rate recovery. In December 2018, the Georgia PSC approved Georgia Power's request to increase the NCCR tariff by $88 million annually, effective January 1, 2019.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Georgia Power is required to file semi-annual VCM reports with the Georgia PSC by February 28 and August 31 of each year. In 2013, in connection with the eighth VCM report, the Georgia PSC approved a stipulation between Georgia Power and the staff of the Georgia PSC to waive the requirement to amend the Plant Vogtle Units 3 and 4 certificate in accordance with the 2009 certification order until the completion of Plant Vogtle Unit 3, or earlier if deemed appropriate by the Georgia PSC and Georgia Power.
In 2016, the Georgia PSC voted to approve a settlement agreement (Vogtle Cost Settlement Agreement) resolving certain prudency matters in connection with the fifteenth VCM report. In December 2017, the Georgia PSC voted to approve (and issued its related order on January 11, 2018) Georgia Power's seventeenth VCM report and modified the Vogtle Cost Settlement Agreement. The Vogtle Cost Settlement Agreement, as modified by the January 11, 2018 order, resolved the following regulatory matters related to Plant Vogtle Units 3 and 4: (i) none of the $3.3 billion of costs incurred through December 31, 2015 and reflected in the fourteenth VCM report should be disallowed from rate base on the basis of imprudence; (ii) the Contractor Settlement Agreement was reasonable and prudent and none of the amounts paid pursuant to the Contractor Settlement Agreement should be disallowed from rate base on the basis of imprudence; (iii) (a) capital costs incurred up to $5.68 billion would be presumed to be reasonable and prudent with the burden of proof on any party challenging such costs, (b) Georgia Power would have the burden to show that any capital costs above $5.68 billion were prudent, and (c) a revised capital cost forecast of $7.3 billion (after reflecting the impact of payments received under the Guarantee Settlement Agreement and related Customer Refunds) was found reasonable; (iv) construction of Plant Vogtle Units 3 and 4 should be completed, with Southern Nuclear serving as project manager and Bechtel as primary contractor; (v) approved and deemed reasonable Georgia Power's revised schedule placing Plant Vogtle Units 3 and 4 in service in November 2021 and November 2022, respectively; (vi) confirmed that the revised cost forecast does not represent a cost cap and that prudence decisions on cost recovery will be made at a later date, consistent with applicable Georgia law; (vii) reduced the ROE used to calculate the NCCR tariff (a) from 10.95% (the ROE rate setting point authorized by the Georgia PSC in the 2013 ARP) to 10.00% effective January 1, 2016, (b) from 10.00% to 8.30%, effective January 1, 2020, and (c) from 8.30% to 5.30%, effective January 1, 2021 (provided that the ROE in no case will be less than Georgia Power's average cost of long-term debt); (viii) reduced the ROE used for AFUDC equity for Plant Vogtle Units 3 and 4 from 10.00% to Georgia Power's average cost of long-term debt, effective January 1, 2018; and (ix) agreed that upon Unit 3 reaching commercial operation, retail base rates would be adjusted to include carrying costs on those capital costs deemed prudent in the Vogtle Cost Settlement Agreement. The January 11, 2018 order also stated that if Plant Vogtle Units 3 and 4 are not commercially operational by June 1, 2021 and June 1, 2022, respectively, the ROE used to calculate the NCCR tariff will be further reduced by 10 basis points each month (but not lower than Georgia Power's average cost of long-term debt) until the respective Unit is commercially operational. The ROE reductions negatively impacted earnings by approximately $100 million in 2018 and are estimated to have negative earnings impacts of approximately $75 million in 2019 and an aggregate of approximately $635 million from 2020 to 2022.
In its January 11, 2018 order, the Georgia PSC also stated if other conditions change and assumptions upon which Georgia Power's seventeenth VCM report are based do not materialize, the Georgia PSC reserved the right to reconsider the decision to continue construction.
In February 2018, Georgia Interfaith Power & Light, Inc. (GIPL) and Partnership for Southern Equity, Inc. (PSE) filed a petition appealing the Georgia PSC's January 11, 2018 order with the Fulton County Superior Court. In March 2018, Georgia Watch filed a similar appeal to the Fulton County Superior Court for judicial review of the Georgia PSC's decision and denial of Georgia Watch's motion for reconsideration. In December 2018, the Fulton County Superior Court granted Georgia Power's motion to dismiss the two appeals. On January 9, 2019, GIPL, PSE, and Georgia Watch filed an appeal of this decision with the Georgia Court of Appeals. Georgia Power believes the appeal has no merit; however, an adverse outcome in the appeal combined with subsequent adverse action by the Georgia PSC could have a material impact on Southern Company's results of operations, financial condition, and liquidity.
In August 2018, Georgia Power filed its nineteenth VCM report with the Georgia PSC, which requested approval of $578 million of construction capital costs incurred from January 1, 2018 through June 30, 2018. On February 19, 2019, the Georgia PSC approved the nineteenth VCM, but deferred approval of $51.6 million of expenditures
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
related to Georgia Power's portion of an administrative claim filed in the Westinghouse bankruptcy proceedings. Through the nineteenth VCM, the Georgia PSC has approved total construction capital costs incurred through June 30, 2018 of $5.4 billion (before $1.7 billion of payments received under the Guarantee Settlement Agreement and approximately $188 million in related Customer Refunds). In addition, the staff of the Georgia PSC requested, and Georgia Power agreed, to report the results of the cost and schedule validation process to the Georgia PSC (which is expected to occur by May 1, 2019) and to file its twentieth VCM report concurrently with the twenty-first VCM report by August 31, 2019.
The ultimate outcome of these matters cannot be determined at this time.
See RISK FACTORS of Southern Company in the Form 10-K for a discussion of certain risks associated with the licensing, construction, and operation of nuclear generating units, including potential impacts that could result from a major incident at a nuclear facility anywhere in the world.
DOE Financing
At March 31, 2019, Georgia Power had borrowed $3.46 billion related to Plant Vogtle Units 3 and 4 costs as provided through the Amended and Restated Loan Guarantee Agreement and related multi-advance credit facilities among Georgia Power, the DOE, and the FFB, which provide for borrowings of up to approximately $5.130 billion, subject to the satisfaction of certain conditions. See Note 8 to the financial statements under "Long-term Debt – DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under "DOE Loan Guarantee Borrowings" herein for additional information, including applicable covenants, events of default, mandatory prepayment events, and conditions to borrowing.
The ultimate outcome of these matters cannot be determined at this time.
Other Matters
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Other Matters" of Southern Company in Item 7 for additional information.
Southern Company and its subsidiaries are involved in various other matters that could affect future earnings, including matters being litigated, as well as other regulatory matters and matters that could result in asset impairments. In addition, Southern Company and its subsidiaries are subject to certain claims and legal actions arising in the ordinary course of business. The business activities of Southern Company's subsidiaries are subject to extensive governmental regulation related to public health and the environment, such as laws and regulations governing air, water, land, and protection of other natural resources. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental laws and regulations, has occurred throughout the U.S. This litigation has included claims for damages alleged to have been caused by CO2 and other emissions, CCR, and alleged exposure to hazardous materials, and/or requests for injunctive relief in connection with such matters.
The ultimate outcome of such pending or potential litigation, regulatory matters, or potential asset impairments cannot be predicted at this time; however, for current proceedings not specifically reported 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 would have a material effect on Southern Company's financial statements. See Notes (B) and (C) to the Condensed Financial Statements herein for a discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
Litigation
In January 2017, a putative securities class action complaint was filed against Southern Company, certain of its officers, and certain former Mississippi Power officers in the U.S. District Court for the Northern District of Georgia by Monroe County Employees' Retirement System on behalf of all persons who purchased shares of Southern Company's common stock between April 25, 2012 and October 29, 2013. The complaint alleges that Southern Company, certain of its officers, and certain former Mississippi Power officers made materially false and
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
misleading statements regarding the Kemper County energy facility in violation of certain provisions under the Securities Exchange Act of 1934, as amended. The complaint seeks, among other things, compensatory damages and litigation costs and attorneys' fees. In 2017, the plaintiffs filed an amended complaint that provided additional detail about their claims, increased the purported class period by one day, and added certain other former Mississippi Power officers as defendants. Also in 2017, the defendants filed a motion to dismiss the plaintiffs' amended complaint with prejudice, to which the plaintiffs filed an opposition. In March 2018, the court issued an order granting, in part, the defendants' motion to dismiss. The court dismissed certain claims against certain officers of Southern Company and Mississippi Power and dismissed the allegations related to a number of the statements that plaintiffs challenged as being false or misleading. In April 2018, the defendants filed a motion for reconsideration of the court's order, seeking dismissal of the remaining claims in the lawsuit. In August 2018, the court denied the motion for reconsideration and denied a motion to certify the issue for interlocutory appeal.
In February 2017, Jean Vineyard and Judy Mesirov each filed a shareholder derivative lawsuit in the U.S. District Court for the Northern District of Georgia. Each of these lawsuits names as defendants Southern Company, certain of its directors, certain of its officers, and certain former Mississippi Power officers. In 2017, these two shareholder derivative lawsuits were consolidated in the U.S. District Court for the Northern District of Georgia. The complaints allege that the defendants caused Southern Company to make false or misleading statements regarding the Kemper County energy facility cost and schedule. Further, the complaints allege that the defendants were unjustly enriched and caused the waste of corporate assets and also allege that the individual defendants violated their fiduciary duties. Each plaintiff seeks to recover, on behalf of Southern Company, unspecified actual damages and, on each plaintiff's own behalf, attorneys' fees and costs in bringing the lawsuit. Each plaintiff also seeks certain changes to Southern Company's corporate governance and internal processes. In April 2018, the court entered an order staying this lawsuit until 30 days after the resolution of any dispositive motions or any settlement, whichever is earlier, in the putative securities class action.
In May 2017, Helen E. Piper Survivor's Trust filed a shareholder derivative lawsuit in the Superior Court of Gwinnett County, Georgia that names as defendants Southern Company, certain of its directors, certain of its officers, and certain former Mississippi Power officers. The complaint alleges that the individual defendants, among other things, breached their fiduciary duties in connection with schedule delays and cost overruns associated with the construction of the Kemper County energy facility. The complaint further alleges that the individual defendants authorized or failed to correct false and misleading statements regarding the Kemper County energy facility schedule and cost and failed to implement necessary internal controls to prevent harm to Southern Company. The plaintiff seeks to recover, on behalf of Southern Company, unspecified actual damages and disgorgement of profits and, on its behalf, attorneys' fees and costs in bringing the lawsuit. The plaintiff also seeks certain unspecified changes to Southern Company's corporate governance and internal processes. In May 2018, the court entered an order staying this lawsuit until 30 days after the resolution of any dispositive motions or any settlement, whichever is earlier, in the putative securities class action.
In May 2018, Southern Company and Mississippi Power received a notice of dispute and arbitration demand filed by Martin Product Sales, LLC (Martin) based on two agreements, both related to Kemper IGCC byproducts for which Mississippi Power provided termination notices in 2017. Martin alleges breach of contract, breach of good faith and fair dealing, fraud and misrepresentation, and civil conspiracy and makes a claim for damages in the amount of approximately $143 million, as well as additional unspecified damages, attorney's fees, costs, and interest. In the first quarter 2019, Mississippi Power and Southern Company filed motions to dismiss.
Southern Company believes these legal challenges have no merit; however, an adverse outcome in any of these proceedings could have an impact on Southern Company's results of operations, financial condition, and liquidity. The ultimate outcome of these matters cannot be determined at this time.
Mississippi Power
In conjunction with Southern Company's sale of Gulf Power, Mississippi Power and Gulf Power have committed to seek a restructuring of their 50% undivided ownership interests in Plant Daniel such that each of them would, after the restructuring, own 100% of a generating unit. On January 15, 2019, Gulf Power provided notice to Mississippi
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Power that Gulf Power will retire its share of the generating capacity of Plant Daniel on January 15, 2024. Mississippi Power has the option to purchase Gulf Power's ownership interest for $1 on January 15, 2024, provided that Mississippi Power exercises the option no later than 120 days prior to that date. Mississippi Power is assessing the potential operational and economic effects of Gulf Power's notice. The ultimate outcome of these matters remains subject to completion of Mississippi Power's evaluations and applicable regulatory approvals, including by the FERC and the Mississippi PSC, and cannot be determined at this time. See Note (K) to the Condensed Financial Statements under "Southern Company" herein for information regarding the sale of Gulf Power.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Southern Company prepares its consolidated financial statements in accordance with GAAP. Significant accounting policies are described in Notes 1, 5, and 6 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 Southern Company's results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of Southern Company in Item 7 of the Form 10-K for a complete discussion of Southern Company's critical accounting policies and estimates.
Recently Issued Accounting Standards
See Note (A) to the Condensed Financial Statements herein for information regarding Southern Company's recently adopted accounting standards.
FINANCIAL CONDITION AND LIQUIDITY
Overview
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Southern Company in Item 7 of the Form 10-K for additional information. Southern Company's financial condition remained stable at March 31, 2019. Southern Company intends to continue to monitor its access to short-term and long-term capital markets as well as bank credit agreements to meet future capital and liquidity needs. See "Capital Requirements and Contractual Obligations," "Sources of Capital," and "Financing Activities" herein for additional information.
Net cash provided from operating activities totaled $0.7 billion for the first three months of 2019, a decrease of $0.8 billion from the corresponding period in 2018. The decrease in net cash provided from operating activities was primarily due to the timing of vendor payments and the impacts of the Gulf Power disposition and the Southern Company Gas Dispositions. Net cash provided from investing activities totaled $2.5 billion for the first three months of 2019 primarily due to proceeds from the sale of Gulf Power, partially offset by the traditional electric operating companies' installation of equipment to comply with environmental standards and construction of electric generation, transmission, and distribution facilities and capital expenditures for Southern Company Gas' infrastructure replacement programs. Net cash used for financing activities totaled $3.4 billion for the first three months of 2019 primarily due to repayments of short-term bank debt, net redemptions and repurchases of long-term debt, and common stock dividend payments. Cash flows from financing activities vary from period to period based on capital needs and the maturity or redemption of securities. See Notes (F) and (K) to the Condensed Financial Statements herein for additional information.
Significant balance sheet changes for the first three months of 2019 include decreases in assets and liabilities held for sale of $4.9 billion and $3.2 billion, respectively, primarily related to the sale of Gulf Power; the recording of $1.9 billion in operating lease right-of-use assets, net of amortization and operating lease obligations related to the adoption of FASB ASC Topic 842, Leases; a decrease of $1.7 billion in notes payable related to the repayment of short-term bank debt; an increase of $1.6 billion in total stockholders' equity primarily related to the gain on the sale
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of Gulf Power; an increase of $1.4 billion in accumulated deferred income taxes primarily related to the expected utilization of tax credit carryforwards in the 2019 tax year as a result of increased taxable income from the sale of Gulf Power; a decrease of $1.2 billion in long-term debt (including amounts due within one year) resulting from net repayments of long-term debt; and an increase of $0.8 billion in total property, plant, and equipment primarily related to the traditional electric operating companies' installation of equipment to comply with environmental standards and construction of electric generation, transmission, and distribution facilities. See Notes (F), (K), and (L) to the Condensed Financial Statements herein for additional information.
At the end of the first quarter 2019, the market price of Southern Company's common stock was $51.68 per share (based on the closing price as reported on the New York Stock Exchange) and the book value was $25.41 per share, representing a market-to-book ratio of 203%, compared to $43.92, $23.91, and 184%, respectively, at the end of 2018. Southern Company's common stock dividend for the first quarter 2019 was $0.60 per share compared to $0.58 per share in the first quarter 2018.
Capital Requirements and Contractual Obligations
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Southern Company in Item 7 of the Form 10-K for a description of Southern Company's capital requirements and contractual obligations. Approximately $2.3 billion will be required through March 31, 2020 to fund maturities of long-term debt. See "Sources of Capital" herein 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 sources at existing electric generating units, to meet regulatory requirements; changes in FERC rules and regulations; state regulatory agency approvals; changes in the expected environmental compliance program; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; storm impacts; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered. Additionally, planned expenditures for plant acquisitions may vary due to market opportunities and Southern Power's ability to execute its growth strategy. See Note 15 to the financial statements under "Southern Power" in Item 8 of the Form 10-K and Note (K) to the Condensed Financial Statements under "Southern Power" herein for additional information regarding Southern Power's plant acquisitions and construction projects.
The construction program also includes Plant Vogtle Units 3 and 4, which includes components based on new technology that only recently began initial operation in the global nuclear industry at this scale and which may be subject to additional revised cost estimates during construction. The ability to control costs and avoid cost and schedule overruns during the development, construction, and operation of new facilities is subject to a number of factors, including, but not limited to, changes in labor costs, availability, and productivity; challenges with management of contractors, subcontractors, or vendors; adverse weather conditions; shortages, increased costs, or inconsistent quality of equipment, materials, and labor; contractor or supplier delay; non-performance under construction, operating, or other agreements; operational readiness, including specialized operator training and required site safety programs; engineering or design problems; design and other licensing-based compliance matters, including the timely resolution of ITAAC and the related approvals by the NRC; challenges with start-up activities, including major equipment failure and system integration; and/or operational performance. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Georgia Power – Nuclear Construction" herein for information regarding Plant Vogtle Units 3 and 4 and additional factors that may impact construction expenditures.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Sources of Capital
Southern Company intends to meet its future capital needs through operating cash flows, borrowings from financial institutions, and debt and equity issuances in the capital markets. Equity capital can be provided from any combination of Southern Company's stock plans, private placements, or public offerings. The amount and timing of additional equity and debt issuances in 2019, as well as in subsequent years, will be contingent on Southern Company's investment opportunities and the Southern Company system's capital requirements and will depend upon prevailing market conditions and other factors. See "Capital Requirements and Contractual Obligations" herein for additional information.
Except as described herein, the traditional electric operating companies, Southern Power, and Southern Company Gas plan to obtain the funds required for construction and other purposes from operating cash flows, external security issuances, borrowings from financial institutions, and equity contributions or loans from Southern Company. Southern Power also plans to utilize tax equity partnership contributions, as well as funds resulting from its pending asset sales. However, the amount, type, and timing of any future financings, if needed, will depend upon prevailing market conditions, regulatory approval, and other factors. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" of Southern Company in Item 7 of the Form 10-K for additional information. Also see Note (K) to the Condensed Financial Statements under "Southern Power" herein for additional information regarding the pending sales of Plants Mankato and Nacogdoches.
In addition, in 2014, Georgia Power entered into a loan guarantee agreement with the DOE and, in March 2019, entered into the Amended and Restated Loan Guarantee Agreement, under which the proceeds of borrowings may be used to reimburse Georgia Power for Eligible Project Costs incurred in connection with its construction of Plant Vogtle Units 3 and 4.
Under the Amended and Restated Loan Guarantee Agreement, the DOE has agreed to guarantee the obligations of Georgia Power under note purchase agreements among the DOE, Georgia Power, and the FFB and related promissory notes which provide for two multi-advance term loan facilities (FFB Credit Facilities). Under the FFB Credit Facilities, Georgia Power may make term loan borrowings through the FFB in an amount up to approximately $5.130 billion, provided that total aggregate borrowings under the FFB Credit Facilities may not exceed 70% of (i) Eligible Project Costs minus (ii) approximately $1.492 billion (reflecting the amounts received by Georgia Power under the Guarantee Settlement Agreement less the Customer Refunds). At March 31, 2019, Georgia Power had borrowed $3.46 billion under the FFB Credit Facilities.
See Note (F) to the Condensed Financial Statements under "DOE Loan Guarantee Borrowings" herein for additional information regarding the Amended and Restated Loan Guarantee Agreement, including applicable covenants, events of default, mandatory prepayment events, and additional conditions to borrowing. Also see Note (B) to the Condensed Financial Statements under "Georgia Power – Nuclear Construction" herein for additional information regarding Plant Vogtle Units 3 and 4.
Southern Company's current liabilities frequently exceed current assets because of scheduled maturities of long-term debt and the periodic use of short-term debt as a funding source, as well as significant seasonal fluctuations in cash needs. As of March 31, 2019, Southern Company's current liabilities exceeded current assets by $1.2 billion, primarily due to long-term debt that is due within one year of $2.3 billion (including approximately $1.0 billion at Georgia Power, $0.3 billion at Mississippi Power, $0.6 billion at Southern Power, and $0.4 billion at Southern Company Gas) and notes payable of $1.3 billion (including approximately $0.5 billion at the parent company, $0.3 billion at Georgia Power, $0.1 billion at Southern Power, and $0.4 billion at Southern Company Gas), partially offset by $1.4 billion of cash and cash equivalents. To meet short-term cash needs and contingencies, the Southern Company system has substantial cash flow from operating activities and access to capital markets and financial institutions. Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas intend to utilize operating cash flows, as well as commercial paper, lines of credit, bank notes, and securities issuances, as market conditions permit, as well as, under certain circumstances for the traditional electric
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
operating companies, Southern Power, and Southern Company Gas, equity contributions and/or loans from Southern Company to meet their short-term capital needs.
At March 31, 2019, Southern Company and its subsidiaries had approximately $1.4 billion of cash and cash equivalents. Committed credit arrangements with banks at March 31, 2019 were as follows:
|
| | | | | | | | | | | | | | | | | |
| | Expires | | |
| Company | 2019 | 2020 | 2022 | | Total | | Unused(d) |
| | (in millions) |
Southern Company(a) | $ | — |
| $ | — |
| $ | 2,000 |
| | $ | 2,000 |
| | $ | 1,999 |
|
| Alabama Power | 33 |
| 500 |
| 800 |
| | 1,333 |
| | 1,333 |
|
| Georgia Power | — |
| — |
| 1,750 |
| | 1,750 |
| | 1,736 |
|
| Mississippi Power | 100 |
| — |
| — |
| | 100 |
| | 100 |
|
Southern Power(b) | — |
| — |
| 750 |
| | 750 |
| | 741 |
|
Southern Company Gas(c) | — |
| — |
| 1,900 |
| | 1,900 |
| | 1,895 |
|
| Other | 30 |
| — |
| — |
| | 30 |
| | 30 |
|
| Southern Company Consolidated | $ | 163 |
| $ | 500 |
| $ | 7,200 |
| | $ | 7,863 |
| | $ | 7,834 |
|
| |
| (a) | Represents the Southern Company parent entity. |
| |
| (b) | Does not include Southern Power Company's $120 million continuing letter of credit facility for standby letters of credit expiring in 2021, of which $24 million was unused at March 31, 2019. Southern Power's subsidiaries are not parties to its bank credit arrangement. |
| |
| (c) | Southern Company Gas, as the parent entity, guarantees the obligations of Southern Company Gas Capital, which is the borrower of $1.4 billion of this arrangement. Southern Company Gas' committed credit arrangement also includes $500 million for which Nicor Gas is the borrower and which is restricted for working capital needs of Nicor Gas. Pursuant to this multi-year credit arrangement, the allocations between Southern Company Gas Capital and Nicor Gas may be adjusted. |
| |
| (d) | Amounts used are for letters of credit. |
See Note 8 to the financial statements under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.
Most of these bank credit arrangements, as well as the term loan arrangements of Alabama Power, Southern Power Company, and SEGCO, contain covenants that limit debt levels and contain cross-acceleration or cross-default provisions to other indebtedness (including guarantee obligations) that are restricted only to the indebtedness of the individual company. Such cross-default provisions to other indebtedness would trigger an event of default if the applicable borrower defaulted on indebtedness or guarantee obligations over a specified threshold. Such cross-acceleration provisions to other indebtedness would trigger an event of default if the applicable borrower defaulted on indebtedness, the payment of which was then accelerated. At March 31, 2019, Southern Company, the traditional electric operating companies, Southern Power Company, Southern Company Gas, Nicor Gas, and SEGCO were in compliance with all such covenants. None of the bank credit arrangements contain material adverse change clauses at the time of borrowings.
Subject to applicable market conditions, Southern Company and its subsidiaries expect to renew or replace their bank credit arrangements as needed, prior to expiration. In connection therewith, Southern Company and its subsidiaries may extend the maturity dates and/or increase or decrease the lending commitments thereunder.
A portion of the unused credit with banks is allocated to provide liquidity support to the revenue bonds of the traditional electric operating companies and the commercial paper programs of Southern Company, the traditional electric operating companies, Southern Power Company, Southern Company Gas, Nicor Gas, and SEGCO. The amount of variable rate revenue bonds of the traditional electric operating companies outstanding requiring liquidity support as of March 31, 2019 was approximately $1.4 billion. In addition, at March 31, 2019, the traditional electric operating companies had approximately $432 million of revenue bonds outstanding that are required to be remarketed within the next 12 months. Subsequent to March 31, 2019, Georgia Power purchased and held approximately $115 million of outstanding pollution control revenue bonds required to be remarketed.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Southern Company, Alabama Power, Georgia Power, Southern Power Company, Southern Company Gas, 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. Short-term borrowings are included in notes payable in the balance sheets.
Details of short-term borrowings were as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | Short-term Debt at March 31, 2019 | | 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) |
| Commercial paper | | $ | 1,151 |
| | 2.9 | % | | $ | 1,248 |
| | 2.9 | % | | $ | 2,293 |
|
| Short-term bank debt | | 100 |
| | 3.1 | % | | 208 |
| | 3.2 | % | | 1,850 |
|
| Total | | $ | 1,251 |
| | 2.9 | % | | $ | 1,456 |
| | 2.9 | % | | |
| |
| (*) | Average and maximum amounts are based upon daily balances during the three-month period ended March 31, 2019. |
Southern Company believes the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, bank term loans, and operating cash flows.
Credit Rating Risk
At March 31, 2019, Southern Company and its subsidiaries 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 subsidiaries to BBB and/or Baa2 or below. These contracts are for physical electricity and natural gas purchases and sales, fuel purchases, fuel transportation and storage, energy price risk management, transmission, interest rate management, and construction of new generation at Plant Vogtle Units 3 and 4.
The maximum potential collateral requirements under these contracts at March 31, 2019 were as follows:
|
| | | |
| Credit Ratings | Maximum Potential
Collateral
Requirements |
| | (in millions) |
| At BBB and/or Baa2 | $ | 30 |
|
| At BBB- and/or Baa3 | $ | 433 |
|
At BB+ and/or Ba1(*) | $ | 1,988 |
|
| |
| (*) | Any additional credit rating downgrades at or below BB- and/or Ba3 could increase collateral requirements up to an additional $38 million. |
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 Southern Company and its subsidiaries to access capital markets, and would be likely to impact the cost at which they do so.
As a result of the Tax Reform Legislation, certain financial metrics, such as the funds from operations to debt percentage, used by the credit rating agencies to assess Southern Company and its subsidiaries may be negatively impacted. Southern Company and most of its regulated subsidiaries have taken actions to mitigate the resulting impacts, which, among other alternatives, include adjusting capital structure. Absent actions by Southern Company and its subsidiaries that fully mitigate the impacts, the credit ratings of Southern Company and certain of its subsidiaries could be negatively affected. See Note 2 to the financial statements in Item 8 of the Form 10-K for
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
additional information related to state PSC or other regulatory agency actions related to the Tax Reform Legislation, including approvals of capital structure adjustments for Alabama Power, Georgia Power, and Atlanta Gas Light by their respective state PSCs and a similar request by Nicor Gas currently pending Illinois Commission approval, which are expected to help mitigate the potential adverse impacts to certain of their credit metrics.
Financing Activities
During the first three months of 2019, Southern Company issued approximately 6.5 million shares of common stock primarily through employee equity compensation plans and received proceeds of approximately $224 million.
The following table outlines the long-term debt financing activities for Southern Company and its subsidiaries for the first three months of 2019:
|
| | | | | | | | | | | | | | | | | | | |
| Company | Senior Note Maturities, Redemptions, and Repurchases | | Revenue Bond Issuances and Reofferings of Purchased Bonds | | Revenue Bond Maturities, Redemptions, and Repurchases | | Other Long-Term Debt Issuances | | Other Long-Term Debt Redemptions and Maturities(a) |
| | (in millions) |
Southern Company(b) | $ | 2,100 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Alabama Power | 200 |
| | — |
| | — |
| | — |
| | — |
|
| Georgia Power | — |
| | 343 |
| | 108 |
| | 835 |
| | 2 |
|
| Mississippi Power | — |
| | 43 |
| | — |
| | — |
| | — |
|
| Other | — |
| | — |
| | — |
| | — |
| | 19 |
|
| Southern Company Consolidated | $ | 2,300 |
| | $ | 386 |
| | $ | 108 |
| | $ | 835 |
| | $ | 21 |
|
| |
| (a) | Includes reductions in finance lease obligations resulting from cash payments under finance leases. |
| |
| (b) | Represents the Southern Company parent entity. |
Except as otherwise described herein, Southern Company and its subsidiaries 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 subsidiaries also used the proceeds for their construction programs.
In January 2019, Southern Company repaid a $250 million short-term uncommitted bank credit arrangement and a $1.5 billion short-term floating rate bank loan.
Also in January 2019, through cash tender offers, Southern Company repurchased and retired approximately $522 million of the $1.0 billion aggregate principal amount outstanding of its 1.85% Senior Notes due July 1, 2019 (1.85% Notes), approximately $180 million of the $350 million aggregate principal amount outstanding of its Series 2014B 2.15% Senior Notes due September 1, 2019 (Series 2014B Notes), and approximately $504 million of the $750 million aggregate principal amount outstanding of its Series 2018A Floating Rate Notes due February 14, 2020 (Series 2018A Notes), for an aggregate purchase price, excluding accrued and unpaid interest, of approximately $1.2 billion. In addition, following the completion of the cash tender offers, in February 2019, Southern Company completed the redemption of all of the Series 2018A Notes, 1.85% Notes, and Series 2014B Notes remaining outstanding.
As reflected in the table above, in March 2019, Georgia Power made additional borrowings under the FFB Credit Facilities in an aggregate principal amount of $835 million at an interest rate of 3.213% through the final maturity date of February 20, 2044. The proceeds were used to reimburse Georgia Power for Eligible Project Costs relating to the construction of Plant Vogtle Units 3 and 4.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Subsequent to March 31, 2019, Georgia Power purchased and held the following pollution control revenue bonds, which may be reoffered to the public at a later date:
$55 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Fourth Series 1994;
$30 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Fourth Series 1995;
$20 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Ninth Series 1994; and
$10 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Second Series 1994.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Southern Company and its subsidiaries 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.
PART I
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
During the three months ended March 31, 2019, there were no material changes to Southern Company's, Alabama Power's, Georgia Power's, Mississippi Power's, and Southern Power's disclosures about market risk. For additional market risk disclosures relating to Southern Company Gas, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" of Southern Company Gas herein. For an in-depth discussion of each registrant's market risks, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" of each registrant in Item 7 of the Form 10-K and Note 1 to the financial statements under "Financial Instruments" and Notes 13 and 14 to the financial statements in Item 8 of the Form 10-K. Also see Notes (I) and (J) to the Condensed Financial Statements herein for information relating to derivative instruments.
Item 4. Controls and Procedures.
| |
| (a) | Evaluation of disclosure controls and procedures. |
As of the end of the period covered by this Quarterly Report on Form 10-Q, Southern Company, Alabama Power, Georgia Power, Mississippi Power, Southern Power, and Southern Company Gas conducted separate evaluations under the supervision and with the participation of each company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based upon these evaluations, the Chief Executive Officer and the Chief Financial Officer, in each case, concluded that the disclosure controls and procedures are effective.
| |
| (b) | Changes in internal controls over financial reporting. |
There have been no changes in Southern Company's, Alabama Power's, Georgia Power's, Mississippi Power's, Southern Power's, or Southern Company Gas' internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the first quarter 2019 that have materially affected or are reasonably likely to materially affect Southern Company's, Alabama Power's, Georgia Power's, Mississippi Power's, Southern Power's, or Southern Company Gas' internal control over financial reporting.
ALABAMA POWER COMPANY
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2019 | | 2018 |
| | (in millions) |
| Operating Revenues: | | | |
| Retail revenues | $ | 1,213 |
| | $ | 1,285 |
|
| Wholesale revenues, non-affiliates | 61 |
| | 74 |
|
| Wholesale revenues, affiliates | 60 |
| | 51 |
|
| Other revenues | 74 |
| | 63 |
|
| Total operating revenues | 1,408 |
| | 1,473 |
|
| Operating Expenses: | | | |
| Fuel | 301 |
| | 326 |
|
| Purchased power, non-affiliates | 37 |
| | 64 |
|
| Purchased power, affiliates | 21 |
| | 37 |
|
| Other operations and maintenance | 409 |
| | 387 |
|
| Depreciation and amortization | 199 |
| | 189 |
|
| Taxes other than income taxes | 103 |
| | 98 |
|
| Total operating expenses | 1,070 |
| | 1,101 |
|
| Operating Income | 338 |
| | 372 |
|
| Other Income and (Expense): | | | |
| Allowance for equity funds used during construction | 14 |
| | 13 |
|
| Interest expense, net of amounts capitalized | (83 | ) | | (79 | ) |
| Other income (expense), net | 14 |
| | 5 |
|
| Total other income and (expense) | (55 | ) | | (61 | ) |
| Earnings Before Income Taxes | 283 |
| | 311 |
|
| Income taxes | 62 |
| | 82 |
|
| Net Income | 221 |
| | 229 |
|
| Dividends on Preferred Stock | 4 |
| | 4 |
|
| Net Income After Dividends on Preferred Stock | $ | 217 |
| | $ | 225 |
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2019 | | 2018 |
| | (in millions) |
| Net Income | $ | 221 |
| | $ | 229 |
|
| Other comprehensive income (loss): | | | |
| Qualifying hedges: | | | |
Reclassification adjustment for amounts included in net income,
net of tax of $- and $1, respectively | 1 |
| | 1 |
|
| Total other comprehensive income (loss) | 1 |
| | 1 |
|
| Comprehensive Income | $ | 222 |
| | $ | 230 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2019 | | 2018 |
| | (in millions) |
| Operating Activities: | | | |
| Net income | $ | 221 |
| | $ | 229 |
|
| Adjustments to reconcile net income to net cash provided from operating activities — | | | |
| Depreciation and amortization, total | 244 |
| | 228 |
|
| Deferred income taxes | — |
| | 32 |
|
| Other, net | (24 | ) | | (21 | ) |
| Changes in certain current assets and liabilities — | | | |
| -Receivables | 105 |
| | (1 | ) |
| -Prepayments | (78 | ) | | (82 | ) |
| -Materials and supplies | (4 | ) | | (27 | ) |
| -Other current assets | 19 |
| | 19 |
|
| -Accounts payable | (286 | ) | | (216 | ) |
| -Accrued taxes | 80 |
| | 57 |
|
| -Accrued compensation | (122 | ) | | (108 | ) |
| -Other current liabilities | (9 | ) | | 45 |
|
| Net cash provided from operating activities | 146 |
| | 155 |
|
| Investing Activities: | | | |
| Property additions | (390 | ) | | (490 | ) |
| Nuclear decommissioning trust fund purchases | (68 | ) | | (50 | ) |
| Nuclear decommissioning trust fund sales | 68 |
| | 51 |
|
| Cost of removal, net of salvage | (16 | ) | | (19 | ) |
| Change in construction payables | (95 | ) | | (50 | ) |
| Other investing activities | (10 | ) | | (6 | ) |
| Net cash used for investing activities | (511 | ) | | (564 | ) |
| Financing Activities: | | | |
| Increase in notes payable, net | — |
| | 245 |
|
| Proceeds — Capital contributions from parent company | 1,232 |
| | 484 |
|
| Redemptions — Senior notes | (200 | ) | | — |
|
| Payment of common stock dividends | (211 | ) | | (202 | ) |
| Other financing activities | (10 | ) | | (9 | ) |
| Net cash provided from financing activities | 811 |
| | 518 |
|
| Net Change in Cash, Cash Equivalents, and Restricted Cash | 446 |
| | 109 |
|
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 313 |
| | 544 |
|
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 759 |
| | $ | 653 |
|
| Supplemental Cash Flow Information: | | | |
| Cash paid during the period for — | | | |
| Interest (net of $5 and $5 capitalized for 2019 and 2018, respectively) | $ | 89 |
| | $ | 84 |
|
| Income taxes, net | — |
| | 9 |
|
| Noncash transactions — Accrued property additions at end of period | 176 |
| | 195 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Assets | | At March 31, 2019 | | At December 31, 2018 |
| | | (in millions) |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 759 |
| | $ | 313 |
|
| Receivables — | | | | |
| Customer accounts receivable | | 382 |
| | 403 |
|
| Unbilled revenues | | 126 |
| | 150 |
|
| Affiliated | | 45 |
| | 94 |
|
| Other accounts and notes receivable | | 58 |
| | 51 |
|
| Accumulated provision for uncollectible accounts | | (10 | ) | | (10 | ) |
| Fossil fuel stock | | 120 |
| | 141 |
|
| Materials and supplies | | 558 |
| | 546 |
|
| Prepaid expenses | | 113 |
| | 66 |
|
| Other regulatory assets | | 125 |
| | 137 |
|
| Other current assets | | 21 |
| | 18 |
|
| Total current assets | | 2,297 |
| | 1,909 |
|
| Property, Plant, and Equipment: | | | | |
| In service | | 28,810 |
| | 30,402 |
|
| Less: Accumulated provision for depreciation | | 9,447 |
| | 9,988 |
|
| Plant in service, net of depreciation | | 19,363 |
| | 20,414 |
|
| Other utility plant, net | | 1,315 |
| | — |
|
| Nuclear fuel, at amortized cost | | 320 |
| | 324 |
|
| Construction work in progress | | 1,023 |
| | 1,113 |
|
| Total property, plant, and equipment | | 22,021 |
| | 21,851 |
|
| Other Property and Investments: | | | | |
| Equity investments in unconsolidated subsidiaries | | 64 |
| | 65 |
|
| Nuclear decommissioning trusts, at fair value | | 933 |
| | 847 |
|
| Miscellaneous property and investments | | 129 |
| | 127 |
|
| Total other property and investments | | 1,126 |
| | 1,039 |
|
| Deferred Charges and Other Assets: | | | | |
| Operating lease right-of-use assets, net of amortization | | 160 |
| | — |
|
| Deferred charges related to income taxes | | 239 |
| | 240 |
|
| Deferred under recovered regulatory clause revenues | | 21 |
| | 116 |
|
| Other regulatory assets, deferred | | 1,350 |
| | 1,386 |
|
| Other deferred charges and assets | | 193 |
| | 189 |
|
| Total deferred charges and other assets | | 1,963 |
| | 1,931 |
|
| Total Assets | | $ | 27,407 |
| | $ | 26,730 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Liabilities and Stockholder's Equity | | At March 31, 2019 | | At December 31, 2018 |
| | | (in millions) |
| Current Liabilities: | | | | |
| Securities due within one year | | $ | 1 |
| | $ | 201 |
|
| Accounts payable — | | | | |
| Affiliated | | 262 |
| | 364 |
|
| Other | | 346 |
| | 614 |
|
| Customer deposits | | 97 |
| | 96 |
|
| Accrued taxes | | 97 |
| | 44 |
|
| Accrued interest | | 77 |
| | 89 |
|
| Accrued compensation | | 102 |
| | 227 |
|
| Asset retirement obligations | | 163 |
| | 163 |
|
| Other current liabilities | | 97 |
| | 161 |
|
| Total current liabilities | | 1,242 |
| | 1,959 |
|
| Long-term Debt | | 7,924 |
| | 7,923 |
|
| Deferred Credits and Other Liabilities: | | | | |
| Accumulated deferred income taxes | | 2,971 |
| | 2,962 |
|
| Deferred credits related to income taxes | | 2,015 |
| | 2,027 |
|
| Accumulated deferred ITCs | | 105 |
| | 106 |
|
| Employee benefit obligations | | 302 |
| | 314 |
|
| Operating lease obligations | | 147 |
| | — |
|
| Asset retirement obligations, deferred | | 3,064 |
| | 3,047 |
|
| Other cost of removal obligations | | 489 |
| | 497 |
|
| Other regulatory liabilities | | 107 |
| | 69 |
|
| Other deferred credits and liabilities | | 30 |
| | 58 |
|
| Total deferred credits and other liabilities | | 9,230 |
| | 9,080 |
|
| Total Liabilities | | 18,396 |
| | 18,962 |
|
| Redeemable Preferred Stock | | 291 |
| | 291 |
|
Common Stockholder's Equity (See accompanying statements) | | 8,720 |
| | 7,477 |
|
| Total Liabilities and Stockholder's Equity | | $ | 27,407 |
| | $ | 26,730 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY (UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Number of
Common
Shares
Issued | | Common
Stock | | Paid-In
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Total |
| | (in millions) |
| Balance at December 31, 2017 | 31 |
| | $ | 1,222 |
| | $ | 2,986 |
| | $ | 2,647 |
| | $ | (26 | ) | | $ | 6,829 |
|
Net income after dividends on
preferred stock | — |
| | — |
| | — |
| | 225 |
| | — |
| | 225 |
|
| Capital contributions from parent company | — |
| | — |
| | 488 |
| | — |
| | — |
| | 488 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Cash dividends on common stock | — |
| | — |
| | — |
| | (202 | ) | | — |
| | (202 | ) |
| Other | — |
| | — |
| | — |
| | — |
| | (6 | ) | | (6 | ) |
| Balance at March 31, 2018 | 31 |
| | $ | 1,222 |
| | $ | 3,474 |
| | $ | 2,670 |
| | $ | (31 | ) | | $ | 7,335 |
|
| | | | | | | | | | | | |
| Balance at December 31, 2018 | 31 |
| | $ | 1,222 |
| | $ | 3,508 |
| | $ | 2,775 |
| | $ | (28 | ) | | $ | 7,477 |
|
Net income after dividends on
preferred stock | — |
| | — |
| | — |
| | 217 |
| | — |
| | 217 |
|
| Capital contributions from parent company | — |
| | — |
| | 1,236 |
| | — |
| | — |
| | 1,236 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Cash dividends on common stock | — |
| | — |
| | — |
| | (211 | ) | | — |
| | (211 | ) |
| Balance at March 31, 2019 | 31 |
| | $ | 1,222 |
| | $ | 4,744 |
| | $ | 2,781 |
| | $ | (27 | ) | | $ | 8,720 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2019 vs. FIRST QUARTER 2018
OVERVIEW
Alabama Power operates as a vertically integrated utility providing electric service to retail and wholesale customers within its traditional service territory located in the State of Alabama in addition to wholesale customers in the Southeast.
Many factors affect the opportunities, challenges, and risks of Alabama Power's business of providing electric service. These factors include the ability to maintain a constructive regulatory environment, to maintain and grow energy sales and customers, and to effectively manage and secure timely recovery of costs. These costs include those related to projected long-term demand growth, stringent environmental standards, including CCR rules, reliability, fuel, capital expenditures, including improving the electric transmission and distribution systems, and restoration following major storms. Alabama Power has various regulatory mechanisms that operate to address cost recovery. Effectively operating pursuant to these regulatory mechanisms and appropriately balancing required costs and capital expenditures with customer prices will continue to challenge Alabama Power for the foreseeable future.
Alabama Power continues to focus on several key performance indicators including, but not limited to, customer satisfaction, plant availability, system reliability, and net income after dividends on preferred stock.
RESULTS OF OPERATIONS
Net Income
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) |
| (% change) |
| $(8) | | (3.6) |
Alabama Power's net income after dividends on preferred stock for the first quarter 2019 was $217 million compared to $225 million for the corresponding period in 2018. This decrease was primarily related to a decrease in retail revenues associated with milder weather and lower customer usage and an increase in non-fuel operations and maintenance expenses. These decreases to income were partially offset by an increase in retail revenues under Rate CNP Compliance associated with increases in average net investments and a decrease in income tax expense associated with the application in 2018 of the accounting order approved by the Alabama PSC in May 2018 related to the Tax Reform Legislation (Tax Reform Accounting Order). See Note 2 to the financial statements under "Alabama Power – Tax Reform Accounting Order" in Item 8 of the Form 10-K for additional information.
Retail Revenues
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(72) | | (5.6) |
In the first quarter 2019, retail revenues were $1.21 billion compared to $1.29 billion for the corresponding period in 2018.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of the changes in retail revenues were as follows:
|
| | | | | | |
| | First Quarter 2019 |
| | (in millions) |
| (% change) |
| Retail – prior year | $ | 1,285 |
| | |
| Estimated change resulting from – | | | |
| Rates and pricing | 34 |
| | 2.6 |
|
| Sales decline | (17 | ) | | (1.3 | ) |
| Weather | (25 | ) | | (1.9 | ) |
| Fuel and other cost recovery | (64 | ) | | (5.0 | ) |
| Retail – current year | $ | 1,213 |
| | (5.6 | )% |
Revenues associated with changes in rates and pricing increased in the first quarter 2019 when compared to the corresponding period in 2018 primarily due to increased revenues under Rate CNP Compliance associated with increases in average net investments. 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 first quarter 2019 when compared to the corresponding period in 2018. Weather-adjusted commercial KWH sales decreased 3.5% in the first quarter 2019 and weather-adjusted residential KWH sales decreased 2.3% in the first quarter 2019 when compared to the corresponding period in 2018 primarily due to lower customer usage resulting from customer initiatives in energy savings for commercial customers and lower usage due to more energy-efficient residential appliances. Industrial KWH sales decreased 3.0% in the first quarter 2019 when compared to the corresponding period in 2018 as a result of a decrease in demand resulting from changes in production levels primarily in the primary metals, chemicals, and paper sectors, partially offset by increased demand in the pipeline sector.
Revenues resulting from changes in weather decreased in the first quarter 2019 due to milder weather. In the first quarter 2019, the resulting decreases were 3.3% and 1.7% for residential and commercial sales revenues, respectively.
Fuel and other cost recovery revenues decreased in the first quarter 2019 when compared to the corresponding period in 2018 primarily due to a decrease in generation.
Electric rates include provisions to recognize the full recovery of fuel costs, purchased power costs, PPAs certificated by the Alabama PSC, and costs associated with the natural disaster reserve. 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
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(13) | | (17.6) |
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 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.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the first quarter 2019, wholesale revenues from sales to non-affiliates were $61 million compared to $74 million for the corresponding period in 2018. The decrease was primarily due to a 10.1% decrease in the price of energy due to lower natural gas prices and a 9.4% decrease in KWH sales as a result of lower demand in the first quarter 2019 compared to the corresponding period in 2018.
Wholesale Revenues – Affiliates
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $9 | | 17.6 |
Wholesale revenues from sales to affiliated companies will vary depending on demand and the availability and cost of generating resources at each company. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost and energy purchases are generally offset by energy revenues through Alabama Power's energy cost recovery clause.
In the first quarter 2019, wholesale revenues from sales to affiliates were $60 million compared to $51 million for the corresponding period in 2018. The increase was primarily due to a 33.4% increase in KWH sales partially offset by a 12.6% decrease in the price of energy due to increased hydro generation in the first quarter 2019 as compared to the corresponding period in 2018.
Other Revenues
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $11 | | 17.5 |
In the first quarter 2019, other revenues were $74 million compared to $63 million for the corresponding period in 2018. This increase was primarily due to an increase in OATT revenues and opportunity sales of natural gas.
Fuel and Purchased Power Expenses
|
| | | | | | |
| | First Quarter 2019 vs. First Quarter 2018 |
| | (change in millions) | | (% change) |
| Fuel | $ | (25 | ) | | (7.7 | ) |
| Purchased power – non-affiliates | (27 | ) | | (42.2 | ) |
| Purchased power – affiliates | (16 | ) | | (43.2 | ) |
| Total fuel and purchased power expenses | $ | (68 | ) | | |
In the first quarter 2019, fuel and purchased power expenses were $359 million compared to $427 million for the corresponding period in 2018. The decrease was primarily due to a $53 million decrease related to the volume of KWHs generated (excluding hydro) and purchased and a $14 million decrease in the average cost of purchased power.
Fuel and purchased power energy transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Alabama Power's energy cost recovery clause. See Note 2 to the financial statements under "Alabama Power – Rate ECR" in Item 8 of the Form 10-K for additional information.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of Alabama Power's generation and purchased power were as follows:
|
| | | |
| | First Quarter 2019 |
| First Quarter 2018 |
Total generation (in billions of KWHs) | 16 | | 16 |
Total purchased power (in billions of KWHs) | 1 | | 1 |
Sources of generation (percent) — | | | |
| Coal | 43 | | 50 |
| Nuclear | 23 | | 23 |
| Gas | 19 | | 18 |
| Hydro | 15 | | 9 |
Cost of fuel, generated (in cents per net KWH) — | | | |
| Coal | 2.78 | | 2.69 |
| Nuclear | 0.78 | | 0.75 |
| Gas | 2.57 | | 2.87 |
Average cost of fuel, generated (in cents per net KWH)(a) | 2.19 | | 2.23 |
Average cost of purchased power (in cents per net KWH)(b) | 5.75 | | 7.10 |
| |
| (a) | KWHs generated by hydro are excluded from the average cost of fuel, generated. |
| |
| (b) | Average cost of purchased power includes fuel, energy, and transmission purchased by Alabama Power for tolling agreements where power is generated by the provider. |
Fuel
In the first quarter 2019, fuel expense was $301 million compared to $326 million for the corresponding period in 2018. The decrease was primarily due to a 79.7% increase in the volume of KWHs generated by hydro, a 12.7% decrease in the volume of KWHs generated by coal, and a 10.5% decrease in the average cost of natural gas per KWH generated, which excludes fuel associated with tolling agreements. The decrease was partially offset by a 4.6% increase in the volume of KWHs generated by natural gas and a 3.4% increase in the average cost of coal per KWH generated.
Purchased Power – Non-Affiliates
In the first quarter 2019, purchased power expense from non-affiliates was $37 million compared to $64 million for the corresponding period in 2018. The decrease was primarily related to a 28.3% decrease in the average cost of purchased power per KWH due to lower natural gas prices and a 19.7% decrease in the amount of energy purchased due to milder weather in the first quarter 2019 compared to the corresponding period in 2018.
Energy purchases from non-affiliates will vary depending on the market prices of wholesale energy as compared to the cost of the Southern Company system's generation, demand for energy within the Southern Company system's service territory, and the availability of the Southern Company system's generation.
Purchased Power – Affiliates
In the first quarter 2019, purchased power expense from affiliates was $21 million compared to $37 million for the corresponding period in 2018. The decrease was primarily related to a 48.6% decrease in the amount of energy purchased due to increased hydro generation, partially offset by an 11.4% increase in the average cost of purchased power per KWH as a result of firm transportation costs.
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.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Operations and Maintenance Expenses
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $22 | | 5.7 |
In the first quarter 2019, other operations and maintenance expenses were $409 million compared to $387 million for the corresponding period in 2018. This increase was primarily due to increases of $8 million in environmental expenses, $6 million in certain compensation and benefit expenses, and $4 million in nuclear generation expenses primarily due to plant improvement projects.
Depreciation and Amortization
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $10 | | 5.3 |
In the first quarter 2019, depreciation and amortization was $199 million compared to $189 million for the corresponding period in 2018. This increase was primarily due to additional plant in service associated with compliance-related steam, distribution, and transmission.
Other Income (Expense), Net
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $9 | | 180.0 |
In the first quarter 2019, other income (expense), net was $14 million compared to $5 million for the corresponding period in 2018. This increase was primarily due to an increase in interest income from temporary cash investments and additional sales of non-utility property in 2019.
Income Taxes
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(20) | | (24.4) |
In the first quarter 2019, income taxes were $62 million compared to $82 million for the corresponding period in 2018. This decrease was primarily due to lower pre-tax earnings in the first quarter 2019 compared to the corresponding period in 2018 and the application of the Tax Reform Accounting Order in 2018. See Note 2 to the financial statements under "Alabama Power – Tax Reform Accounting Order" in Item 8 of the Form 10-K for additional information.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Alabama Power's future earnings potential. The level of Alabama Power's future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Alabama Power's primary business of providing electric service. These factors include Alabama Power's ability to maintain a constructive regulatory environment that continues to allow for the timely recovery of prudently-incurred costs during a time of increasing costs and the weak pace of growth in new customers and electricity use per customer, especially in residential and commercial markets. Earnings 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, both of
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
which could contribute to a net reduction in customer usage. Earnings are subject to a variety of other factors. These factors include weather, competition, new energy contracts with other utilities, energy conservation practiced by customers, the use of alternative energy sources by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth or decline in Alabama Power's service territory. Demand for electricity is primarily driven by the pace of economic growth that may be affected by changes in regional and global economic conditions, which may impact future earnings. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Alabama Power in Item 7 of the Form 10-K.
Environmental Matters
Alabama Power's operations are regulated by state and federal environmental agencies through a variety of laws and regulations governing air, water, land, and protection of other natural resources. Alabama Power maintains comprehensive environmental compliance and GHG strategies to assess upcoming requirements and compliance costs associated with these environmental laws and regulations. The costs, including capital expenditures, operations and maintenance costs, and costs reflected in ARO liabilities, required to comply with environmental laws and regulations and to achieve stated goals may impact future electric generating unit retirement and replacement decisions, results of operations, cash flows, and/or financial condition. Related costs may result from the installation of additional environmental controls, closure and monitoring of CCR facilities, unit retirements, or changing fuel sources for certain existing units, as well as related upgrades to Alabama Power's transmission and distribution systems. A major portion of these costs is expected to be recovered through existing ratemaking provisions. The ultimate impact of environmental laws and regulations and GHG goals will depend on various factors, such as state adoption and implementation of requirements, the availability and cost of any deployed technology, fuel prices, and the outcome of pending and/or future legal challenges.
New or revised environmental laws and regulations could affect many areas of Alabama Power's operations. The impact of any such changes cannot be determined at this time. Environmental compliance costs could affect earnings if such costs cannot continue to be recovered in rates on a timely basis. Environmental compliance costs are recovered through Rate CNP Compliance. Further, increased costs that are recovered through regulated rates could contribute to reduced demand for electricity, which could negatively affect results of operations, cash flows, and/or financial condition. Additionally, many commercial and industrial customers may also be affected by existing and future environmental requirements, which for some may have the potential to ultimately affect their demand for electricity. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" of Alabama Power in Item 7 of the Form 10-K and Note 2 to the financial statements under "Alabama Power – Rate CNP Compliance" and Note 3 to the financial statements under "Environmental Remediation" in Item 8 of the Form 10-K for additional information.
FERC Matters
See Note 2 to the financial statements under "FERC Matters – Open Access Transmission Tariff" in Item 8 of the Form 10-K for additional information.
On March 25, 2019, the Alabama Municipal Electric Authority and Cooperative Energy and SCS and the traditional electric operating companies (including Alabama Power) filed a formal settlement agreement with the FERC agreeing to a rate reduction based on a 10.6% ROE, with a retroactive effective date of May 10, 2018, and a five-year moratorium on these parties seeking changes to the OATT formula rate. The ultimate outcome of this matter cannot be determined at this time; however, if approved by the FERC as filed, the OATT settlement would not have a material impact on the financial statements of Alabama Power.
Retail Regulatory Matters
Alabama Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Alabama PSC. Alabama Power currently recovers its costs from the regulated retail business primarily through Rate RSE, Rate CNP, Rate ECR, and Rate NDR. In addition, the Alabama PSC issues accounting
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
orders to address current events impacting Alabama Power. See Note 2 to the financial statements under "Alabama Power" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein for additional information regarding Alabama Power's rate mechanisms, accounting orders, and the recovery balance of each regulatory clause for Alabama Power.
Environmental Accounting Order
In connection with management's decision to retire Plant Gorgas, in February 2019, Alabama Power reclassified approximately $1.3 billion for Plant Gorgas Unit 10 from plant in service, net of depreciation to other utility plant, net and continued to depreciate the asset according to the original depreciation rates. On April 15, 2019, Alabama Power retired Plant Gorgas Units 8, 9, and 10 and reclassified approximately $740 million of the remaining net investment costs of the units to a regulatory asset to be recovered over the units' remaining useful lives as established prior to the decision to retire. Additionally, approximately $700 million of net capitalized asset retirement costs will be reclassified to a regulatory asset and recovered in accordance with accounting guidance provided by the Alabama PSC. See Note 2 to the financial statements under "Alabama Power – Environmental Accounting Order" and Note 6 in Item 8 of the Form 10-K for additional information.
Other Matters
Alabama Power is involved in various other matters that could affect future earnings, including matters being litigated and regulatory matters. In addition, Alabama Power is subject to certain claims and legal actions arising in the ordinary course of business. Alabama Power's business activities are subject to extensive governmental regulation related to public health and the environment, such as laws and regulations governing air, water, land, and protection of other natural resources. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental laws and regulations, has occurred throughout the U.S. This litigation has included claims for damages alleged to have been caused by CO2 and other emissions, CCR, and alleged exposure to hazardous materials, and/or requests for injunctive relief in connection with such matters.
The ultimate outcome of such pending or potential litigation or regulatory matters cannot be predicted at this time; however, for current proceedings not specifically reported 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 would have a material effect on Alabama Power's financial statements. See Notes (B) and (C) to the Condensed Financial Statements herein for a discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Alabama Power prepares its financial statements in accordance with GAAP. Significant accounting policies are described in Notes 1, 5, and 6 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 Alabama Power's results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of Alabama Power in Item 7 of the Form 10-K for a complete discussion of Alabama Power's critical accounting policies and estimates.
Recently Issued Accounting Standards
See Note (A) to the Condensed Financial Statements herein for information regarding Alabama Power's recently adopted accounting standards.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
Overview
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Alabama Power in Item 7 of the Form 10-K for additional information. Alabama Power's financial condition remained stable at March 31, 2019. Alabama Power intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements to meet future capital and liquidity needs. See "Capital Requirements and Contractual Obligations," "Sources of Capital," and "Financing Activities" herein for additional information.
Net cash provided from operating activities totaled $146 million for the first three months of 2019, a decrease of $9 million as compared to the first three months of 2018. The decrease in net cash provided from operating activities was primarily due to timing of vendor payments and other current liabilities, partially offset by increased fuel cost recovery. Net cash used for investing activities totaled $511 million for the first three months of 2019 primarily related to additional capital expenditures for distribution, environmental, and transmission assets. Net cash provided from financing activities totaled $811 million for the first three months of 2019 primarily due to capital contributions from Southern Company, partially offset by a payment of common stock dividends and a long-term debt maturity. Fluctuations in cash flows from financing activities vary from period to period based on capital needs and the maturity or redemption of securities.
Significant balance sheet changes for the first three months of 2019 include increases of $1.2 billion in total common stockholder's equity, primarily due to a $1.225 billion capital contribution from Southern Company, and $446 million in cash and cash equivalents. Other significant changes include decreases of $268 million in other accounts payable primarily due to the timing of vendor payments and $200 million in securities due within one year due to the maturity of long-term debt.
Capital Requirements and Contractual Obligations
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Alabama Power in Item 7 of the Form 10-K for a description of Alabama Power's capital requirements and contractual obligations. There are no scheduled maturities of long-term debt through March 31, 2020.
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" of Alabama Power in Item 7 of the Form 10-K for additional information on Alabama Power's environmental compliance strategy.
The construction program is 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 generating plants, including unit retirements and replacements and adding or changing fuel sources at existing generating units, to meet regulatory requirements; changes in the expected environmental compliance program; changes in FERC rules and regulations; Alabama PSC approvals; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; storm impacts; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.
Sources of Capital
Alabama Power plans to obtain the funds to meet its future capital needs from sources similar to those used in the past, which were primarily from operating cash flows, external security issuances, borrowings from financial institutions, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon prevailing market conditions, regulatory approval, and other factors. In January 2019, Alabama Power received a capital contribution totaling $1.225 billion from Southern Company. See
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" of Alabama Power in Item 7 of the Form 10-K for additional information.
Alabama Power's current liabilities sometimes exceed 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.
At March 31, 2019, Alabama Power had approximately $759 million of cash and cash equivalents. Committed credit arrangements with banks at March 31, 2019 were as follows:
|
| | | | | | | | | | | | | | | | | | |
| Expires | | | | |
| 2019 | | 2020 | | 2022 | | Total | | Unused |
| (in millions) |
| $ | 33 |
| | $ | 500 |
| | $ | 800 |
| | $ | 1,333 |
| | $ | 1,333 |
|
See Note 8 to the financial statements under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.
Most of these bank credit arrangements, as well as Alabama Power's term loan arrangements, contain covenants that limit debt levels and contain cross-acceleration provisions to other indebtedness (including guarantee obligations) of Alabama Power. Such cross-acceleration provisions to other indebtedness would trigger an event of default if Alabama Power defaulted on indebtedness, the payment of which was then accelerated. At March 31, 2019, Alabama Power was in compliance with all such covenants. None of the bank credit arrangements contain material adverse change clauses at the time of borrowings.
Subject to applicable market conditions, Alabama Power expects to renew or replace its bank credit arrangements as needed prior to expiration. In connection therewith, Alabama Power 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 Alabama Power's pollution control revenue bonds and commercial paper programs. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support was approximately $854 million as of March 31, 2019. At March 31, 2019, Alabama Power had $87 million of fixed rate pollution control revenue bonds outstanding that were required to be reoffered within the next 12 months.
Alabama Power also has substantial cash flow from operating activities and access to the capital markets, including a commercial paper program, to meet liquidity needs. Alabama Power may meet short-term cash needs through its commercial paper program. Alabama Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper at the request and for the benefit of Alabama Power and the other traditional electric operating companies. Proceeds from such issuances for the benefit of Alabama Power are loaned directly to Alabama Power. The obligations of each traditional electric operating company under these arrangements are several and there is no cross-affiliate credit support. Short-term borrowings are included in notes payable in the balance sheets.
Details of short-term borrowings were as follows:
|
| | | | | | | | | | |
| | Short-term Debt During the Period(*) |
| | Average
Amount Outstanding | | Weighted
Average
Interest
Rate | | Maximum
Amount
Outstanding |
| | (in millions) | | | | (in millions) |
| Commercial paper | $ | 32 |
| | 2.7 | % | | $ | 185 |
|
| |
| (*) | Average and maximum amounts are based upon daily balances during the three-month period ended March 31, 2019. No short-term debt was outstanding at March 31, 2019. |
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Alabama Power believes the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, and operating cash flows.
Credit Rating Risk
At March 31, 2019, Alabama Power 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 to BBB and/or Baa2 or below. These contracts are primarily for physical electricity purchases, fuel purchases, fuel transportation and storage, energy price risk management, and transmission. At March 31, 2019, the maximum potential collateral requirements at a rating below BBB- and/or Baa3 totaled approximately $354 million.
Included in these amounts are certain agreements that could require collateral in the event that either Alabama Power or Georgia Power (an affiliate of Alabama 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 Alabama Power to access capital markets and would be likely to impact the cost at which it does so.
As a result of the Tax Reform Legislation, certain financial metrics, such as the funds from operations to debt percentage, used by the credit rating agencies to assess Southern Company and its subsidiaries, including Alabama Power, may be negatively impacted. The modifications to Rate RSE and other commitments approved by the Alabama PSC are expected to help mitigate these potential adverse impacts to certain credit metrics and will help Alabama Power meet its goal of achieving an equity ratio of approximately 55% by the end of 2025. See Note 2 to the financial statements under "Alabama Power – Rate RSE" in Item 8 of the Form 10-K for additional information.
Financing Activities
In February 2019, Alabama Power repaid at maturity $200 million aggregate principal amount of Series Z 5.125% Senior Notes due February 15, 2019.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Alabama Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.
Regulatory Matters
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.
Fuel Cost Recovery
The traditional electric operating companies each have established fuel cost recovery rates approved by their respective state PSCs. Fuel cost recovery revenues are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes in the billing factor will not have a significant effect on Southern Company's revenues or net income, but will affect cash flow. The traditional electric operating companies continuously monitor their under or over recovered fuel cost balances and make appropriate filings with their state PSCs to adjust fuel cost recovery rates as necessary.
Alabama Power
Alabama Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Alabama PSC. Alabama Power currently recovers its costs from the regulated retail business primarily through Rate RSE, Rate CNP, Rate ECR, and Rate NDR. In addition, the Alabama PSC issues accounting orders to address current events impacting Alabama Power.
Environmental Accounting Order
In connection with management's decision to retire Plant Gorgas, in February 2019, Alabama Power reclassified approximately $1.3 billion for Plant Gorgas Unit 10 from plant in service, net of depreciation to other utility plant, net and continued to depreciate the asset according to the original depreciation rates. On April 15, 2019, Alabama Power retired Plant Gorgas Units 8, 9, and 10 and reclassified approximately $740 million of the remaining net investment costs of the units to a regulatory asset to be recovered over the units' remaining useful lives as established prior to the decision to retire. Additionally, approximately $700 million of net capitalized asset retirement costs will be reclassified to a regulatory asset and recovered in accordance with accounting guidance provided by the Alabama PSC. See Note 2 to the financial statements under "Alabama Power – Environmental Accounting Order" and Note 6 in Item 8 of the Form 10-K for additional information.
Georgia Power
Georgia Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Georgia PSC. Georgia Power currently recovers its costs from the regulated retail business through the 2013 ARP, which includes traditional base tariff rates, Demand-Side Management tariffs, Environmental Compliance Cost Recovery tariffs, and Municipal Franchise Fee tariffs. Georgia Power is scheduled to file a base rate case by July 1, 2019, which may continue or modify these tariffs. In addition, financing costs related to certified construction costs of Plant Vogtle Units 3 and 4 are being collected through the NCCR tariff and fuel costs are collected through a separate fuel cost recovery tariff.
Mississippi Power
Kemper County Energy Facility
As the mining permit holder, Liberty Fuels Company, LLC has a legal obligation to perform mine reclamation, and Mississippi Power has a contractual obligation to fund all reclamation activities. As a result of the abandonment of the Kemper IGCC, final mine reclamation began in 2018 and is expected to be substantially completed in 2020, with monitoring expected to continue through 2027. See Note 6 to the financial statements in Item 8 of the Form 10-K for additional information.
During the first quarter 2019, Mississippi Power recorded pre-tax charges to income of $2 million ($1 million after tax), primarily resulting from the abandonment and related closure activities and ongoing period costs, net of sales proceeds, for the mine and gasifier-related assets at the Kemper County energy facility. Additional closure costs for
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the mine and gasifier-related assets, currently estimated at up to $10 million pre-tax (excluding salvage, net of dismantlement costs), may be incurred through the first half of 2020. In addition, period costs, including, but not limited to, costs for compliance and safety, ARO accretion, and property taxes for the mine and gasifier-related assets, are estimated at $11 million for the remainder of 2019 and $2 million to $6 million annually in 2020 through 2023.
In addition, Mississippi Power constructed the CO2 pipeline for the planned transport of captured CO2 for use in enhanced oil recovery and is currently evaluating its options regarding the final disposition of the CO2 pipeline, including removal of the pipeline. This evaluation is expected to be complete later in 2019. If Mississippi Power ultimately decides to remove the CO2 pipeline, the cost of removal could have a material impact on Southern Company's financial statements.
In December 2018, Mississippi Power filed with the DOE its request for property closeout certification under the contract related to the $387 million of grants received. Mississippi Power and the DOE are currently in discussions regarding the requested closeout and property disposition, which may require payment to the DOE for a portion of certain property that is to be retained by Mississippi Power. In connection with the DOE closeout discussions, on April 29, 2019, the Civil Division of the Department of Justice informed Southern Company and Mississippi Power of an investigation related to the Kemper County energy facility. The ultimate outcome of these matters cannot be determined at this time; however, they could have a material impact on Southern Company's financial statements.
Southern Company Gas
The natural gas distribution utilities are subject to regulation and oversight by their respective state regulatory agencies for the rates charged to their customers and other matters. With the exception of Atlanta Gas Light, which does not sell natural gas to end-use customers, the natural gas distribution utilities are authorized by the relevant regulatory agencies in the states in which they serve to use natural gas cost recovery mechanisms that adjust rates to reflect changes in the wholesale cost of natural gas and ensure recovery of all costs prudently incurred in purchasing natural gas for customers. Natural gas cost recovery revenues are adjusted for differences in actual recoverable natural gas costs and amounts billed in current regulated rates. Changes in the billing factor will not have a significant effect on revenues or net income, but will affect cash flows. In addition to natural gas cost recovery mechanisms, there are other cost recovery mechanisms, such as regulatory riders, which vary by utility but allow recovery of certain costs, such as those related to infrastructure replacement programs, as well as environmental remediation and energy efficiency plans.
In November 2018, Nicor Gas filed a general base rate case with the Illinois Commission requesting a $230 million increase in annual base rate revenues. The requested increase is based on a projected test year for the 12-month period ending September 30, 2020, a ROE of 10.6%, and an increase in the equity ratio from 52% to 54% to address the negative cash flow and credit metric impacts of the Tax Reform Legislation.
On April 16, 2019, Nicor Gas entered into a stipulation agreement to resolve all related issues with the Staff of the Illinois Commission, including a ROE of 9.86% and an equity ratio of 54%. Also on April 16, 2019, Nicor Gas filed its rebuttal testimony with the Illinois Commission incorporating the stipulation agreement and addressing the remaining items outstanding with the other two intervenors. As a result of the stipulation agreement and rebuttal testimony, the revised requested annual revenue increase is $180 million.
The Illinois Commission is expected to rule on the requested increase within the statutory time limit of 11 months from the filing of the rate case, after which rate adjustments will be effective.
Atlanta Gas Light is required to file a traditional base rate case no later than June 3, 2019 for rates effective January 1, 2020.
The ultimate outcome of these matters cannot be determined at this time.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Construction Program
Overview
The subsidiary companies of Southern Company are engaged in continuous construction programs to accommodate existing and estimated future loads on their respective systems. The Southern Company system intends to continue its strategy of developing and constructing new electric generating facilities, adding environmental modifications to certain existing units, expanding and improving the electric transmission and distribution systems, and updating and expanding the natural gas distribution systems. For the traditional electric operating companies, major generation construction projects are subject to state PSC approval in order to be included in retail rates. While Southern Power generally constructs and acquires generation assets covered by long-term PPAs, any uncontracted capacity could negatively affect future earnings. Southern Company Gas is engaged in various infrastructure improvement programs designed to update or expand the natural gas distribution systems of the natural gas distribution utilities to improve reliability and meet operational flexibility and growth. The natural gas distribution utilities recover their investment and a return associated with these infrastructure programs through their regulated rates. See Notes 2 and 15 to the financial statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects" and "Southern Power," respectively, in Item 8 of the Form 10-K and Note (K) to the Condensed Financial Statements under "Southern Power" herein for additional information.
The largest construction project currently underway in the Southern Company system is Plant Vogtle Units 3 and 4 (45.7% ownership interest by Georgia Power in the two units, each with approximately 1,100 MWs). See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" in Item 8 of the Form 10-K and "Nuclear Construction" herein for additional information.
Also see FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" herein for additional information regarding Southern Company's capital requirements for its subsidiaries' construction programs.
Nuclear Construction
See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding the construction of Plant Vogtle Units 3 and 4, the joint ownership agreements and related funding agreement, VCM reports, and the NCCR tariff.
In 2009, the Georgia PSC certified construction of Plant Vogtle Units 3 and 4. Georgia Power holds a 45.7% ownership interest in Plant Vogtle Units 3 and 4. In 2012, the NRC issued the related combined construction and operating licenses, which allowed full construction of the two AP1000 nuclear units (with electric generating capacity of approximately 1,100 MWs each) and related facilities to begin. Until March 2017, construction on Plant Vogtle Units 3 and 4 continued under the Vogtle 3 and 4 Agreement, which was a substantially fixed price agreement. In March 2017, the EPC Contractor filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. In connection with the EPC Contractor's bankruptcy filing, Georgia Power, acting for itself and as agent for the other Vogtle Owners, entered into several transitional arrangements to allow construction to continue. In July 2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners, entered into the Vogtle Services Agreement, whereby Westinghouse provides facility design and engineering services, procurement and technical support, and staff augmentation on a time and materials cost basis. The Vogtle Services Agreement provides that it will continue until the start-up and testing of Plant Vogtle Units 3 and 4 are complete and electricity is generated and sold from both units. The Vogtle Services Agreement is terminable by the Vogtle Owners upon 30 days' written notice.
In October 2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners, executed the Bechtel Agreement, a cost reimbursable plus fee arrangement, whereby Bechtel is reimbursed for actual costs plus a base fee and an at-risk fee, which is subject to adjustment based on Bechtel's performance against cost and schedule targets. Each Vogtle Owner is severally (not jointly) liable for its proportionate share, based on its ownership interest, of all amounts owed to Bechtel under the Bechtel Agreement. The Vogtle Owners may terminate the Bechtel Agreement at any time for their convenience, provided that the Vogtle Owners will be required to pay
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
amounts related to work performed prior to the termination (including the applicable portion of the base fee), certain termination-related costs, and, at certain stages of the work, the applicable portion of the at-risk fee. Bechtel may terminate the Bechtel Agreement under certain circumstances, including certain Vogtle Owner suspensions of work, certain breaches of the Bechtel Agreement by the Vogtle Owners, Vogtle Owner insolvency, and certain other events.
Cost and Schedule
Georgia Power's approximate proportionate share of the remaining estimated capital cost to complete Plant Vogtle Units 3 and 4 by the expected in-service dates of November 2021 and November 2022, respectively, is as follows:
|
| | | |
| | (in billions) |
Base project capital cost forecast(a)(b) | $ | 8.0 |
|
| Construction contingency estimate | 0.4 |
|
Total project capital cost forecast(a)(b) | 8.4 |
|
Net investment as of March 31, 2019(b) | (4.9 | ) |
Remaining estimate to complete(a) | $ | 3.5 |
|
| |
| (a) | Excludes financing costs expected to be capitalized through AFUDC of approximately $325 million. |
| |
| (b) | Net of $1.7 billion received from Toshiba under the Guarantee Settlement Agreement and approximately $188 million in related Customer Refunds. |
Georgia Power estimates that its financing costs for construction of Plant Vogtle Units 3 and 4 will total approximately $3.1 billion, of which $1.9 billion had been incurred through March 31, 2019.
In April 2019, Southern Nuclear completed a cost and schedule validation process to verify and update quantities of commodities remaining to install, labor hours to install remaining quantities and related productivity, testing and system turnover requirements, and forecasted staffing needs and related costs. This process confirmed the total estimated project capital cost forecast for Plant Vogtle Units 3 and 4. The expected in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4, as previously approved by the Georgia PSC, remain unchanged.
As construction continues, challenges with management of contractors, subcontractors, and vendors; supervision of craft labor and related craft labor productivity, ability to attract and retain craft labor, and/or related cost escalation; procurement, fabrication, delivery, assembly, and/or installation and the initial testing and start-up, including any required engineering changes, of plant systems, structures, or components (some of which are based on new technology that only recently began initial operation in the global nuclear industry at this scale), any of which may require additional labor and/or materials; or other issues could arise and change the projected schedule and estimated cost. Monthly construction production targets established as part of a strategy to maintain and build margin to the approved in-service dates will continue to increase significantly throughout 2019. To meet these increasing monthly targets, existing craft construction productivity must improve and additional craft laborers must be retained and deployed.
There have been technical and procedural challenges to the construction and licensing of Plant Vogtle Units 3 and 4 at the federal and state level and additional challenges may arise. Processes are in place that are designed to assure compliance with the requirements specified in the Westinghouse Design Control Document and the combined construction and operating licenses, including inspections by Southern Nuclear and the NRC that occur throughout construction. As a result of such compliance processes, certain license amendment requests have been filed and approved or are pending before the NRC. Various design and other licensing-based compliance matters, including the timely resolution of ITAAC and the related approvals by the NRC, may arise, which may result in additional license amendments or require other resolution. If any license amendment requests or other licensing-based compliance issues are not resolved in a timely manner, there may be delays in the project schedule that could result in increased costs.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The ultimate outcome of these matters cannot be determined at this time. However, any extension of the regulatory-approved project schedule is currently estimated to result in additional base capital costs of approximately $50 million per month, based on Georgia Power's ownership interests, and AFUDC of approximately $12 million per month. While Georgia Power is not precluded from seeking recovery of any future capital cost forecast increase, management will ultimately determine whether or not to seek recovery. Any further changes to the capital cost forecast that are not expected to be recoverable through regulated rates will be required to be charged to income and such charges could be material.
Joint Owner Contracts
In November 2017, the Vogtle Owners entered into an amendment to their joint ownership agreements for Plant Vogtle Units 3 and 4 to provide for, among other conditions, additional Vogtle Owner approval requirements. Effective in August 2018, the Vogtle Owners further amended the joint ownership agreements to clarify and provide procedures for certain provisions of the joint ownership agreements related to adverse events that require the vote of the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 to continue construction (as amended, and together with the November 2017 amendment, the Vogtle Joint Ownership Agreements). The Vogtle Joint Ownership Agreements also confirm that the Vogtle Owners' sole recourse against Georgia Power or Southern Nuclear for any action or inaction in connection with their performance as agent for the Vogtle Owners is limited to removal of Georgia Power and/or Southern Nuclear as agent, except in cases of willful misconduct.
As a result of the increase in the total project capital cost forecast and Georgia Power's decision not to seek rate recovery of the increase in the base capital costs in conjunction with the nineteenth VCM report, the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 were required to vote to continue construction. In September 2018, the Vogtle Owners unanimously voted to continue construction of Plant Vogtle Units 3 and 4.
Amendments to the Vogtle Joint Ownership Agreements
In connection with the vote to continue construction, Georgia Power entered into (i) the Vogtle Owner Term Sheet with the other Vogtle Owners and MEAG's wholly-owned subsidiaries MEAG SPVJ, MEAG Power SPVM, LLC (MEAG SPVM), and MEAG Power SPVP, LLC (MEAG SPVP) to take certain actions which partially mitigate potential financial exposure for the other Vogtle Owners, including additional amendments to the Vogtle Joint Ownership Agreements and the purchase of PTCs from the other Vogtle Owners at pre-established prices, and (ii) the MEAG Term Sheet with MEAG and MEAG SPVJ to provide funding with respect to MEAG SPVJ's ownership interest in Plant Vogtle Units 3 and 4 under certain circumstances. On January 14, 2019, Georgia Power, MEAG, and MEAG SPVJ entered into an agreement to implement the provisions of the MEAG Term Sheet. On February 18, 2019, Georgia Power, the other Vogtle Owners, and MEAG's wholly-owned subsidiaries MEAG SPVJ, MEAG SPVM, and MEAG SPVP entered into certain amendments to the Vogtle Joint Ownership Agreements to implement the provisions of the Vogtle Owner Term Sheet.
The ultimate outcome of these matters cannot be determined at this time.
Regulatory Matters
In 2009, the Georgia PSC voted to certify construction of Plant Vogtle Units 3 and 4 with a certified capital cost of $4.418 billion. In addition, in 2009 the Georgia PSC approved inclusion of the Plant Vogtle Units 3 and 4 related CWIP accounts in rate base, and the State of Georgia enacted the Georgia Nuclear Energy Financing Act, which allows Georgia Power to recover financing costs for Plant Vogtle Units 3 and 4. Financing costs are recovered on all applicable certified costs through annual adjustments to the NCCR tariff up to the certified capital cost of $4.418 billion. As ofAt March 31, 2018,2019, Georgia Power had recovered approximately $1.6$1.9 billion of financing costs. On March 20,Financing costs related to capital costs above $4.418 billion will be recovered through AFUDC; however, Georgia Power will not record AFUDC related to any capital costs in excess of the total deemed reasonable by the Georgia PSC (currently $7.3 billion) and not requested for rate recovery. In December 2018, the Georgia PSC approved a decreaseGeorgia Power's request to increase the NCCR tariff of approximately $50by $88 million annually, effective AprilJanuary 1, 2018.2019.
GEORGIA POWERSOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Georgia Power is required to file semi-annual VCM reports with the Georgia PSC by February 28 and August 31 of each year. In 2013, in connection with the eighth VCM report, the Georgia PSC approved a stipulation between Georgia Power and the staff of the Georgia PSC to waive the requirement to amend the Plant Vogtle Units 3 and 4 certificate in accordance with the 2009 certification order until the completion of Plant Vogtle Unit 3, or earlier if deemed appropriate by the Georgia PSC and Georgia Power.
In 2016, the Georgia PSC voted to approve a settlement agreement (Vogtle Cost Settlement Agreement) resolving certain prudency matters in connection with the fifteenth VCM report. In December 2017, the Georgia PSC voted to approve (and issued its related order on January 11, 2018) certain recommendations made by Georgia Power in thePower's seventeenth VCM report and modifyingmodified the Vogtle Cost Settlement Agreement. The Vogtle Cost Settlement Agreement, as modified by the January 11, 2018 order, resolved the following regulatory matters related to Plant Vogtle Units 3 and 4: (i) none of the $3.3 billion of costs incurred through December 31, 2015 and reflected in the fourteenth VCM report should be disallowed from rate base on the basis of imprudence; (ii) the Contractor Settlement Agreement was reasonable and prudent and none of the amounts paid pursuant to the Contractor Settlement Agreement should be disallowed from rate base on the basis of imprudence; (iii) (a) capital costs incurred up to $5.68 billion would be presumed to be reasonable and prudent with the burden of proof on any party challenging such costs, (b) Georgia Power would have the burden to show that any capital costs above $5.68 billion were prudent, and (c) a revised capital cost forecast of $7.3 billion (after reflecting the impact of payments received under the Guarantee Settlement Agreement and related Customer Refunds) was found reasonable; (iv) construction of Plant Vogtle Units 3 and 4 should be completed, with Southern Nuclear serving as project manager and Bechtel as primary contractor; (v) approved and deemed reasonable Georgia Power's revised schedule placing Plant Vogtle Units 3 and 4 in service in November 2021 and November 2022, respectively; (vi) confirmed that the revised cost forecast does not represent a cost cap and that prudence decisions on cost recovery will be made at a later date, consistent with applicable Georgia law; (vii) reduced the ROE used to calculate the NCCR tariff (a) from 10.95% (the ROE rate setting point authorized by the Georgia PSC in the 2013 ARP) to 10.00% effective January 1, 2016, (b) from 10.00% to 8.30%, effective January 1, 2020, and (c) from 8.30% to 5.30%, effective January 1, 2021 (provided that the ROE in no case will be less than Georgia Power's average cost of long-term debt); (viii) reduced the ROE used for AFUDC equity for Plant Vogtle Units 3 and 4 from 10.00% to Georgia Power's average cost of long-term debt, effective January 1, 2018; and (ix) agreed that upon Unit 3 reaching commercial operation, retail base rates would be adjusted to include carrying costs on those capital costs deemed prudent in the Vogtle Cost Settlement Agreement. The January 11, 2018 order also stated that if Plant Vogtle Units 3 and 4 are not commercially operational by June 1, 2021 and June 1, 2022, respectively, the ROE used to calculate the NCCR tariff will be further reduced by 10 basis points each month (but not lower than Georgia Power's average cost of long-term debt) until the respective unitUnit is commercially operational. The ROE reductions negatively impacted earnings by approximately $25$100 million in 20172018 and are estimated to have negative earnings impacts of approximately $100$75 million in 20182019 and an aggregate of $585approximately $635 million from 20192020 to 2022.
In its January 11, 2018 order, the Georgia PSC also stated if other certain conditions change and assumptions upon which Georgia Power's seventeenth VCM report are based do not materialize, both Georgia Power and the Georgia PSC reservereserved the right to reconsider the decision to continue construction.
OnIn February 12, 2018, Georgia Interfaith Power & Light, Inc. (GIPL) and Partnership for Southern Equity, Inc. (PSE) filed a petition appealing the Georgia PSC's January 11, 2018 order with the Fulton County Superior Court. OnIn March 8, 2018, Georgia Watch filed a similar appeal to the Fulton County Superior Court for judicial review of the Georgia PSC's final decision and denial of Georgia Watch's motion for reconsideration. In December 2018, the Fulton County Superior Court granted Georgia Power's motion to dismiss the two appeals. On January 9, 2019, GIPL, PSE, and Georgia Watch filed an appeal of this decision with the Georgia Court of Appeals. Georgia Power believes the two appeals haveappeal has no merit; however, an adverse outcome in eitherthe appeal combined with subsequent adverse action by the Georgia PSC could have a material impact on Georgia Power'sSouthern Company's results of operations, financial condition, and liquidity.
The IRS has allocated PTCs to each of Plant Vogtle Units 3 and 4. The nominal value of Georgia Power's portion of the PTCs is approximately $500 million per unit.
The Georgia PSC has approved seventeen VCM reports covering the periods through June 30, 2017, including total construction capital costs incurred through that date of $4.4 billion.In August 2018, Georgia Power filed its eighteenthnineteenth VCM report on February 28, 2018 requestingwith the Georgia PSC, which requested approval of $448$578 million of construction capital costs (excludingincurred from January 1, 2018 through June 30, 2018. On February 19, 2019, the $1.7 billionGeorgia PSC approved the nineteenth VCM, but deferred approval of $51.6 million of expenditures
GEORGIA POWERSOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
related to Georgia Power's portion of an administrative claim filed in the Westinghouse bankruptcy proceedings. Through the nineteenth VCM, the Georgia PSC has approved total construction capital costs incurred through June 30, 2018 of $5.4 billion (before $1.7 billion of payments received from Toshiba under the Guarantee Settlement Agreement and theapproximately $188 million in related Customer Refunds recognized as a regulatory liability) incurred from July 1, 2017 through December 31, 2017.
The ultimate outcome of these matters cannot be determined at this time.
Cost and Schedule
Georgia Power's approximate proportionate shareRefunds). In addition, the staff of the remaining estimated capital cost to complete Plant Vogtle Units 3Georgia PSC requested, and 4 with in-service dates of November 2021 and November 2022, respectively, is as follows:
|
| | | |
| | (in billions) |
| Project capital cost forecast | $ | 7.3 |
|
| Net investment as of March 31, 2018 | (3.7 | ) |
| Remaining estimate to complete | $ | 3.6 |
|
Note: Excludes financing costs capitalized through AFUDC and is net of $1.7 billion received from Toshiba in 2017 under the Guarantee Settlement Agreement and $188 million in Customer Refunds recognized as a regulatory liability in 2017.
Georgia Power estimates that its financing costs for constructionagreed, to report the results of Plant Vogtle Units 3the cost and 4 will total approximately $3.1 billion, of which $1.6 billion had been incurred through March 31, 2018.
Subsequentschedule validation process to the EPC Contractor bankruptcy filing, a number of subcontractorsGeorgia PSC (which is expected to the EPC Contractor alleged non-paymentoccur by the EPC Contractor for amounts owed for work performed on Plant Vogtle Units 3May 1, 2019) and 4. Georgia Power, acting for itself and as agent for the Vogtle Owners, has taken actions to remove liens filed by these subcontractors through the posting of surety bonds. Related to such liens, certain subcontractors have filed, and additional subcontractors may file lawsuits against the EPC Contractor and the Vogtle Owners to preserve their payment rights with respect to such claims. All amounts associatedits twentieth VCM report concurrently with the removal of subcontractor liens and other EPC Contractor pre-petition accounts payable have been paid or accrued as of Marchtwenty-first VCM report by August 31, 2018.
As construction continues, challenges with management of contractors, subcontractors, and vendors, labor productivity and availability, fabrication, delivery, assembly, and installation of plant systems, structures, and components (some of which are based on new technology and have not yet operated in the global nuclear industry at this scale), or other issues could arise and change the projected schedule and estimated cost.
There have been technical and procedural challenges to the construction and licensing of Plant Vogtle Units 3 and 4 at the federal and state level and additional challenges may arise. Processes are in place that are designed to assure compliance with the requirements specified in the Westinghouse Design Control Document and the combined construction and operating licenses, including inspections by Southern Nuclear and the NRC that occur throughout construction. As a result of such compliance processes, certain license amendment requests have been filed and approved or are pending before the NRC. Various design and other licensing-based compliance matters, including the timely resolution of Inspections, Tests, Analyses, and Acceptance Criteria and the related approvals by the NRC, may arise, which may result in additional license amendments or require other resolution. If any license amendment requests or other licensing-based compliance issues are not resolved in a timely manner, there may be delays in the project schedule that could result in increased costs.2019.
The ultimate outcome of these matters cannot be determined at this time.
See RISK FACTORS of Georgia PowerSouthern Company in Item 1A of the Form 10-K for a discussion of certain risks associated with the licensing, construction, and operation of nuclear generating units, including potential impacts that could result from a major incident at a nuclear facility anywhere in the world.
DOE Financing
As ofAt March 31, 2018,2019, Georgia Power had borrowed $2.6$3.46 billion related to Plant Vogtle Units 3 and 4 costs as provided through the Amended and Restated Loan Guarantee Agreement and arelated multi-advance credit facilityfacilities among Georgia Power, the DOE, and the FFB, which providesprovide for borrowings of up to $3.46approximately $5.130 billion, subject to the satisfaction of certain conditions. In September
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2017, the DOE issued a conditional commitment to Georgia Power for up to approximately $1.67 billion in additional guaranteed loans under the Loan Guarantee Agreement. This conditional commitment expires on June 30, 2018, subject to any further extension approved by the DOE. Final approval and issuance of these additional loan guarantees by the DOE cannot be assured and are subject to the negotiation of definitive agreements, completion of due diligence by the DOE, receipt of any necessary regulatory approvals, and satisfaction of other conditions. See Note 68 to the financial statements of Georgia Power under "DOE"Long-term Debt – DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under "DOE Loan Guarantee Borrowings" herein for additional information, including applicable covenants, events of default, mandatory prepayment events, and conditions to borrowing.
The ultimate outcome of these matters cannot be determined at this time.
Other Matters
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax "Other Matters" of Georgia PowerSouthern Company in Item 7 of the Form 10-Kfor additional information.
Southern Company and FINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk," Note (B) to the Condensed Financial Statements under "Regulatory Matters – Georgia Power," and Note (H) to the Condensed Financial Statements herein for information regarding the Tax Reform Legislation and related regulatory actions.
Other Matters
Georgia Power isits subsidiaries are involved in various other matters being litigated and regulatory matters that could affect future earnings.earnings, including matters being litigated, as well as other regulatory matters and matters that could result in asset impairments. In addition, Georgia Power isSouthern Company and its subsidiaries are subject to certain claims and legal actions arising in the ordinary course of business. Georgia Power'sThe business activities of Southern Company's subsidiaries are subject to extensive governmental regulation related to public health and the environment, such as regulationlaws and regulations governing air, water, land, and protection of air emissions and water discharges.other natural resources. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental laws and regulations, has occurred throughout the U.S. This litigation has included claims for damages alleged to have been caused by CO2 and other emissions, CCR, and alleged exposure to hazardous materials, and/or requests for injunctive relief in connection with such matters.
The ultimate outcome of such pending or potential litigation, regulatory matters, or potential asset impairments cannot be predicted at this time; however, for current proceedings not specifically reported 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 would have a material effect on Southern Company's financial statements. See Notes (B) and (C) to the Condensed Financial Statements herein for a discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
Litigation
In January 2017, a putative securities class action complaint was filed against Southern Company, certain of its officers, and certain former Mississippi Power officers in the U.S. District Court for the Northern District of Georgia by Monroe County Employees' Retirement System on behalf of all persons who purchased shares of Southern Company's common stock between April 25, 2012 and October 29, 2013. The complaint alleges that Southern Company, certain of its officers, and certain former Mississippi Power officers made materially false and
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
misleading statements regarding the Kemper County energy facility in violation of certain provisions under the Securities Exchange Act of 1934, as amended. The complaint seeks, among other things, compensatory damages and litigation costs and attorneys' fees. In 2017, the plaintiffs filed an amended complaint that provided additional detail about their claims, increased the purported class period by one day, and added certain other former Mississippi Power officers as defendants. Also in 2017, the defendants filed a motion to dismiss the plaintiffs' amended complaint with prejudice, to which the plaintiffs filed an opposition. In March 2018, the court issued an order granting, in part, the defendants' motion to dismiss. The court dismissed certain claims against certain officers of Southern Company and Mississippi Power and dismissed the allegations related to a number of the statements that plaintiffs challenged as being false or misleading. In April 2018, the defendants filed a motion for reconsideration of the court's order, seeking dismissal of the remaining claims in the lawsuit. In August 2018, the court denied the motion for reconsideration and denied a motion to certify the issue for interlocutory appeal.
In February 2017, Jean Vineyard and Judy Mesirov each filed a shareholder derivative lawsuit in the U.S. District Court for the Northern District of Georgia. Each of these lawsuits names as defendants Southern Company, certain of its directors, certain of its officers, and certain former Mississippi Power officers. In 2017, these two shareholder derivative lawsuits were consolidated in the U.S. District Court for the Northern District of Georgia. The complaints allege that the defendants caused Southern Company to make false or misleading statements regarding the Kemper County energy facility cost and schedule. Further, the complaints allege that the defendants were unjustly enriched and caused the waste of corporate assets and also allege that the individual defendants violated their fiduciary duties. Each plaintiff seeks to recover, on behalf of Southern Company, unspecified actual damages and, on each plaintiff's own behalf, attorneys' fees and costs in bringing the lawsuit. Each plaintiff also seeks certain changes to Southern Company's corporate governance and internal processes. In April 2018, the court entered an order staying this lawsuit until 30 days after the resolution of any dispositive motions or any settlement, whichever is earlier, in the putative securities class action.
In May 2017, Helen E. Piper Survivor's Trust filed a shareholder derivative lawsuit in the Superior Court of Gwinnett County, Georgia that names as defendants Southern Company, certain of its directors, certain of its officers, and certain former Mississippi Power officers. The complaint alleges that the individual defendants, among other things, breached their fiduciary duties in connection with schedule delays and cost overruns associated with the construction of the Kemper County energy facility. The complaint further alleges that the individual defendants authorized or failed to correct false and misleading statements regarding the Kemper County energy facility schedule and cost and failed to implement necessary internal controls to prevent harm to Southern Company. The plaintiff seeks to recover, on behalf of Southern Company, unspecified actual damages and disgorgement of profits and, on its behalf, attorneys' fees and costs in bringing the lawsuit. The plaintiff also seeks certain unspecified changes to Southern Company's corporate governance and internal processes. In May 2018, the court entered an order staying this lawsuit until 30 days after the resolution of any dispositive motions or any settlement, whichever is earlier, in the putative securities class action.
In May 2018, Southern Company and Mississippi Power received a notice of dispute and arbitration demand filed by Martin Product Sales, LLC (Martin) based on two agreements, both related to Kemper IGCC byproducts for which Mississippi Power provided termination notices in 2017. Martin alleges breach of contract, breach of good faith and fair dealing, fraud and misrepresentation, and civil conspiracy and makes a claim for damages in the amount of approximately $143 million, as well as additional unspecified damages, attorney's fees, costs, and interest. In the first quarter 2019, Mississippi Power and Southern Company filed motions to dismiss.
Southern Company believes these legal challenges have no merit; however, an adverse outcome in any of these proceedings could have an impact on Southern Company's results of operations, financial condition, and liquidity. The ultimate outcome of these matters cannot be determined at this time.
Mississippi Power
In conjunction with Southern Company's sale of Gulf Power, Mississippi Power and Gulf Power have committed to seek a restructuring of their 50% undivided ownership interests in Plant Daniel such that each of them would, after the restructuring, own 100% of a generating unit. On January 15, 2019, Gulf Power provided notice to Mississippi
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Power that Gulf Power will retire its share of the generating capacity of Plant Daniel on January 15, 2024. Mississippi Power has the option to purchase Gulf Power's ownership interest for $1 on January 15, 2024, provided that Mississippi Power exercises the option no later than 120 days prior to that date. Mississippi Power is assessing the potential operational and economic effects of Gulf Power's notice. The ultimate outcome of these matters remains subject to completion of Mississippi Power's evaluations and applicable regulatory approvals, including by the FERC and the Mississippi PSC, and cannot be determined at this time. See Note (K) to the Condensed Financial Statements under "Southern Company" herein for information regarding the sale of Gulf Power.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Southern Company prepares its consolidated financial statements in accordance with GAAP. Significant accounting policies are described in Notes 1, 5, and 6 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 Southern Company's results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of Southern Company in Item 7 of the Form 10-K for a complete discussion of Southern Company's critical accounting policies and estimates.
Recently Issued Accounting Standards
See Note (A) to the Condensed Financial Statements herein for information regarding Southern Company's recently adopted accounting standards.
FINANCIAL CONDITION AND LIQUIDITY
Overview
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Southern Company in Item 7 of the Form 10-K for additional information. Southern Company's financial condition remained stable at March 31, 2019. Southern Company intends to continue to monitor its access to short-term and long-term capital markets as well as bank credit agreements to meet future capital and liquidity needs. See "Capital Requirements and Contractual Obligations," "Sources of Capital," and "Financing Activities" herein for additional information.
Net cash provided from operating activities totaled $0.7 billion for the first three months of 2019, a decrease of $0.8 billion from the corresponding period in 2018. The decrease in net cash provided from operating activities was primarily due to the timing of vendor payments and the impacts of the Gulf Power disposition and the Southern Company Gas Dispositions. Net cash provided from investing activities totaled $2.5 billion for the first three months of 2019 primarily due to proceeds from the sale of Gulf Power, partially offset by the traditional electric operating companies' installation of equipment to comply with environmental standards and construction of electric generation, transmission, and distribution facilities and capital expenditures for Southern Company Gas' infrastructure replacement programs. Net cash used for financing activities totaled $3.4 billion for the first three months of 2019 primarily due to repayments of short-term bank debt, net redemptions and repurchases of long-term debt, and common stock dividend payments. Cash flows from financing activities vary from period to period based on capital needs and the maturity or redemption of securities. See Notes (F) and (K) to the Condensed Financial Statements herein for additional information.
Significant balance sheet changes for the first three months of 2019 include decreases in assets and liabilities held for sale of $4.9 billion and $3.2 billion, respectively, primarily related to the sale of Gulf Power; the recording of $1.9 billion in operating lease right-of-use assets, net of amortization and operating lease obligations related to the adoption of FASB ASC Topic 842, Leases; a decrease of $1.7 billion in notes payable related to the repayment of short-term bank debt; an increase of $1.6 billion in total stockholders' equity primarily related to the gain on the sale
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of Gulf Power; an increase of $1.4 billion in accumulated deferred income taxes primarily related to the expected utilization of tax credit carryforwards in the 2019 tax year as a result of increased taxable income from the sale of Gulf Power; a decrease of $1.2 billion in long-term debt (including amounts due within one year) resulting from net repayments of long-term debt; and an increase of $0.8 billion in total property, plant, and equipment primarily related to the traditional electric operating companies' installation of equipment to comply with environmental standards and construction of electric generation, transmission, and distribution facilities. See Notes (F), (K), and (L) to the Condensed Financial Statements herein for additional information.
At the end of the first quarter 2019, the market price of Southern Company's common stock was $51.68 per share (based on the closing price as reported on the New York Stock Exchange) and the book value was $25.41 per share, representing a market-to-book ratio of 203%, compared to $43.92, $23.91, and 184%, respectively, at the end of 2018. Southern Company's common stock dividend for the first quarter 2019 was $0.60 per share compared to $0.58 per share in the first quarter 2018.
Capital Requirements and Contractual Obligations
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Southern Company in Item 7 of the Form 10-K for a description of Southern Company's capital requirements and contractual obligations. Approximately $2.3 billion will be required through March 31, 2020 to fund maturities of long-term debt. See "Sources of Capital" herein 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 sources at existing electric generating units, to meet regulatory requirements; changes in FERC rules and regulations; state regulatory agency approvals; changes in the expected environmental compliance program; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; storm impacts; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered. Additionally, planned expenditures for plant acquisitions may vary due to market opportunities and Southern Power's ability to execute its growth strategy. See Note 15 to the financial statements under "Southern Power" in Item 8 of the Form 10-K and Note (K) to the Condensed Financial Statements under "Southern Power" herein for additional information regarding Southern Power's plant acquisitions and construction projects.
The construction program also includes Plant Vogtle Units 3 and 4, which includes components based on new technology that only recently began initial operation in the global nuclear industry at this scale and which may be subject to additional revised cost estimates during construction. The ability to control costs and avoid cost and schedule overruns during the development, construction, and operation of new facilities is subject to a number of factors, including, but not limited to, changes in labor costs, availability, and productivity; challenges with management of contractors, subcontractors, or vendors; adverse weather conditions; shortages, increased costs, or inconsistent quality of equipment, materials, and labor; contractor or supplier delay; non-performance under construction, operating, or other agreements; operational readiness, including specialized operator training and required site safety programs; engineering or design problems; design and other licensing-based compliance matters, including the timely resolution of ITAAC and the related approvals by the NRC; challenges with start-up activities, including major equipment failure and system integration; and/or operational performance. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Georgia Power – Nuclear Construction" herein for information regarding Plant Vogtle Units 3 and 4 and additional factors that may impact construction expenditures.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Sources of Capital
Southern Company intends to meet its future capital needs through operating cash flows, borrowings from financial institutions, and debt and equity issuances in the capital markets. Equity capital can be provided from any combination of Southern Company's stock plans, private placements, or public offerings. The amount and timing of additional equity and debt issuances in 2019, as well as in subsequent years, will be contingent on Southern Company's investment opportunities and the Southern Company system's capital requirements and will depend upon prevailing market conditions and other factors. See "Capital Requirements and Contractual Obligations" herein for additional information.
Except as described herein, the traditional electric operating companies, Southern Power, and Southern Company Gas plan to obtain the funds required for construction and other purposes from operating cash flows, external security issuances, borrowings from financial institutions, and equity contributions or loans from Southern Company. Southern Power also plans to utilize tax equity partnership contributions, as well as funds resulting from its pending asset sales. However, the amount, type, and timing of any future financings, if needed, will depend upon prevailing market conditions, regulatory approval, and other factors. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" of Southern Company in Item 7 of the Form 10-K for additional information. Also see Note (K) to the Condensed Financial Statements under "Southern Power" herein for additional information regarding the pending sales of Plants Mankato and Nacogdoches.
In addition, in 2014, Georgia Power entered into a loan guarantee agreement with the DOE and, in March 2019, entered into the Amended and Restated Loan Guarantee Agreement, under which the proceeds of borrowings may be used to reimburse Georgia Power for Eligible Project Costs incurred in connection with its construction of Plant Vogtle Units 3 and 4.
Under the Amended and Restated Loan Guarantee Agreement, the DOE has agreed to guarantee the obligations of Georgia Power under note purchase agreements among the DOE, Georgia Power, and the FFB and related promissory notes which provide for two multi-advance term loan facilities (FFB Credit Facilities). Under the FFB Credit Facilities, Georgia Power may make term loan borrowings through the FFB in an amount up to approximately $5.130 billion, provided that total aggregate borrowings under the FFB Credit Facilities may not exceed 70% of (i) Eligible Project Costs minus (ii) approximately $1.492 billion (reflecting the amounts received by Georgia Power under the Guarantee Settlement Agreement less the Customer Refunds). At March 31, 2019, Georgia Power had borrowed $3.46 billion under the FFB Credit Facilities.
See Note (F) to the Condensed Financial Statements under "DOE Loan Guarantee Borrowings" herein for additional information regarding the Amended and Restated Loan Guarantee Agreement, including applicable covenants, events of default, mandatory prepayment events, and additional conditions to borrowing. Also see Note (B) to the Condensed Financial Statements under "Georgia Power – Nuclear Construction" herein for additional information regarding Plant Vogtle Units 3 and 4.
Southern Company's current liabilities frequently exceed current assets because of scheduled maturities of long-term debt and the periodic use of short-term debt as a funding source, as well as significant seasonal fluctuations in cash needs. As of March 31, 2019, Southern Company's current liabilities exceeded current assets by $1.2 billion, primarily due to long-term debt that is due within one year of $2.3 billion (including approximately $1.0 billion at Georgia Power, $0.3 billion at Mississippi Power, $0.6 billion at Southern Power, and $0.4 billion at Southern Company Gas) and notes payable of $1.3 billion (including approximately $0.5 billion at the parent company, $0.3 billion at Georgia Power, $0.1 billion at Southern Power, and $0.4 billion at Southern Company Gas), partially offset by $1.4 billion of cash and cash equivalents. To meet short-term cash needs and contingencies, the Southern Company system has substantial cash flow from operating activities and access to capital markets and financial institutions. Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas intend to utilize operating cash flows, as well as commercial paper, lines of credit, bank notes, and securities issuances, as market conditions permit, as well as, under certain circumstances for the traditional electric
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
operating companies, Southern Power, and Southern Company Gas, equity contributions and/or loans from Southern Company to meet their short-term capital needs.
At March 31, 2019, Southern Company and its subsidiaries had approximately $1.4 billion of cash and cash equivalents. Committed credit arrangements with banks at March 31, 2019 were as follows:
|
| | | | | | | | | | | | | | | | | |
| | Expires | | |
| Company | 2019 | 2020 | 2022 | | Total | | Unused(d) |
| | (in millions) |
Southern Company(a) | $ | — |
| $ | — |
| $ | 2,000 |
| | $ | 2,000 |
| | $ | 1,999 |
|
| Alabama Power | 33 |
| 500 |
| 800 |
| | 1,333 |
| | 1,333 |
|
| Georgia Power | — |
| — |
| 1,750 |
| | 1,750 |
| | 1,736 |
|
| Mississippi Power | 100 |
| — |
| — |
| | 100 |
| | 100 |
|
Southern Power(b) | — |
| — |
| 750 |
| | 750 |
| | 741 |
|
Southern Company Gas(c) | — |
| — |
| 1,900 |
| | 1,900 |
| | 1,895 |
|
| Other | 30 |
| — |
| — |
| | 30 |
| | 30 |
|
| Southern Company Consolidated | $ | 163 |
| $ | 500 |
| $ | 7,200 |
| | $ | 7,863 |
| | $ | 7,834 |
|
| |
| (a) | Represents the Southern Company parent entity. |
| |
| (b) | Does not include Southern Power Company's $120 million continuing letter of credit facility for standby letters of credit expiring in 2021, of which $24 million was unused at March 31, 2019. Southern Power's subsidiaries are not parties to its bank credit arrangement. |
| |
| (c) | Southern Company Gas, as the parent entity, guarantees the obligations of Southern Company Gas Capital, which is the borrower of $1.4 billion of this arrangement. Southern Company Gas' committed credit arrangement also includes $500 million for which Nicor Gas is the borrower and which is restricted for working capital needs of Nicor Gas. Pursuant to this multi-year credit arrangement, the allocations between Southern Company Gas Capital and Nicor Gas may be adjusted. |
| |
| (d) | Amounts used are for letters of credit. |
See Note 8 to the financial statements under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.
Most of these bank credit arrangements, as well as the term loan arrangements of Alabama Power, Southern Power Company, and SEGCO, contain covenants that limit debt levels and contain cross-acceleration or cross-default provisions to other indebtedness (including guarantee obligations) that are restricted only to the indebtedness of the individual company. Such cross-default provisions to other indebtedness would trigger an event of default if the applicable borrower defaulted on indebtedness or guarantee obligations over a specified threshold. Such cross-acceleration provisions to other indebtedness would trigger an event of default if the applicable borrower defaulted on indebtedness, the payment of which was then accelerated. At March 31, 2019, Southern Company, the traditional electric operating companies, Southern Power Company, Southern Company Gas, Nicor Gas, and SEGCO were in compliance with all such covenants. None of the bank credit arrangements contain material adverse change clauses at the time of borrowings.
Subject to applicable market conditions, Southern Company and its subsidiaries expect to renew or replace their bank credit arrangements as needed, prior to expiration. In connection therewith, Southern Company and its subsidiaries may extend the maturity dates and/or increase or decrease the lending commitments thereunder.
A portion of the unused credit with banks is allocated to provide liquidity support to the revenue bonds of the traditional electric operating companies and the commercial paper programs of Southern Company, the traditional electric operating companies, Southern Power Company, Southern Company Gas, Nicor Gas, and SEGCO. The amount of variable rate revenue bonds of the traditional electric operating companies outstanding requiring liquidity support as of March 31, 2019 was approximately $1.4 billion. In addition, at March 31, 2019, the traditional electric operating companies had approximately $432 million of revenue bonds outstanding that are required to be remarketed within the next 12 months. Subsequent to March 31, 2019, Georgia Power purchased and held approximately $115 million of outstanding pollution control revenue bonds required to be remarketed.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Southern Company, Alabama Power, Georgia Power, Southern Power Company, Southern Company Gas, 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. Short-term borrowings are included in notes payable in the balance sheets.
Details of short-term borrowings were as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | Short-term Debt at March 31, 2019 | | 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) |
| Commercial paper | | $ | 1,151 |
| | 2.9 | % | | $ | 1,248 |
| | 2.9 | % | | $ | 2,293 |
|
| Short-term bank debt | | 100 |
| | 3.1 | % | | 208 |
| | 3.2 | % | | 1,850 |
|
| Total | | $ | 1,251 |
| | 2.9 | % | | $ | 1,456 |
| | 2.9 | % | | |
| |
| (*) | Average and maximum amounts are based upon daily balances during the three-month period ended March 31, 2019. |
Southern Company believes the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, bank term loans, and operating cash flows.
Credit Rating Risk
At March 31, 2019, Southern Company and its subsidiaries 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 subsidiaries to BBB and/or Baa2 or below. These contracts are for physical electricity and natural gas purchases and sales, fuel purchases, fuel transportation and storage, energy price risk management, transmission, interest rate management, and construction of new generation at Plant Vogtle Units 3 and 4.
The maximum potential collateral requirements under these contracts at March 31, 2019 were as follows:
|
| | | |
| Credit Ratings | Maximum Potential
Collateral
Requirements |
| | (in millions) |
| At BBB and/or Baa2 | $ | 30 |
|
| At BBB- and/or Baa3 | $ | 433 |
|
At BB+ and/or Ba1(*) | $ | 1,988 |
|
| |
| (*) | Any additional credit rating downgrades at or below BB- and/or Ba3 could increase collateral requirements up to an additional $38 million. |
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 Southern Company and its subsidiaries to access capital markets, and would be likely to impact the cost at which they do so.
As a result of the Tax Reform Legislation, certain financial metrics, such as the funds from operations to debt percentage, used by the credit rating agencies to assess Southern Company and its subsidiaries may be negatively impacted. Southern Company and most of its regulated subsidiaries have taken actions to mitigate the resulting impacts, which, among other alternatives, include adjusting capital structure. Absent actions by Southern Company and its subsidiaries that fully mitigate the impacts, the credit ratings of Southern Company and certain of its subsidiaries could be negatively affected. See Note 2 to the financial statements in Item 8 of the Form 10-K for
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
additional information related to state PSC or other regulatory agency actions related to the Tax Reform Legislation, including approvals of capital structure adjustments for Alabama Power, Georgia Power, and Atlanta Gas Light by their respective state PSCs and a similar request by Nicor Gas currently pending Illinois Commission approval, which are expected to help mitigate the potential adverse impacts to certain of their credit metrics.
Financing Activities
During the first three months of 2019, Southern Company issued approximately 6.5 million shares of common stock primarily through employee equity compensation plans and received proceeds of approximately $224 million.
The following table outlines the long-term debt financing activities for Southern Company and its subsidiaries for the first three months of 2019:
|
| | | | | | | | | | | | | | | | | | | |
| Company | Senior Note Maturities, Redemptions, and Repurchases | | Revenue Bond Issuances and Reofferings of Purchased Bonds | | Revenue Bond Maturities, Redemptions, and Repurchases | | Other Long-Term Debt Issuances | | Other Long-Term Debt Redemptions and Maturities(a) |
| | (in millions) |
Southern Company(b) | $ | 2,100 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Alabama Power | 200 |
| | — |
| | — |
| | — |
| | — |
|
| Georgia Power | — |
| | 343 |
| | 108 |
| | 835 |
| | 2 |
|
| Mississippi Power | — |
| | 43 |
| | — |
| | — |
| | — |
|
| Other | — |
| | — |
| | — |
| | — |
| | 19 |
|
| Southern Company Consolidated | $ | 2,300 |
| | $ | 386 |
| | $ | 108 |
| | $ | 835 |
| | $ | 21 |
|
| |
| (a) | Includes reductions in finance lease obligations resulting from cash payments under finance leases. |
| |
| (b) | Represents the Southern Company parent entity. |
Except as otherwise described herein, Southern Company and its subsidiaries 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 subsidiaries also used the proceeds for their construction programs.
In January 2019, Southern Company repaid a $250 million short-term uncommitted bank credit arrangement and a $1.5 billion short-term floating rate bank loan.
Also in January 2019, through cash tender offers, Southern Company repurchased and retired approximately $522 million of the $1.0 billion aggregate principal amount outstanding of its 1.85% Senior Notes due July 1, 2019 (1.85% Notes), approximately $180 million of the $350 million aggregate principal amount outstanding of its Series 2014B 2.15% Senior Notes due September 1, 2019 (Series 2014B Notes), and approximately $504 million of the $750 million aggregate principal amount outstanding of its Series 2018A Floating Rate Notes due February 14, 2020 (Series 2018A Notes), for an aggregate purchase price, excluding accrued and unpaid interest, of approximately $1.2 billion. In addition, following the completion of the cash tender offers, in February 2019, Southern Company completed the redemption of all of the Series 2018A Notes, 1.85% Notes, and Series 2014B Notes remaining outstanding.
As reflected in the table above, in March 2019, Georgia Power made additional borrowings under the FFB Credit Facilities in an aggregate principal amount of $835 million at an interest rate of 3.213% through the final maturity date of February 20, 2044. The proceeds were used to reimburse Georgia Power for Eligible Project Costs relating to the construction of Plant Vogtle Units 3 and 4.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Subsequent to March 31, 2019, Georgia Power purchased and held the following pollution control revenue bonds, which may be reoffered to the public at a later date:
$55 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Fourth Series 1994;
$30 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Fourth Series 1995;
$20 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Ninth Series 1994; and
$10 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Second Series 1994.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Southern Company and its subsidiaries 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.
PART I
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
During the three months ended March 31, 2019, there were no material changes to Southern Company's, Alabama Power's, Georgia Power's, Mississippi Power's, and Southern Power's disclosures about market risk. For additional market risk disclosures relating to Southern Company Gas, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" of Southern Company Gas herein. For an in-depth discussion of each registrant's market risks, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" of each registrant in Item 7 of the Form 10-K and Note 1 to the financial statements under "Financial Instruments" and Notes 13 and 14 to the financial statements in Item 8 of the Form 10-K. Also see Notes (I) and (J) to the Condensed Financial Statements herein for information relating to derivative instruments.
Item 4. Controls and Procedures.
| |
| (a) | Evaluation of disclosure controls and procedures. |
As of the end of the period covered by this Quarterly Report on Form 10-Q, Southern Company, Alabama Power, Georgia Power, Mississippi Power, Southern Power, and Southern Company Gas conducted separate evaluations under the supervision and with the participation of each company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based upon these evaluations, the Chief Executive Officer and the Chief Financial Officer, in each case, concluded that the disclosure controls and procedures are effective.
| |
| (b) | Changes in internal controls over financial reporting. |
There have been no changes in Southern Company's, Alabama Power's, Georgia Power's, Mississippi Power's, Southern Power's, or Southern Company Gas' internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the first quarter 2019 that have materially affected or are reasonably likely to materially affect Southern Company's, Alabama Power's, Georgia Power's, Mississippi Power's, Southern Power's, or Southern Company Gas' internal control over financial reporting.
ALABAMA POWER COMPANY
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2019 | | 2018 |
| | (in millions) |
| Operating Revenues: | | | |
| Retail revenues | $ | 1,213 |
| | $ | 1,285 |
|
| Wholesale revenues, non-affiliates | 61 |
| | 74 |
|
| Wholesale revenues, affiliates | 60 |
| | 51 |
|
| Other revenues | 74 |
| | 63 |
|
| Total operating revenues | 1,408 |
| | 1,473 |
|
| Operating Expenses: | | | |
| Fuel | 301 |
| | 326 |
|
| Purchased power, non-affiliates | 37 |
| | 64 |
|
| Purchased power, affiliates | 21 |
| | 37 |
|
| Other operations and maintenance | 409 |
| | 387 |
|
| Depreciation and amortization | 199 |
| | 189 |
|
| Taxes other than income taxes | 103 |
| | 98 |
|
| Total operating expenses | 1,070 |
| | 1,101 |
|
| Operating Income | 338 |
| | 372 |
|
| Other Income and (Expense): | | | |
| Allowance for equity funds used during construction | 14 |
| | 13 |
|
| Interest expense, net of amounts capitalized | (83 | ) | | (79 | ) |
| Other income (expense), net | 14 |
| | 5 |
|
| Total other income and (expense) | (55 | ) | | (61 | ) |
| Earnings Before Income Taxes | 283 |
| | 311 |
|
| Income taxes | 62 |
| | 82 |
|
| Net Income | 221 |
| | 229 |
|
| Dividends on Preferred Stock | 4 |
| | 4 |
|
| Net Income After Dividends on Preferred Stock | $ | 217 |
| | $ | 225 |
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2019 | | 2018 |
| | (in millions) |
| Net Income | $ | 221 |
| | $ | 229 |
|
| Other comprehensive income (loss): | | | |
| Qualifying hedges: | | | |
Reclassification adjustment for amounts included in net income,
net of tax of $- and $1, respectively | 1 |
| | 1 |
|
| Total other comprehensive income (loss) | 1 |
| | 1 |
|
| Comprehensive Income | $ | 222 |
| | $ | 230 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2019 | | 2018 |
| | (in millions) |
| Operating Activities: | | | |
| Net income | $ | 221 |
| | $ | 229 |
|
| Adjustments to reconcile net income to net cash provided from operating activities — | | | |
| Depreciation and amortization, total | 244 |
| | 228 |
|
| Deferred income taxes | — |
| | 32 |
|
| Other, net | (24 | ) | | (21 | ) |
| Changes in certain current assets and liabilities — | | | |
| -Receivables | 105 |
| | (1 | ) |
| -Prepayments | (78 | ) | | (82 | ) |
| -Materials and supplies | (4 | ) | | (27 | ) |
| -Other current assets | 19 |
| | 19 |
|
| -Accounts payable | (286 | ) | | (216 | ) |
| -Accrued taxes | 80 |
| | 57 |
|
| -Accrued compensation | (122 | ) | | (108 | ) |
| -Other current liabilities | (9 | ) | | 45 |
|
| Net cash provided from operating activities | 146 |
| | 155 |
|
| Investing Activities: | | | |
| Property additions | (390 | ) | | (490 | ) |
| Nuclear decommissioning trust fund purchases | (68 | ) | | (50 | ) |
| Nuclear decommissioning trust fund sales | 68 |
| | 51 |
|
| Cost of removal, net of salvage | (16 | ) | | (19 | ) |
| Change in construction payables | (95 | ) | | (50 | ) |
| Other investing activities | (10 | ) | | (6 | ) |
| Net cash used for investing activities | (511 | ) | | (564 | ) |
| Financing Activities: | | | |
| Increase in notes payable, net | — |
| | 245 |
|
| Proceeds — Capital contributions from parent company | 1,232 |
| | 484 |
|
| Redemptions — Senior notes | (200 | ) | | — |
|
| Payment of common stock dividends | (211 | ) | | (202 | ) |
| Other financing activities | (10 | ) | | (9 | ) |
| Net cash provided from financing activities | 811 |
| | 518 |
|
| Net Change in Cash, Cash Equivalents, and Restricted Cash | 446 |
| | 109 |
|
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 313 |
| | 544 |
|
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 759 |
| | $ | 653 |
|
| Supplemental Cash Flow Information: | | | |
| Cash paid during the period for — | | | |
| Interest (net of $5 and $5 capitalized for 2019 and 2018, respectively) | $ | 89 |
| | $ | 84 |
|
| Income taxes, net | — |
| | 9 |
|
| Noncash transactions — Accrued property additions at end of period | 176 |
| | 195 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Assets | | At March 31, 2019 | | At December 31, 2018 |
| | | (in millions) |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 759 |
| | $ | 313 |
|
| Receivables — | | | | |
| Customer accounts receivable | | 382 |
| | 403 |
|
| Unbilled revenues | | 126 |
| | 150 |
|
| Affiliated | | 45 |
| | 94 |
|
| Other accounts and notes receivable | | 58 |
| | 51 |
|
| Accumulated provision for uncollectible accounts | | (10 | ) | | (10 | ) |
| Fossil fuel stock | | 120 |
| | 141 |
|
| Materials and supplies | | 558 |
| | 546 |
|
| Prepaid expenses | | 113 |
| | 66 |
|
| Other regulatory assets | | 125 |
| | 137 |
|
| Other current assets | | 21 |
| | 18 |
|
| Total current assets | | 2,297 |
| | 1,909 |
|
| Property, Plant, and Equipment: | | | | |
| In service | | 28,810 |
| | 30,402 |
|
| Less: Accumulated provision for depreciation | | 9,447 |
| | 9,988 |
|
| Plant in service, net of depreciation | | 19,363 |
| | 20,414 |
|
| Other utility plant, net | | 1,315 |
| | — |
|
| Nuclear fuel, at amortized cost | | 320 |
| | 324 |
|
| Construction work in progress | | 1,023 |
| | 1,113 |
|
| Total property, plant, and equipment | | 22,021 |
| | 21,851 |
|
| Other Property and Investments: | | | | |
| Equity investments in unconsolidated subsidiaries | | 64 |
| | 65 |
|
| Nuclear decommissioning trusts, at fair value | | 933 |
| | 847 |
|
| Miscellaneous property and investments | | 129 |
| | 127 |
|
| Total other property and investments | | 1,126 |
| | 1,039 |
|
| Deferred Charges and Other Assets: | | | | |
| Operating lease right-of-use assets, net of amortization | | 160 |
| | — |
|
| Deferred charges related to income taxes | | 239 |
| | 240 |
|
| Deferred under recovered regulatory clause revenues | | 21 |
| | 116 |
|
| Other regulatory assets, deferred | | 1,350 |
| | 1,386 |
|
| Other deferred charges and assets | | 193 |
| | 189 |
|
| Total deferred charges and other assets | | 1,963 |
| | 1,931 |
|
| Total Assets | | $ | 27,407 |
| | $ | 26,730 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Liabilities and Stockholder's Equity | | At March 31, 2019 | | At December 31, 2018 |
| | | (in millions) |
| Current Liabilities: | | | | |
| Securities due within one year | | $ | 1 |
| | $ | 201 |
|
| Accounts payable — | | | | |
| Affiliated | | 262 |
| | 364 |
|
| Other | | 346 |
| | 614 |
|
| Customer deposits | | 97 |
| | 96 |
|
| Accrued taxes | | 97 |
| | 44 |
|
| Accrued interest | | 77 |
| | 89 |
|
| Accrued compensation | | 102 |
| | 227 |
|
| Asset retirement obligations | | 163 |
| | 163 |
|
| Other current liabilities | | 97 |
| | 161 |
|
| Total current liabilities | | 1,242 |
| | 1,959 |
|
| Long-term Debt | | 7,924 |
| | 7,923 |
|
| Deferred Credits and Other Liabilities: | | | | |
| Accumulated deferred income taxes | | 2,971 |
| | 2,962 |
|
| Deferred credits related to income taxes | | 2,015 |
| | 2,027 |
|
| Accumulated deferred ITCs | | 105 |
| | 106 |
|
| Employee benefit obligations | | 302 |
| | 314 |
|
| Operating lease obligations | | 147 |
| | — |
|
| Asset retirement obligations, deferred | | 3,064 |
| | 3,047 |
|
| Other cost of removal obligations | | 489 |
| | 497 |
|
| Other regulatory liabilities | | 107 |
| | 69 |
|
| Other deferred credits and liabilities | | 30 |
| | 58 |
|
| Total deferred credits and other liabilities | | 9,230 |
| | 9,080 |
|
| Total Liabilities | | 18,396 |
| | 18,962 |
|
| Redeemable Preferred Stock | | 291 |
| | 291 |
|
Common Stockholder's Equity (See accompanying statements) | | 8,720 |
| | 7,477 |
|
| Total Liabilities and Stockholder's Equity | | $ | 27,407 |
| | $ | 26,730 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY (UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Number of
Common
Shares
Issued | | Common
Stock | | Paid-In
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Total |
| | (in millions) |
| Balance at December 31, 2017 | 31 |
| | $ | 1,222 |
| | $ | 2,986 |
| | $ | 2,647 |
| | $ | (26 | ) | | $ | 6,829 |
|
Net income after dividends on
preferred stock | — |
| | — |
| | — |
| | 225 |
| | — |
| | 225 |
|
| Capital contributions from parent company | — |
| | — |
| | 488 |
| | — |
| | — |
| | 488 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Cash dividends on common stock | — |
| | — |
| | — |
| | (202 | ) | | — |
| | (202 | ) |
| Other | — |
| | — |
| | — |
| | — |
| | (6 | ) | | (6 | ) |
| Balance at March 31, 2018 | 31 |
| | $ | 1,222 |
| | $ | 3,474 |
| | $ | 2,670 |
| | $ | (31 | ) | | $ | 7,335 |
|
| | | | | | | | | | | | |
| Balance at December 31, 2018 | 31 |
| | $ | 1,222 |
| | $ | 3,508 |
| | $ | 2,775 |
| | $ | (28 | ) | | $ | 7,477 |
|
Net income after dividends on
preferred stock | — |
| | — |
| | — |
| | 217 |
| | — |
| | 217 |
|
| Capital contributions from parent company | — |
| | — |
| | 1,236 |
| | — |
| | — |
| | 1,236 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Cash dividends on common stock | — |
| | — |
| | — |
| | (211 | ) | | — |
| | (211 | ) |
| Balance at March 31, 2019 | 31 |
| | $ | 1,222 |
| | $ | 4,744 |
| | $ | 2,781 |
| | $ | (27 | ) | | $ | 8,720 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2019 vs. FIRST QUARTER 2018
OVERVIEW
Alabama Power operates as a vertically integrated utility providing electric service to retail and wholesale customers within its traditional service territory located in the State of Alabama in addition to wholesale customers in the Southeast.
Many factors affect the opportunities, challenges, and risks of Alabama Power's business of providing electric service. These factors include the ability to maintain a constructive regulatory environment, to maintain and grow energy sales and customers, and to effectively manage and secure timely recovery of costs. These costs include those related to projected long-term demand growth, stringent environmental standards, including CCR rules, reliability, fuel, capital expenditures, including improving the electric transmission and distribution systems, and restoration following major storms. Alabama Power has various regulatory mechanisms that operate to address cost recovery. Effectively operating pursuant to these regulatory mechanisms and appropriately balancing required costs and capital expenditures with customer prices will continue to challenge Alabama Power for the foreseeable future.
Alabama Power continues to focus on several key performance indicators including, but not limited to, customer satisfaction, plant availability, system reliability, and net income after dividends on preferred stock.
RESULTS OF OPERATIONS
Net Income
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) |
| (% change) |
| $(8) | | (3.6) |
Alabama Power's net income after dividends on preferred stock for the first quarter 2019 was $217 million compared to $225 million for the corresponding period in 2018. This decrease was primarily related to a decrease in retail revenues associated with milder weather and lower customer usage and an increase in non-fuel operations and maintenance expenses. These decreases to income were partially offset by an increase in retail revenues under Rate CNP Compliance associated with increases in average net investments and a decrease in income tax expense associated with the application in 2018 of the accounting order approved by the Alabama PSC in May 2018 related to the Tax Reform Legislation (Tax Reform Accounting Order). See Note 2 to the financial statements under "Alabama Power – Tax Reform Accounting Order" in Item 8 of the Form 10-K for additional information.
Retail Revenues
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(72) | | (5.6) |
In the first quarter 2019, retail revenues were $1.21 billion compared to $1.29 billion for the corresponding period in 2018.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of the changes in retail revenues were as follows:
|
| | | | | | |
| | First Quarter 2019 |
| | (in millions) |
| (% change) |
| Retail – prior year | $ | 1,285 |
| | |
| Estimated change resulting from – | | | |
| Rates and pricing | 34 |
| | 2.6 |
|
| Sales decline | (17 | ) | | (1.3 | ) |
| Weather | (25 | ) | | (1.9 | ) |
| Fuel and other cost recovery | (64 | ) | | (5.0 | ) |
| Retail – current year | $ | 1,213 |
| | (5.6 | )% |
Revenues associated with changes in rates and pricing increased in the first quarter 2019 when compared to the corresponding period in 2018 primarily due to increased revenues under Rate CNP Compliance associated with increases in average net investments. 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 first quarter 2019 when compared to the corresponding period in 2018. Weather-adjusted commercial KWH sales decreased 3.5% in the first quarter 2019 and weather-adjusted residential KWH sales decreased 2.3% in the first quarter 2019 when compared to the corresponding period in 2018 primarily due to lower customer usage resulting from customer initiatives in energy savings for commercial customers and lower usage due to more energy-efficient residential appliances. Industrial KWH sales decreased 3.0% in the first quarter 2019 when compared to the corresponding period in 2018 as a result of a decrease in demand resulting from changes in production levels primarily in the primary metals, chemicals, and paper sectors, partially offset by increased demand in the pipeline sector.
Revenues resulting from changes in weather decreased in the first quarter 2019 due to milder weather. In the first quarter 2019, the resulting decreases were 3.3% and 1.7% for residential and commercial sales revenues, respectively.
Fuel and other cost recovery revenues decreased in the first quarter 2019 when compared to the corresponding period in 2018 primarily due to a decrease in generation.
Electric rates include provisions to recognize the full recovery of fuel costs, purchased power costs, PPAs certificated by the Alabama PSC, and costs associated with the natural disaster reserve. 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
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(13) | | (17.6) |
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 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.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the first quarter 2019, wholesale revenues from sales to non-affiliates were $61 million compared to $74 million for the corresponding period in 2018. The decrease was primarily due to a 10.1% decrease in the price of energy due to lower natural gas prices and a 9.4% decrease in KWH sales as a result of lower demand in the first quarter 2019 compared to the corresponding period in 2018.
Wholesale Revenues – Affiliates
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $9 | | 17.6 |
Wholesale revenues from sales to affiliated companies will vary depending on demand and the availability and cost of generating resources at each company. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost and energy purchases are generally offset by energy revenues through Alabama Power's energy cost recovery clause.
In the first quarter 2019, wholesale revenues from sales to affiliates were $60 million compared to $51 million for the corresponding period in 2018. The increase was primarily due to a 33.4% increase in KWH sales partially offset by a 12.6% decrease in the price of energy due to increased hydro generation in the first quarter 2019 as compared to the corresponding period in 2018.
Other Revenues
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $11 | | 17.5 |
In the first quarter 2019, other revenues were $74 million compared to $63 million for the corresponding period in 2018. This increase was primarily due to an increase in OATT revenues and opportunity sales of natural gas.
Fuel and Purchased Power Expenses
|
| | | | | | |
| | First Quarter 2019 vs. First Quarter 2018 |
| | (change in millions) | | (% change) |
| Fuel | $ | (25 | ) | | (7.7 | ) |
| Purchased power – non-affiliates | (27 | ) | | (42.2 | ) |
| Purchased power – affiliates | (16 | ) | | (43.2 | ) |
| Total fuel and purchased power expenses | $ | (68 | ) | | |
In the first quarter 2019, fuel and purchased power expenses were $359 million compared to $427 million for the corresponding period in 2018. The decrease was primarily due to a $53 million decrease related to the volume of KWHs generated (excluding hydro) and purchased and a $14 million decrease in the average cost of purchased power.
Fuel and purchased power energy transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Alabama Power's energy cost recovery clause. See Note 2 to the financial statements under "Alabama Power – Rate ECR" in Item 8 of the Form 10-K for additional information.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of Alabama Power's generation and purchased power were as follows:
|
| | | |
| | First Quarter 2019 |
| First Quarter 2018 |
Total generation (in billions of KWHs) | 16 | | 16 |
Total purchased power (in billions of KWHs) | 1 | | 1 |
Sources of generation (percent) — | | | |
| Coal | 43 | | 50 |
| Nuclear | 23 | | 23 |
| Gas | 19 | | 18 |
| Hydro | 15 | | 9 |
Cost of fuel, generated (in cents per net KWH) — | | | |
| Coal | 2.78 | | 2.69 |
| Nuclear | 0.78 | | 0.75 |
| Gas | 2.57 | | 2.87 |
Average cost of fuel, generated (in cents per net KWH)(a) | 2.19 | | 2.23 |
Average cost of purchased power (in cents per net KWH)(b) | 5.75 | | 7.10 |
| |
| (a) | KWHs generated by hydro are excluded from the average cost of fuel, generated. |
| |
| (b) | Average cost of purchased power includes fuel, energy, and transmission purchased by Alabama Power for tolling agreements where power is generated by the provider. |
Fuel
In the first quarter 2019, fuel expense was $301 million compared to $326 million for the corresponding period in 2018. The decrease was primarily due to a 79.7% increase in the volume of KWHs generated by hydro, a 12.7% decrease in the volume of KWHs generated by coal, and a 10.5% decrease in the average cost of natural gas per KWH generated, which excludes fuel associated with tolling agreements. The decrease was partially offset by a 4.6% increase in the volume of KWHs generated by natural gas and a 3.4% increase in the average cost of coal per KWH generated.
Purchased Power – Non-Affiliates
In the first quarter 2019, purchased power expense from non-affiliates was $37 million compared to $64 million for the corresponding period in 2018. The decrease was primarily related to a 28.3% decrease in the average cost of purchased power per KWH due to lower natural gas prices and a 19.7% decrease in the amount of energy purchased due to milder weather in the first quarter 2019 compared to the corresponding period in 2018.
Energy purchases from non-affiliates will vary depending on the market prices of wholesale energy as compared to the cost of the Southern Company system's generation, demand for energy within the Southern Company system's service territory, and the availability of the Southern Company system's generation.
Purchased Power – Affiliates
In the first quarter 2019, purchased power expense from affiliates was $21 million compared to $37 million for the corresponding period in 2018. The decrease was primarily related to a 48.6% decrease in the amount of energy purchased due to increased hydro generation, partially offset by an 11.4% increase in the average cost of purchased power per KWH as a result of firm transportation costs.
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.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Operations and Maintenance Expenses
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $22 | | 5.7 |
In the first quarter 2019, other operations and maintenance expenses were $409 million compared to $387 million for the corresponding period in 2018. This increase was primarily due to increases of $8 million in environmental expenses, $6 million in certain compensation and benefit expenses, and $4 million in nuclear generation expenses primarily due to plant improvement projects.
Depreciation and Amortization
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $10 | | 5.3 |
In the first quarter 2019, depreciation and amortization was $199 million compared to $189 million for the corresponding period in 2018. This increase was primarily due to additional plant in service associated with compliance-related steam, distribution, and transmission.
Other Income (Expense), Net
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $9 | | 180.0 |
In the first quarter 2019, other income (expense), net was $14 million compared to $5 million for the corresponding period in 2018. This increase was primarily due to an increase in interest income from temporary cash investments and additional sales of non-utility property in 2019.
Income Taxes
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(20) | | (24.4) |
In the first quarter 2019, income taxes were $62 million compared to $82 million for the corresponding period in 2018. This decrease was primarily due to lower pre-tax earnings in the first quarter 2019 compared to the corresponding period in 2018 and the application of the Tax Reform Accounting Order in 2018. See Note 2 to the financial statements under "Alabama Power – Tax Reform Accounting Order" in Item 8 of the Form 10-K for additional information.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Alabama Power's future earnings potential. The level of Alabama Power's future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Alabama Power's primary business of providing electric service. These factors include Alabama Power's ability to maintain a constructive regulatory environment that continues to allow for the timely recovery of prudently-incurred costs during a time of increasing costs and the weak pace of growth in new customers and electricity use per customer, especially in residential and commercial markets. Earnings 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, both of
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
which could contribute to a net reduction in customer usage. Earnings are subject to a variety of other factors. These factors include weather, competition, new energy contracts with other utilities, energy conservation practiced by customers, the use of alternative energy sources by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth or decline in Alabama Power's service territory. Demand for electricity is primarily driven by the pace of economic growth that may be affected by changes in regional and global economic conditions, which may impact future earnings. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Alabama Power in Item 7 of the Form 10-K.
Environmental Matters
Alabama Power's operations are regulated by state and federal environmental agencies through a variety of laws and regulations governing air, water, land, and protection of other natural resources,resources. Alabama Power maintains comprehensive environmental compliance and GHG strategies to assess upcoming requirements and compliance costs associated with these environmental laws and regulations. The costs, including capital expenditures, operations and maintenance costs, and costs reflected in ARO liabilities, required to comply with environmental laws and regulations and to achieve stated goals may impact future electric generating unit retirement and replacement decisions, results of operations, cash flows, and/or financial condition. Related costs may result from the installation of additional environmental controls, closure and monitoring of CCR facilities, unit retirements, or changing fuel sources for certain existing units, as well as related upgrades to Alabama Power's transmission and distribution systems. A major portion of these costs is expected to be recovered through existing ratemaking provisions. The ultimate impact of environmental laws and regulations and GHG goals will depend on various factors, such as state adoption and implementation of requirements, the availability and cost of any deployed technology, fuel prices, and the outcome of pending and/or future legal challenges.
New or revised environmental laws and regulations could affect many areas of Alabama Power's operations. The impact of any such changes cannot be determined at this time. Environmental compliance costs could affect earnings if such costs cannot continue to be recovered in rates on a timely basis. Environmental compliance costs are recovered through Rate CNP Compliance. Further, increased costs that are recovered through regulated rates could contribute to reduced demand for electricity, which could negatively affect results of operations, cash flows, and/or financial condition. Additionally, many commercial and industrial customers may also be affected by existing and future environmental requirements, which for some may have the potential to ultimately affect their demand for electricity. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" of Alabama Power in Item 7 of the Form 10-K and Note 2 to the financial statements under "Alabama Power – Rate CNP Compliance" and Note 3 to the financial statements under "Environmental Remediation" in Item 8 of the Form 10-K for additional information.
FERC Matters
See Note 2 to the financial statements under "FERC Matters – Open Access Transmission Tariff" in Item 8 of the Form 10-K for additional information.
On March 25, 2019, the Alabama Municipal Electric Authority and Cooperative Energy and SCS and the traditional electric operating companies (including Alabama Power) filed a formal settlement agreement with the FERC agreeing to a rate reduction based on a 10.6% ROE, with a retroactive effective date of May 10, 2018, and a five-year moratorium on these parties seeking changes to the OATT formula rate. The ultimate outcome of this matter cannot be determined at this time; however, if approved by the FERC as filed, the OATT settlement would not have a material impact on the financial statements of Alabama Power.
Retail Regulatory Matters
Alabama Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Alabama PSC. Alabama Power currently recovers its costs from the regulated retail business primarily through Rate RSE, Rate CNP, Rate ECR, and Rate NDR. In addition, the Alabama PSC issues accounting
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
orders to address current events impacting Alabama Power. See Note 2 to the financial statements under "Alabama Power" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein for additional information regarding Alabama Power's rate mechanisms, accounting orders, and the recovery balance of each regulatory clause for Alabama Power.
Environmental Accounting Order
In connection with management's decision to retire Plant Gorgas, in February 2019, Alabama Power reclassified approximately $1.3 billion for Plant Gorgas Unit 10 from plant in service, net of depreciation to other utility plant, net and continued to depreciate the asset according to the original depreciation rates. On April 15, 2019, Alabama Power retired Plant Gorgas Units 8, 9, and 10 and reclassified approximately $740 million of the remaining net investment costs of the units to a regulatory asset to be recovered over the units' remaining useful lives as established prior to the decision to retire. Additionally, approximately $700 million of net capitalized asset retirement costs will be reclassified to a regulatory asset and recovered in accordance with accounting guidance provided by the Alabama PSC. See Note 2 to the financial statements under "Alabama Power – Environmental Accounting Order" and Note 6 in Item 8 of the Form 10-K for additional information.
Other Matters
Alabama Power is involved in various other matters that could affect future earnings, including matters being litigated and regulatory matters. In addition, Alabama Power is subject to certain claims and legal actions arising in the ordinary course of business. Alabama Power's business activities are subject to extensive governmental regulation related to public health and the environment, such as laws and regulations governing air, water, land, and protection of other natural resources. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental laws and regulations, has occurred throughout the U.S. This litigation has included claims for damages alleged to have been caused by CO2 and other emissions, CCR, and alleged exposure to hazardous materials, and/or requests for injunctive relief in connection with such matters.
The ultimate outcome of such pending or potential litigation or regulatory matters cannot be predicted at this time; however, for current proceedings not specifically reported in NoteNotes (B) and (C) to the Condensed Financial Statements herein, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on GeorgiaAlabama Power's financial statements. See NoteNotes (B) and (C) to the Condensed Financial Statements herein for a discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Alabama Power prepares its financial statements in accordance with GAAP. Significant accounting policies are described in Notes 1, 5, and 6 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 Alabama Power's results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of Alabama Power in Item 7 of the Form 10-K for a complete discussion of Alabama Power's critical accounting policies and estimates.
Recently Issued Accounting Standards
See Note (A) to the Condensed Financial Statements herein for information regarding Alabama Power's recently adopted accounting standards.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
Overview
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Alabama Power in Item 7 of the Form 10-K for additional information. Alabama Power's financial condition remained stable at March 31, 2019. Alabama Power intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements to meet future capital and liquidity needs. See "Capital Requirements and Contractual Obligations," "Sources of Capital," and "Financing Activities" herein for additional information.
Net cash provided from operating activities totaled $146 million for the first three months of 2019, a decrease of $9 million as compared to the first three months of 2018. The decrease in net cash provided from operating activities was primarily due to timing of vendor payments and other current liabilities, partially offset by increased fuel cost recovery. Net cash used for investing activities totaled $511 million for the first three months of 2019 primarily related to additional capital expenditures for distribution, environmental, and transmission assets. Net cash provided from financing activities totaled $811 million for the first three months of 2019 primarily due to capital contributions from Southern Company, partially offset by a payment of common stock dividends and a long-term debt maturity. Fluctuations in cash flows from financing activities vary from period to period based on capital needs and the maturity or redemption of securities.
Significant balance sheet changes for the first three months of 2019 include increases of $1.2 billion in total common stockholder's equity, primarily due to a $1.225 billion capital contribution from Southern Company, and $446 million in cash and cash equivalents. Other significant changes include decreases of $268 million in other accounts payable primarily due to the timing of vendor payments and $200 million in securities due within one year due to the maturity of long-term debt.
Capital Requirements and Contractual Obligations
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Alabama Power in Item 7 of the Form 10-K for a description of Alabama Power's capital requirements and contractual obligations. There are no scheduled maturities of long-term debt through March 31, 2020.
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" of Alabama Power in Item 7 of the Form 10-K for additional information on Alabama Power's environmental compliance strategy.
The construction program is 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 generating plants, including unit retirements and replacements and adding or changing fuel sources at existing generating units, to meet regulatory requirements; changes in the expected environmental compliance program; changes in FERC rules and regulations; Alabama PSC approvals; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; storm impacts; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.
Sources of Capital
Alabama Power plans to obtain the funds to meet its future capital needs from sources similar to those used in the past, which were primarily from operating cash flows, external security issuances, borrowings from financial institutions, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon prevailing market conditions, regulatory approval, and other factors. In January 2019, Alabama Power received a capital contribution totaling $1.225 billion from Southern Company. See
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" of Alabama Power in Item 7 of the Form 10-K for additional information.
Alabama Power's current liabilities sometimes exceed 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.
At March 31, 2019, Alabama Power had approximately $759 million of cash and cash equivalents. Committed credit arrangements with banks at March 31, 2019 were as follows:
|
| | | | | | | | | | | | | | | | | | |
| Expires | | | | |
| 2019 | | 2020 | | 2022 | | Total | | Unused |
| (in millions) |
| $ | 33 |
| | $ | 500 |
| | $ | 800 |
| | $ | 1,333 |
| | $ | 1,333 |
|
See Note 8 to the financial statements under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.
Most of these bank credit arrangements, as well as Alabama Power's term loan arrangements, contain covenants that limit debt levels and contain cross-acceleration provisions to other indebtedness (including guarantee obligations) of Alabama Power. Such cross-acceleration provisions to other indebtedness would trigger an event of default if Alabama Power defaulted on indebtedness, the payment of which was then accelerated. At March 31, 2019, Alabama Power was in compliance with all such covenants. None of the bank credit arrangements contain material adverse change clauses at the time of borrowings.
Subject to applicable market conditions, Alabama Power expects to renew or replace its bank credit arrangements as needed prior to expiration. In connection therewith, Alabama Power 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 Alabama Power's pollution control revenue bonds and commercial paper programs. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support was approximately $854 million as of March 31, 2019. At March 31, 2019, Alabama Power had $87 million of fixed rate pollution control revenue bonds outstanding that were required to be reoffered within the next 12 months.
Alabama Power also has substantial cash flow from operating activities and access to the capital markets, including a commercial paper program, to meet liquidity needs. Alabama Power may meet short-term cash needs through its commercial paper program. Alabama Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper at the request and for the benefit of Alabama Power and the other traditional electric operating companies. Proceeds from such issuances for the benefit of Alabama Power are loaned directly to Alabama Power. The obligations of each traditional electric operating company under these arrangements are several and there is no cross-affiliate credit support. Short-term borrowings are included in notes payable in the balance sheets.
Details of short-term borrowings were as follows:
|
| | | | | | | | | | |
| | Short-term Debt During the Period(*) |
| | Average
Amount Outstanding | | Weighted
Average
Interest
Rate | | Maximum
Amount
Outstanding |
| | (in millions) | | | | (in millions) |
| Commercial paper | $ | 32 |
| | 2.7 | % | | $ | 185 |
|
| |
| (*) | Average and maximum amounts are based upon daily balances during the three-month period ended March 31, 2019. No short-term debt was outstanding at March 31, 2019. |
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Alabama Power believes the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, and operating cash flows.
Credit Rating Risk
At March 31, 2019, Alabama Power 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 to BBB and/or Baa2 or below. These contracts are primarily for physical electricity purchases, fuel purchases, fuel transportation and storage, energy price risk management, and transmission. At March 31, 2019, the maximum potential collateral requirements at a rating below BBB- and/or Baa3 totaled approximately $354 million.
Included in these amounts are certain agreements that could require collateral in the event that either Alabama Power or Georgia Power (an affiliate of Alabama 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 Alabama Power to access capital markets and would be likely to impact the cost at which it does so.
As a result of the Tax Reform Legislation, certain financial metrics, such as the funds from operations to debt percentage, used by the credit rating agencies to assess Southern Company and its subsidiaries, including Alabama Power, may be negatively impacted. The modifications to Rate RSE and other commitments approved by the Alabama PSC are expected to help mitigate these potential adverse impacts to certain credit metrics and will help Alabama Power meet its goal of achieving an equity ratio of approximately 55% by the end of 2025. See Note 2 to the financial statements under "Alabama Power – Rate RSE" in Item 8 of the Form 10-K for additional information.
Financing Activities
In February 2019, Alabama Power repaid at maturity $200 million aggregate principal amount of Series Z 5.125% Senior Notes due February 15, 2019.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Alabama Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.
GEORGIA POWER COMPANY
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2019 | | 2018 |
| | (in millions) |
| Operating Revenues: | | | |
| Retail revenues | $ | 1,668 |
| | $ | 1,798 |
|
| Wholesale revenues, non-affiliates | 29 |
| | 44 |
|
| Wholesale revenues, affiliates | 3 |
| | 10 |
|
| Other revenues | 133 |
| | 109 |
|
| Total operating revenues | 1,833 |
| | 1,961 |
|
| Operating Expenses: | | | |
| Fuel | 299 |
| | 412 |
|
| Purchased power, non-affiliates | 118 |
| | 121 |
|
| Purchased power, affiliates | 176 |
| | 171 |
|
| Other operations and maintenance | 446 |
| | 408 |
|
| Depreciation and amortization | 240 |
| | 228 |
|
| Taxes other than income taxes | 106 |
| | 108 |
|
| Total operating expenses | 1,385 |
| | 1,448 |
|
| Operating Income | 448 |
| | 513 |
|
| Other Income and (Expense): | | | |
| Interest expense, net of amounts capitalized | (96 | ) | | (106 | ) |
| Other income (expense), net | 40 |
| | 38 |
|
| Total other income and (expense) | (56 | ) | | (68 | ) |
| Earnings Before Income Taxes | 392 |
| | 445 |
|
| Income taxes | 81 |
| | 93 |
|
| Net Income | $ | 311 |
| | $ | 352 |
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2019 | | 2018 |
| | (in millions) |
| Net Income | $ | 311 |
| | $ | 352 |
|
| Other comprehensive income (loss): | | | |
| Qualifying hedges: | | | |
Reclassification adjustment for amounts included in net income,
net of tax of $- and $-, respectively | 1 |
| | 1 |
|
| Total other comprehensive income (loss) | 1 |
| | 1 |
|
| Comprehensive Income | $ | 312 |
| | $ | 353 |
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) |
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2019 | | 2018 |
| | (in millions) |
| Operating Activities: | | | |
| Net income | $ | 311 |
| | $ | 352 |
|
| Adjustments to reconcile net income to net cash provided from operating activities — | | | |
| Depreciation and amortization, total | 287 |
| | 280 |
|
| Deferred income taxes | 127 |
| | (38 | ) |
| Pension, postretirement, and other employee benefits | (35 | ) | | (19 | ) |
| Settlement of asset retirement obligations | (34 | ) | | (23 | ) |
| Other, net | (18 | ) | | 28 |
|
| Changes in certain current assets and liabilities — | | | |
| -Receivables | 91 |
| | 135 |
|
| -Fossil fuel stock | (41 | ) | | 24 |
|
| -Prepaid income taxes | (73 | ) | | 84 |
|
| -Other current assets | 33 |
| | 9 |
|
| -Accounts payable | (166 | ) | | (180 | ) |
| -Accrued taxes | (245 | ) | | (191 | ) |
| -Accrued compensation | (67 | ) | | (85 | ) |
| -Other current liabilities | 42 |
| | (3 | ) |
| Net cash provided from operating activities | 212 |
| | 373 |
|
| Investing Activities: | | | |
| Property additions | (875 | ) | | (681 | ) |
| Nuclear decommissioning trust fund purchases | (129 | ) | | (255 | ) |
| Nuclear decommissioning trust fund sales | 124 |
| | 250 |
|
| Cost of removal, net of salvage | (58 | ) | | (26 | ) |
| Change in construction payables, net of joint owner portion | (38 | ) | | (47 | ) |
| Payments pursuant to LTSAs | (2 | ) | | (43 | ) |
| Proceeds from asset dispositions | 7 |
| | 134 |
|
| Other investing activities | (9 | ) | | — |
|
| Net cash used for investing activities | (980 | ) | | (668 | ) |
| Financing Activities: | | | |
| Decrease in notes payable, net | (19 | ) | | — |
|
| Proceeds — | | | |
| FFB loan | 835 |
| | — |
|
| Pollution control revenue bonds | 343 |
| | — |
|
| Capital contributions from parent company | 27 |
| | 1,474 |
|
| Redemptions and repurchases — | | | |
| Pollution control revenue bonds | (108 | ) | | (278 | ) |
| Short-term borrowings | — |
| | (150 | ) |
| Other long-term debt | — |
| | (100 | ) |
| Payment of common stock dividends | (394 | ) | | (339 | ) |
| Other financing activities | (19 | ) | | (6 | ) |
| Net cash provided from financing activities | 665 |
| | 601 |
|
| Net Change in Cash, Cash Equivalents, and Restricted Cash | (103 | ) | | 306 |
|
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 112 |
| | 852 |
|
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 9 |
| | $ | 1,158 |
|
| Supplemental Cash Flow Information: | | | |
| Cash paid during the period for — | | | |
| Interest (net of $8 and $6 capitalized for 2019 and 2018, respectively) | $ | 92 |
| | $ | 115 |
|
| Noncash transactions — Accrued property additions at end of period | 607 |
| | 525 |
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Assets | | At March 31, 2019 | | At December 31, 2018 |
| | | (in millions) |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 9 |
| | $ | 4 |
|
| Restricted cash and cash equivalents | | — |
| | 108 |
|
| Receivables — | | | | |
| Customer accounts receivable | | 550 |
| | 591 |
|
| Unbilled revenues | | 179 |
| | 208 |
|
| Under recovered fuel clause revenues | | 73 |
| | 115 |
|
| Joint owner accounts receivable | | 170 |
| | 170 |
|
| Affiliated | | 21 |
| | 39 |
|
| Other accounts and notes receivable | | 241 |
| | 80 |
|
| Accumulated provision for uncollectible accounts | | (2 | ) | | (2 | ) |
| Fossil fuel stock | | 272 |
| | 231 |
|
| Materials and supplies | | 504 |
| | 519 |
|
| Prepaid expenses | | 193 |
| | 142 |
|
| Other regulatory assets | | 210 |
| | 199 |
|
| Other current assets | | 48 |
| | 70 |
|
| Total current assets | | 2,468 |
| | 2,474 |
|
| Property, Plant, and Equipment: | | | | |
| In service | | 38,015 |
| | 37,675 |
|
| Less: Accumulated provision for depreciation | | 12,210 |
| | 12,096 |
|
| Plant in service, net of depreciation | | 25,805 |
| | 25,579 |
|
| Nuclear fuel, at amortized cost | | 565 |
| | 550 |
|
| Construction work in progress | | 5,298 |
| | 4,833 |
|
| Total property, plant, and equipment | | 31,668 |
| | 30,962 |
|
| Other Property and Investments: | | | | |
| Equity investments in unconsolidated subsidiaries | | 50 |
| | 51 |
|
| Nuclear decommissioning trusts, at fair value | | 942 |
| | 873 |
|
| Miscellaneous property and investments | | 73 |
| | 72 |
|
| Total other property and investments | | 1,065 |
| | 996 |
|
| Deferred Charges and Other Assets: | | | | |
| Operating lease right-of-use assets, net of amortization | | 1,519 |
| | — |
|
| Deferred charges related to income taxes | | 518 |
| | 517 |
|
| Other regulatory assets, deferred | | 4,921 |
| | 4,902 |
|
| Other deferred charges and assets | | 379 |
| | 514 |
|
| Total deferred charges and other assets | | 7,337 |
| | 5,933 |
|
| Total Assets | | $ | 42,538 |
| | $ | 40,365 |
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Liabilities and Stockholder's Equity | | At March 31, 2019 | | At December 31, 2018 |
| | | (in millions) |
| Current Liabilities: | | | | |
| Securities due within one year | | $ | 973 |
| | $ | 617 |
|
| Notes payable | | 275 |
| | 294 |
|
| Accounts payable — | | | | |
| Affiliated | | 448 |
| | 575 |
|
| Other | | 827 |
| | 890 |
|
| Customer deposits | | 278 |
| | 276 |
|
| Accrued taxes | | 132 |
| | 377 |
|
| Accrued interest | | 103 |
| | 105 |
|
| Accrued compensation | | 112 |
| | 221 |
|
| Asset retirement obligations | | 221 |
| | 202 |
|
| Other regulatory liabilities | | 197 |
| | 169 |
|
| Other current liabilities | | 305 |
| | 183 |
|
| Total current liabilities | | 3,871 |
| | 3,909 |
|
| Long-term Debt | | 10,108 |
| | 9,364 |
|
| Deferred Credits and Other Liabilities: | | | | |
| Accumulated deferred income taxes | | 3,192 |
| | 3,062 |
|
| Deferred credits related to income taxes | | 3,079 |
| | 3,080 |
|
| Accumulated deferred ITCs | | 259 |
| | 262 |
|
| Employee benefit obligations | | 567 |
| | 599 |
|
| Operating lease obligations | | 1,404 |
| | — |
|
| Asset retirement obligations, deferred | | 5,634 |
| | 5,627 |
|
| Other deferred credits and liabilities | | 155 |
| | 139 |
|
| Total deferred credits and other liabilities | | 14,290 |
| | 12,769 |
|
| Total Liabilities | | 28,269 |
| | 26,042 |
|
Common Stockholder's Equity (See accompanying statements) | | 14,269 |
| | 14,323 |
|
| Total Liabilities and Stockholder's Equity | | $ | 42,538 |
| | $ | 40,365 |
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY (UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Number of
Common
Shares
Issued | | Common
Stock | | Paid-In
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Total |
| | (in millions) |
| Balance at December 31, 2017 | 9 |
| | $ | 398 |
| | $ | 7,328 |
| | $ | 4,215 |
| | $ | (10 | ) | | $ | 11,931 |
|
| Net income | — |
| | — |
| | — |
| | 352 |
| | — |
| | 352 |
|
| Capital contributions from parent company | — |
| | — |
| | 1,476 |
| | — |
| | — |
| | 1,476 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Cash dividends on common stock | — |
| | — |
| | — |
| | (339 | ) | | — |
| | (339 | ) |
| Other | — |
| | — |
| | 1 |
| | — |
| | (2 | ) | | (1 | ) |
| Balance at March 31, 2018 | 9 |
| | $ | 398 |
| | $ | 8,805 |
| | $ | 4,228 |
| | $ | (11 | ) | | $ | 13,420 |
|
| | | | | | | | | | | | |
| Balance at December 31, 2018 | 9 |
| | $ | 398 |
| | $ | 10,322 |
| | $ | 3,612 |
| | $ | (9 | ) | | $ | 14,323 |
|
| Net income | — |
| | — |
| | — |
| | 311 |
| | — |
| | 311 |
|
| Capital contributions from parent company | — |
| | — |
| | 29 |
| | — |
| | — |
| | 29 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Cash dividends on common stock | — |
| | — |
| | — |
| | (394 | ) | | — |
| | (394 | ) |
| Other | — |
| | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) |
| Balance at March 31, 2019 | 9 |
| | $ | 398 |
| | $ | 10,350 |
| | $ | 3,529 |
| | $ | (8 | ) | | $ | 14,269 |
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2019 vs. FIRST QUARTER 2018
OVERVIEW
Georgia Power operates as a vertically integrated utility providing electric service to retail customers within its traditional service territory located within the State of Georgia and to wholesale customers in the Southeast.
Many factors affect the opportunities, challenges, and risks of Georgia Power's business of providing electric service. These factors include the ability to maintain a constructive regulatory environment, to maintain and grow energy sales and customers, and to effectively manage and secure timely recovery of costs. These costs include those related to projected long-term demand growth, stringent environmental standards, including CCR rules, reliability, fuel, capital expenditures, including new generating facilities and expanding and improving transmission and distribution facilities, and restoration following major storms. Georgia Power has various regulatory mechanisms that operate to address cost recovery. Effectively operating pursuant to these regulatory mechanisms and appropriately balancing required costs and capital expenditures with customer prices will continue to challenge Georgia Power for the foreseeable future. Georgia Power is required to file a base rate case by July 1, 2019.
Georgia Power continues to focus on several key performance indicators, including, but not limited to, customer satisfaction, plant availability, system reliability, the execution of major construction projects, and net income.
Plant Vogtle Units 3 and 4 Status
In 2009, the Georgia PSC certified construction of Plant Vogtle Units 3 and 4 (with electric generating capacity of approximately 1,100 MWs each). Georgia Power holds a 45.7% ownership interest in Plant Vogtle Units 3 and 4. In March 2017, the EPC Contractor filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. In December 2017, the Georgia PSC approved Georgia Power's recommendation to continue construction. The current expected in-service dates remain November 2021 for Unit 3 and November 2022 for Unit 4.
In the second quarter 2018, Georgia Power revised its base capital cost forecast and estimated contingency to complete construction and start-up of Plant Vogtle Units 3 and 4 to $8.0 billion and $0.4 billion, respectively, for a total project capital cost forecast of $8.4 billion (net of $1.7 billion received under the Guarantee Settlement Agreement and approximately $188 million in related Customer Refunds), with respect to Georgia Power's ownership interest.
As a result of the increase in the total project capital cost forecast and Georgia Power's decision not to seek rate recovery of the increase in the base capital costs, the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 were required to vote to continue construction. In September 2018, the Vogtle Owners unanimously voted to continue construction of Plant Vogtle Units 3 and 4. In connection with the vote to continue construction, Georgia Power entered into (i) a binding term sheet (Vogtle Owner Term Sheet) with the other Vogtle Owners and certain of MEAG's wholly-owned subsidiaries, including MEAG Power SPVJ, LLC (MEAG SPVJ), to take certain actions which partially mitigate potential financial exposure for the other Vogtle Owners and (ii) a term sheet (MEAG Term Sheet) with MEAG and MEAG SPVJ to provide funding with respect to MEAG SPVJ's ownership interest in Plant Vogtle Units 3 and 4 under certain circumstances. On January 14, 2019, Georgia Power, MEAG, and MEAG SPVJ entered into an agreement to implement the provisions of the MEAG Term Sheet. On February 18, 2019, Georgia Power, the other Vogtle Owners, and certain of MEAG's wholly-owned subsidiaries entered into certain amendments to their joint ownership agreements to implement the provisions of the Vogtle Owner Term Sheet.
In April 2019, Southern Nuclear completed a cost and schedule validation process to verify and update quantities of commodities remaining to install, labor hours to install remaining quantities and related productivity, testing and system turnover requirements, and forecasted staffing needs and related costs. This process confirmed the total estimated project capital cost forecast for Plant Vogtle Units 3 and 4. The expected in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4, as previously approved by the Georgia PSC, remain unchanged.
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In March 2019, Georgia Power entered into the Amended and Restated Loan Guarantee Agreement with the DOE, under which the proceeds of borrowings may be used to reimburse Georgia Power for Eligible Project Costs incurred in connection with its construction of Plant Vogtle Units 3 and 4, up to approximately $5.130 billion. At March 31, 2019, Georgia Power had a total of $3.46 billion of borrowings outstanding under the related multi-advance credit facilities.
The ultimate outcome of these matters cannot be determined at this time.
See FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Nuclear Construction" and Note (F) to the Condensed Financial Statements under "DOE Loan Guarantee Borrowings" herein for additional information.
RESULTS OF OPERATIONS
Net Income
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(41) | | (11.6) |
In the first quarter 2019, net income was $311 million compared to $352 million for the corresponding period in 2018. The decrease was primarily due to a decrease in retail revenues largely due to milder weather compared to the corresponding period in 2018 and higher non-fuel operations and maintenance expenses.
Retail Revenues
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(130) | | (7.2) |
In the first quarter 2019, retail revenues were $1.67 billion compared to $1.80 billion for the corresponding period in 2018.
Details of the changes in retail revenues were as follows:
|
| | | | | | |
| | First Quarter 2019 |
| | (in millions) | | (% change) |
| Retail – prior year | $ | 1,798 |
| | |
| Estimated change resulting from – | | | |
| Rates and pricing | 9 |
| | 0.5 |
|
| Sales growth | 5 |
| | 0.3 |
|
| Weather | (57 | ) | | (3.2 | ) |
| Fuel cost recovery | (87 | ) | | (4.8 | ) |
| Retail – current year | $ | 1,668 |
| | (7.2 | )% |
Revenues associated with changes in rates and pricing increased in the first quarter 2019 when compared to the corresponding period in 2018 primarily due to the rate pricing effect of decreased customer usage and increases in revenues recognized under the NCCR tariff, partially offset by lower contributions from commercial and industrial customers with variable demand-driven pricing. See FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Nuclear Construction – Regulatory Matters" herein for additional information related to the NCCR tariff.
Revenues attributable to changes in sales increased in the first quarter 2019 when compared to the corresponding period in 2018. Weather-adjusted residential KWH sales increased 2.1% in the first quarter 2019 largely due to customer growth. Weather-adjusted commercial KWH sales decreased 1.1% in the first quarter 2019 largely due to a
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
decline in average customer usage resulting from an increase in energy saving initiatives, partially offset by customer growth. Weather-adjusted industrial KWH sales were relatively flat in the first quarter 2019. The primary drivers were decreases in the textile and stone, clay, and glass sectors, largely offset by increases in the paper, primary and fabricated metal, and chemical sectors.
Fuel revenues and costs are allocated between retail and wholesale jurisdictions. Retail fuel cost recovery revenues decreased in the first quarter 2019 when compared to the corresponding period in 2018 primarily due to decreased energy sales driven by milder weather, resulting in lower customer demand, and lower generation costs. Electric rates include provisions to periodically 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 MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Fuel Cost Recovery" of Georgia Power in Item 7 of the Form 10-K for additional information.
Wholesale Revenues – Non-Affiliates
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(15) | | (34.1) |
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 either on a levelized basis over the appropriate contract period or the 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.
In the first quarter 2019, wholesale revenues from sales to non-affiliates were $29 million compared to $44 million for the corresponding period in 2018. The decrease was due to a decrease in energy revenues primarily due to lower customer demand and scheduled generation outages.
Other Revenues
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $24 | | 22.0 |
In the first quarter 2019, other revenues were $133 million compared to $109 million for the corresponding period in 2018. The increase was primarily due to revenue increases of $11 million from unregulated sales primarily associated with new energy conservation projects, $6 million from OATT sales, and $4 million from solar application fees.
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and Purchased Power Expenses
|
| | | | | | |
| | First Quarter 2019 vs. First Quarter 2018 |
| | (change in millions) | | (% change) |
| Fuel | $ | (113 | ) | | (27.4 | ) |
| Purchased power – non-affiliates | (3 | ) | | (2.5 | ) |
| Purchased power – affiliates | 5 |
| | 2.9 |
|
| Total fuel and purchased power expenses | $ | (111 | ) | | |
In the first quarter 2019, total fuel and purchased power expenses were $593 million compared to $704 million in the corresponding period in 2018. The decrease was primarily due to a $130 million decrease related to the average cost of fuel and purchased power primarily related to lower energy prices and more rainfall for hydro generation, partially offset by a net increase of $19 million related to the volume of KWHs generated and purchased.
Fuel and purchased power energy transactions do not have a significant impact on earnings since these fuel expenses are generally offset by fuel revenues through Georgia Power's fuel cost recovery mechanism. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Fuel Cost Recovery" of Georgia Power in Item 7 of the Form 10-K for additional information.
Details of Georgia Power's generation and purchased power were as follows:
|
| | | |
| | First Quarter 2019 | | First Quarter 2018 |
Total generation (in billions of KWHs) | 13 | | 16 |
Total purchased power (in billions of KWHs) | 8 | | 6 |
Sources of generation (percent) — | | | |
| Gas | 50 | | 44 |
| Coal | 18 | | 29 |
| Nuclear | 26 | | 24 |
| Hydro | 6 | | 3 |
Cost of fuel, generated (in cents per net KWH) — | | | |
| Gas | 2.59 | | 2.72 |
| Coal | 3.23 | | 3.36 |
| Nuclear | 0.81 | | 0.82 |
Average cost of fuel, generated (in cents per net KWH) | 2.21 | | 2.43 |
Average cost of purchased power (in cents per net KWH)(*) | 3.94 | | 5.38 |
| |
| (*) | Average cost of purchased power includes fuel purchased by Georgia Power for tolling agreements where power is generated by the provider. |
Fuel
In the first quarter 2019, fuel expense was $299 million compared to $412 million in the corresponding period in 2018. The decrease was primarily due to a 22.1% decrease in the volume of KWHs generated largely due to scheduled generation outages and milder weather, a 9.1% decrease in the average cost of fuel primarily related to lower natural gas and coal prices, and more rainfall for hydro generation.
Purchased Power – Non-Affiliates
In the first quarter 2019, purchased power expense from non-affiliates was $118 million compared to $121 million in the corresponding period in 2018. The decrease was primarily due to a 32.5% decrease in the average cost per KWH purchased primarily due to lower natural gas and coal prices, largely offset by a 35.2% increase in the volume
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of KWHs purchased primarily due to scheduled generation outages at Georgia Power-owned generating units. The volume increase also reflects purchases from Gulf Power which were classified as affiliate prior to January 1, 2019. See Note (K) to the Condensed Financial Statements under "Southern Company" herein for information regarding the sale of Gulf Power.
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 first quarter 2019, purchased power expense from affiliates was $176 million compared to $171 million in the corresponding period in 2018. The increase was primarily due to a 36.0% increase in the volume of KWHs purchased primarily due to scheduled generation outages at Georgia Power-owned generating units, partially offset by a 22.8% decrease in the average cost per KWH purchased primarily resulting from lower natural gas and coal prices. The increase in the volume of KWHs purchased was partially offset by the effect of classifying purchases from Gulf Power as non-affiliate beginning January 1, 2019. See Note (K) to the Condensed Financial Statements under "Southern Company" herein for information regarding the sale of Gulf Power.
Energy purchases from affiliates will vary depending on 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
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $38 | | 9.3 |
In the first quarter 2019, other operations and maintenance expenses were $446 million compared to $408 million in the corresponding period in 2018. The increase was primarily due to increases of $16 million in certain compensation and benefit expenses, $14 million in scheduled generation outage expenses, $9 million of expenses from unregulated sales primarily associated with new energy conservation projects, and $6 million primarily due to the timing of vegetation management and other distribution-related maintenance expenses, partially offset by a decrease of $6 million in customer accounts and sales expenses.
Depreciation and Amortization
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $12 | | 5.3 |
In the first quarter 2019, depreciation and amortization was $240 million compared to $228 million in the corresponding period in 2018. The increase was primarily due to additional plant in service.
Interest Expense, Net of Amounts Capitalized
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(10) | | (9.4) |
In the first quarter 2019, interest expense, net of amounts capitalized was $96 million compared to $106 million in the corresponding period in 2018. The decrease was primarily due to a $13 million decrease in interest expense associated with a decrease in outstanding borrowings, partially offset by an increase of $4 million related to PPAs
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
with Southern Power accounted for as finance leases following the adoption of FASB ASC Topic 842, Leases (ASC 842). In prior periods, these expenses were included in purchased power, affiliates. See FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" and "Financing Activities" herein for additional information on borrowings and Note (L) to the Condensed Financial Statements herein for additional information regarding Georgia Power's adoption of ASC 842.
Income Taxes
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(12) | | (12.9) |
In first quarter 2019, income taxes were $81 million compared to $93 million in the corresponding period in 2018. The decrease was primarily due to lower pre-tax earnings and an increase in state ITCs, partially offset by an adjustment in 2018 related to the Tax Reform Legislation.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Georgia Power's future earnings potential. The level of Georgia Power's future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Georgia Power's business of providing electric service. These factors include Georgia Power's ability to maintain a constructive regulatory environment that continues to allow for the timely recovery of prudently-incurred costs during a time of increasing costs, continued customer growth, and the weak pace of growth in electricity use per customer, especially in residential and commercial markets. Plant Vogtle Units 3 and 4 construction and rate recovery are also major factors. Earnings will also depend upon maintaining and growing sales, considering, among other things, the adoption and/or penetration rates of increasingly energy-efficient technologies, increasing volumes of electronic commerce transactions, and more multi-family home construction, all of which could contribute to a net reduction in customer usage. Earnings are subject to a variety of other factors. These factors include weather, competition, new energy contracts with other utilities, energy conservation practiced by customers, the use of alternative energy sources by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth or decline in Georgia Power's service territory. Demand for electricity is primarily driven by the pace of economic growth that may be affected by changes in regional and global economic conditions, which may impact future earnings.
For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Georgia Power in Item 7 of the Form 10-K.
Environmental Matters
Georgia Power's operations are regulated by state and federal environmental agencies through a variety of laws and regulations governing air, water, land, and protection of other natural resources. Georgia Power maintains comprehensive environmental compliance and GHG strategies to assess upcoming requirements and compliance costs associated with these environmental laws and regulations. The costs, including capital expenditures, operations and maintenance costs, and costs reflected in ARO liabilities, required to comply with environmental laws and regulations and to achieve stated goals may impact future electric generating unit retirement and replacement decisions, results of operations, cash flows, and/or financial condition. Related costs may result from the installation of additional environmental controls, closure and monitoring of CCR facilities, unit retirements, or changing fuel sources for certain existing units, as well as related upgrades to Georgia Power's transmission and distribution systems. A major portion of these costs is expected to be recovered through retail rates. The ultimate impact of environmental laws and regulations and GHG goals will depend on various factors, such as state adoption and implementation of requirements, the availability and cost of any deployed technology, fuel prices, and the outcome of pending and/or future legal challenges.
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
New or revised environmental laws and regulations could affect many areas of Georgia Power's operations. The impact of any such changes cannot be determined at this time. Environmental compliance costs could affect earnings if such costs cannot continue to be recovered in rates on a timely basis. Georgia Power's Environmental Compliance Cost Recovery (ECCR) tariff allows for the recovery of capital and operations and maintenance costs related to environmental controls mandated by state and federal regulations. Further, increased costs that are recovered through regulated rates could contribute to reduced demand for electricity, which could negatively affect results of operations, cash flows, and/or financial condition. Additionally, many commercial and industrial customers may also be affected by existing and future environmental requirements, which for some may have the potential to ultimately affect their demand for electricity. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" of Georgia Power in Item 7 and Note 3 to the financial statements under "Environmental Remediation" in Item 8 of the Form 10-K for additional information.
FERC Matters
See Note 2 to the financial statements under "FERC Matters – Open Access Transmission Tariff" in Item 8 of the Form 10-K for additional information.
On March 25, 2019, the Alabama Municipal Electric Authority and Cooperative Energy and SCS and the traditional electric operating companies (including Georgia Power) filed a formal settlement agreement with the FERC agreeing to a rate reduction based on a 10.6% ROE, with a retroactive effective date of May 10, 2018, and a five-year moratorium on these parties seeking changes to the OATT formula rate. The ultimate outcome of this matter cannot be determined at this time; however, if approved by the FERC as filed, the OATT settlement would not have a material impact on the financial statements of Georgia Power.
Retail Regulatory Matters
Georgia Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Georgia PSC. Georgia Power currently recovers its costs from the regulated retail business through the 2013 ARP, which includes traditional base tariff rates, Demand-Side Management tariffs, ECCR tariffs, and Municipal Franchise Fee tariffs. Georgia Power is scheduled to file a base rate case by July 1, 2019, which may continue or modify these tariffs. In addition, financing costs related to certified construction costs of Plant Vogtle Units 3 and 4 are being collected through the NCCR tariff and fuel costs are collected through a separate fuel cost recovery tariff. See Note 2 to the financial statements under "Georgia Power" in Item 8 of the Form 10-K for additional information regarding regulatory matters.
Nuclear Construction
See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding the construction of Plant Vogtle Units 3 and 4, the joint ownership agreements and related funding agreement, VCM reports, and the NCCR tariff.
In 2009, the Georgia PSC certified construction of Plant Vogtle Units 3 and 4. Georgia Power holds a 45.7% ownership interest in Plant Vogtle Units 3 and 4. In 2012, the NRC issued the related combined construction and operating licenses, which allowed full construction of the two AP1000 nuclear units (with electric generating capacity of approximately 1,100 MWs each) and related facilities to begin. Until March 2017, construction on Plant Vogtle Units 3 and 4 continued under the Vogtle 3 and 4 Agreement, which was a substantially fixed price agreement. In March 2017, the EPC Contractor filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. In connection with the EPC Contractor's bankruptcy filing, Georgia Power, acting for itself and as agent for the other Vogtle Owners, entered into several transitional arrangements to allow construction to continue. In July 2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners, entered into the Vogtle Services Agreement, whereby Westinghouse provides facility design and engineering services, procurement and technical support, and staff augmentation on a time and materials cost basis. The Vogtle Services Agreement provides that it will continue until the start-up and testing of Plant Vogtle Units 3 and 4 are complete and electricity
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
is generated and sold from both units. The Vogtle Services Agreement is terminable by the Vogtle Owners upon 30 days' written notice.
In October 2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners, executed the Bechtel Agreement, a cost reimbursable plus fee arrangement, whereby Bechtel is reimbursed for actual costs plus a base fee and an at-risk fee, which is subject to adjustment based on Bechtel's performance against cost and schedule targets. Each Vogtle Owner is severally (not jointly) liable for its proportionate share, based on its ownership interest, of all amounts owed to Bechtel under the Bechtel Agreement. The Vogtle Owners may terminate the Bechtel Agreement at any time for their convenience, provided that the Vogtle Owners will be required to pay amounts related to work performed prior to the termination (including the applicable portion of the base fee), certain termination-related costs, and, at certain stages of the work, the applicable portion of the at-risk fee. Bechtel may terminate the Bechtel Agreement under certain circumstances, including certain Vogtle Owner suspensions of work, certain breaches of the Bechtel Agreement by the Vogtle Owners, Vogtle Owner insolvency, and certain other events.
Cost and Schedule
Georgia Power's approximate proportionate share of the remaining estimated capital cost to complete Plant Vogtle Units 3 and 4 by the expected in-service dates of November 2021 and November 2022, respectively, is as follows:
|
| | | |
| | (in billions) |
Base project capital cost forecast(a)(b) | $ | 8.0 |
|
| Construction contingency estimate | 0.4 |
|
Total project capital cost forecast(a)(b) | 8.4 |
|
Net investment as of March 31, 2019(b) | (4.9 | ) |
Remaining estimate to complete(a) | $ | 3.5 |
|
| |
| (a) | Excludes financing costs expected to be capitalized through AFUDC of approximately $325 million. |
| |
| (b) | Net of $1.7 billion received from Toshiba under the Guarantee Settlement Agreement and approximately $188 million in related Customer Refunds. |
Georgia Power estimates that its financing costs for construction of Plant Vogtle Units 3 and 4 will total approximately $3.1 billion, of which $1.9 billion had been incurred through March 31, 2019.
In April 2019, Southern Nuclear completed a cost and schedule validation process to verify and update quantities of commodities remaining to install, labor hours to install remaining quantities and related productivity, testing and system turnover requirements, and forecasted staffing needs and related costs. This process confirmed the total estimated project capital cost forecast for Plant Vogtle Units 3 and 4. The expected in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4, as previously approved by the Georgia PSC, remain unchanged.
As construction continues, challenges with management of contractors, subcontractors, and vendors; supervision of craft labor and related craft labor productivity, ability to attract and retain craft labor, and/or related cost escalation; procurement, fabrication, delivery, assembly, and/or installation and the initial testing and start-up, including any required engineering changes, of plant systems, structures, or components (some of which are based on new technology that only recently began initial operation in the global nuclear industry at this scale), any of which may require additional labor and/or materials; or other issues could arise and change the projected schedule and estimated cost. Monthly construction production targets established as part of a strategy to maintain and build margin to the approved in-service dates will continue to increase significantly throughout 2019. To meet these increasing monthly targets, existing craft construction productivity must improve and additional craft laborers must be retained and deployed.
There have been technical and procedural challenges to the construction and licensing of Plant Vogtle Units 3 and 4 at the federal and state level and additional challenges may arise. Processes are in place that are designed to assure compliance with the requirements specified in the Westinghouse Design Control Document and the combined
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
construction and operating licenses, including inspections by Southern Nuclear and the NRC that occur throughout construction. As a result of such compliance processes, certain license amendment requests have been filed and approved or are pending before the NRC. Various design and other licensing-based compliance matters, including the timely resolution of ITAAC and the related approvals by the NRC, may arise, which may result in additional license amendments or require other resolution. If any license amendment requests or other licensing-based compliance issues are not resolved in a timely manner, there may be delays in the project schedule that could result in increased costs.
The ultimate outcome of these matters cannot be determined at this time. However, any extension of the regulatory-approved project schedule is currently estimated to result in additional base capital costs of approximately $50 million per month, based on Georgia Power's ownership interests, and AFUDC of approximately $12 million per month. While Georgia Power is not precluded from seeking recovery of any future capital cost forecast increase, management will ultimately determine whether or not to seek recovery. Any further changes to the capital cost forecast that are not expected to be recoverable through regulated rates will be required to be charged to income and such charges could be material.
Joint Owner Contracts
In November 2017, the Vogtle Owners entered into an amendment to their joint ownership agreements for Plant Vogtle Units 3 and 4 to provide for, among other conditions, additional Vogtle Owner approval requirements. Effective in August 2018, the Vogtle Owners further amended the joint ownership agreements to clarify and provide procedures for certain provisions of the joint ownership agreements related to adverse events that require the vote of the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 to continue construction (as amended, and together with the November 2017 amendment, the Vogtle Joint Ownership Agreements). The Vogtle Joint Ownership Agreements also confirm that the Vogtle Owners' sole recourse against Georgia Power or Southern Nuclear for any action or inaction in connection with their performance as agent for the Vogtle Owners is limited to removal of Georgia Power and/or Southern Nuclear as agent, except in cases of willful misconduct.
As a result of the increase in the total project capital cost forecast and Georgia Power's decision not to seek rate recovery of the increase in the base capital costs in conjunction with the nineteenth VCM report, the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 were required to vote to continue construction. In September 2018, the Vogtle Owners unanimously voted to continue construction of Plant Vogtle Units 3 and 4.
Amendments to the Vogtle Joint Ownership Agreements
In connection with the vote to continue construction, Georgia Power entered into (i) the Vogtle Owner Term Sheet with the other Vogtle Owners and MEAG's wholly-owned subsidiaries MEAG SPVJ, MEAG Power SPVM, LLC (MEAG SPVM), and MEAG Power SPVP, LLC (MEAG SPVP) to take certain actions which partially mitigate potential financial exposure for the other Vogtle Owners, including additional amendments to the Vogtle Joint Ownership Agreements and the purchase of PTCs from the other Vogtle Owners at pre-established prices, and (ii) the MEAG Term Sheet with MEAG and MEAG SPVJ to provide funding with respect to MEAG SPVJ's ownership interest in Plant Vogtle Units 3 and 4 under certain circumstances. On January 14, 2019, Georgia Power, MEAG, and MEAG SPVJ entered into an agreement to implement the provisions of the MEAG Term Sheet. On February 18, 2019, Georgia Power, the other Vogtle Owners, and MEAG's wholly-owned subsidiaries MEAG SPVJ, MEAG SPVM, and MEAG SPVP entered into certain amendments to the Vogtle Joint Ownership Agreements to implement the provisions of the Vogtle Owner Term Sheet.
The ultimate outcome of these matters cannot be determined at this time.
Regulatory Matters
In 2009, the Georgia PSC voted to certify construction of Plant Vogtle Units 3 and 4 with a certified capital cost of $4.418 billion. In addition, in 2009 the Georgia PSC approved inclusion of the Plant Vogtle Units 3 and 4 related CWIP accounts in rate base, and the State of Georgia enacted the Georgia Nuclear Energy Financing Act, which allows Georgia Power to recover financing costs for Plant Vogtle Units 3 and 4. Financing costs are recovered on all
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
applicable certified costs through annual adjustments to the NCCR tariff up to the certified capital cost of $4.418 billion. At March 31, 2019, Georgia Power had recovered approximately $1.9 billion of financing costs. Financing costs related to capital costs above $4.418 billion will be recovered through AFUDC; however, Georgia Power will not record AFUDC related to any capital costs in excess of the total deemed reasonable by the Georgia PSC (currently $7.3 billion) and not requested for rate recovery. In December 2018, the Georgia PSC approved Georgia Power's request to increase the NCCR tariff by $88 million annually, effective January 1, 2019.
Georgia Power is required to file semi-annual VCM reports with the Georgia PSC by February 28 and August 31 of each year. In 2013, in connection with the eighth VCM report, the Georgia PSC approved a stipulation between Georgia Power and the staff of the Georgia PSC to waive the requirement to amend the Plant Vogtle Units 3 and 4 certificate in accordance with the 2009 certification order until the completion of Plant Vogtle Unit 3, or earlier if deemed appropriate by the Georgia PSC and Georgia Power.
In 2016, the Georgia PSC voted to approve a settlement agreement (Vogtle Cost Settlement Agreement) resolving certain prudency matters in connection with the fifteenth VCM report. In December 2017, the Georgia PSC voted to approve (and issued its related order on January 11, 2018) Georgia Power's seventeenth VCM report and modified the Vogtle Cost Settlement Agreement. The Vogtle Cost Settlement Agreement, as modified by the January 11, 2018 order, resolved the following regulatory matters related to Plant Vogtle Units 3 and 4: (i) none of the $3.3 billion of costs incurred through December 31, 2015 and reflected in the fourteenth VCM report should be disallowed from rate base on the basis of imprudence; (ii) the Contractor Settlement Agreement was reasonable and prudent and none of the amounts paid pursuant to the Contractor Settlement Agreement should be disallowed from rate base on the basis of imprudence; (iii) (a) capital costs incurred up to $5.68 billion would be presumed to be reasonable and prudent with the burden of proof on any party challenging such costs, (b) Georgia Power would have the burden to show that any capital costs above $5.68 billion were prudent, and (c) a revised capital cost forecast of $7.3 billion (after reflecting the impact of payments received under the Guarantee Settlement Agreement and related Customer Refunds) was found reasonable; (iv) construction of Plant Vogtle Units 3 and 4 should be completed, with Southern Nuclear serving as project manager and Bechtel as primary contractor; (v) approved and deemed reasonable Georgia Power's revised schedule placing Plant Vogtle Units 3 and 4 in service in November 2021 and November 2022, respectively; (vi) confirmed that the revised cost forecast does not represent a cost cap and that prudence decisions on cost recovery will be made at a later date, consistent with applicable Georgia law; (vii) reduced the ROE used to calculate the NCCR tariff (a) from 10.95% (the ROE rate setting point authorized by the Georgia PSC in the 2013 ARP) to 10.00% effective January 1, 2016, (b) from 10.00% to 8.30%, effective January 1, 2020, and (c) from 8.30% to 5.30%, effective January 1, 2021 (provided that the ROE in no case will be less than Georgia Power's average cost of long-term debt); (viii) reduced the ROE used for AFUDC equity for Plant Vogtle Units 3 and 4 from 10.00% to Georgia Power's average cost of long-term debt, effective January 1, 2018; and (ix) agreed that upon Unit 3 reaching commercial operation, retail base rates would be adjusted to include carrying costs on those capital costs deemed prudent in the Vogtle Cost Settlement Agreement. The January 11, 2018 order also stated that if Plant Vogtle Units 3 and 4 are not commercially operational by June 1, 2021 and June 1, 2022, respectively, the ROE used to calculate the NCCR tariff will be further reduced by 10 basis points each month (but not lower than Georgia Power's average cost of long-term debt) until the respective Unit is commercially operational. The ROE reductions negatively impacted earnings by approximately $100 million in 2018 and are estimated to have negative earnings impacts of approximately $75 million in 2019 and an aggregate of approximately $635 million from 2020 to 2022.
In its January 11, 2018 order, the Georgia PSC also stated if other conditions change and assumptions upon which Georgia Power's seventeenth VCM report are based do not materialize, the Georgia PSC reserved the right to reconsider the decision to continue construction.
In February 2018, Georgia Interfaith Power & Light, Inc. (GIPL) and Partnership for Southern Equity, Inc. (PSE) filed a petition appealing the Georgia PSC's January 11, 2018 order with the Fulton County Superior Court. In March 2018, Georgia Watch filed a similar appeal to the Fulton County Superior Court for judicial review of the Georgia PSC's decision and denial of Georgia Watch's motion for reconsideration. In December 2018, the Fulton County Superior Court granted Georgia Power's motion to dismiss the two appeals. On January 9, 2019, GIPL, PSE, and Georgia Watch filed an appeal of this decision with the Georgia Court of Appeals. Georgia Power believes the
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
appeal has no merit; however, an adverse outcome in the appeal combined with subsequent adverse action by the Georgia PSC could have a material impact on Georgia Power's results of operations, financial condition, and liquidity.
In August 2018, Georgia Power filed its nineteenth VCM report with the Georgia PSC, which requested approval of $578 million of construction capital costs incurred from January 1, 2018 through June 30, 2018. On February 19, 2019, the Georgia PSC approved the nineteenth VCM, but deferred approval of $51.6 million of expenditures related to Georgia Power's portion of an administrative claim filed in the Westinghouse bankruptcy proceedings. Through the nineteenth VCM, the Georgia PSC has approved total construction capital costs incurred through June 30, 2018 of $5.4 billion (before $1.7 billion of payments received under the Guarantee Settlement Agreement and approximately $188 million in related Customer Refunds). In addition, the staff of the Georgia PSC requested, and Georgia Power agreed, to report the results of the cost and schedule validation process to the Georgia PSC (which is expected to occur by May 1, 2019) and to file its twentieth VCM report concurrently with the twenty-first VCM report by August 31, 2019.
The ultimate outcome of these matters cannot be determined at this time.
See RISK FACTORS of Georgia Power in the Form 10-K for a discussion of certain risks associated with the licensing, construction, and operation of nuclear generating units, including potential impacts that could result from a major incident at a nuclear facility anywhere in the world.
DOE Financing
At March 31, 2019, Georgia Power had borrowed $3.46 billion related to Plant Vogtle Units 3 and 4 costs as provided through the Amended and Restated Loan Guarantee Agreement and related multi-advance credit facilities among Georgia Power, the DOE, and the FFB, which provide for borrowings of up to approximately $5.130 billion, subject to the satisfaction of certain conditions. See Note 8 to the financial statements under "Long-term Debt – DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under "DOE Loan Guarantee Borrowings" herein for additional information, including applicable covenants, events of default, mandatory prepayment events, and conditions to borrowing.
The ultimate outcome of these matters cannot be determined at this time.
Other Matters
Georgia Power is involved in various other matters that could affect future earnings, including matters being litigated and regulatory matters. In addition, Georgia Power is subject to certain claims and legal actions arising in the ordinary course of business. Georgia Power's business activities are subject to extensive governmental regulation related to public health and the environment, such as laws and regulations governing air, water, land, and protection of other natural resources. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental laws and regulations, has occurred throughout the U.S. This litigation has included claims for damages alleged to have been caused by CO2 and other emissions, CCR, and alleged exposure to hazardous materials, and/or requests for injunctive relief in connection with such matters.
The ultimate outcome of such pending or potential litigation or regulatory matters cannot be predicted at this time; however, for current proceedings not specifically reported 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 would have a material effect on Georgia Power's financial statements. See Notes (B) and (C) to the Condensed Financial Statements herein for a discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Georgia Power prepares its financial statements in accordance with GAAP. Significant accounting policies are described in NoteNotes 1, 5, and 6 to the financial statements of Georgia Power 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 Georgia Power's results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of Georgia Power in Item 7 of the Form 10-K for a complete discussion of Georgia Power's critical accounting policies and estimates.
Recently Issued Accounting Standards
See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Recently Issued Accounting Standards" of Georgia Power in Item 7 of the Form 10-K for additional information regarding ASU No.
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2016-02, Leases (Topic 842). See Note (A) to the Condensed Financial Statements herein for information regarding Georgia Power's recently adopted accounting standards.
FINANCIAL CONDITION AND LIQUIDITY
Overview
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Georgia Power in Item 7 of the Form 10-K for additional information. Georgia Power's financial condition remained stable at March 31, 2018.2019. Georgia Power intends to continue to monitor its access to short-term and long-term capital markets as well as bank credit agreements to meet future capital and liquidity needs. See "Capital Requirements and Contractual Obligations," "Sources of Capital," and "Financing Activities" herein for additional information.
Net cash provided from operating activities totaled $373$212 million for the first three months of 20182019 compared to $111$373 million for the corresponding period in 2017.2018. The increasedecrease was primarily due to increased fuel cost recovery and the timing of fossil fuel stock purchases and higher payments for property tax payments.taxes and municipal franchise fees. Net cash used for investing activities totaled $668$980 million for the first three months of 20182019 primarily related to installation of equipment to comply with environmental standards and construction of generation, transmission, and distribution facilities.facilities, including approximately $360 million related to the construction of Plant Vogtle Units 3 and 4. Net cash provided from financing activities totaled $601$665 million for the first three months of 20182019 primarily due to capital contributionsborrowings from Southern Company,the FFB for construction of Plant Vogtle Units 3 and 4 and the reoffering of pollution control revenue bonds, partially offset by paymentspayment of a common stock dividenddividends and the redemption of pollution control revenue bond repurchases.bonds. Cash flows from financing activities vary from period to period based on capital needs and the maturity or redemption of securities.
Significant balance sheet changes for the first three months of 20182019 include recording $1.5 billion in operating lease right-of-use assets, net of amortization and $1.5 billion in operating lease obligations related to the adoption of ASC 842, an increase of $1.5$1.1 billion in paid-in capitallong-term debt (including securities due within one year) primarily due to capital contributions receivedborrowings from Southern Company,the FFB for construction of Plant Vogtle Units 3 and 4 and the reoffering of pollution control revenue bonds previously purchased and held by Georgia Power, and an increase of $395 million$0.7 billion in property, plant, and equipment to comply with environmental standards and the construction of generation, transmission, and distribution facilities, and a decrease of $376 million in long-term debt (including securities due within one year) primarily duefacilities. See Note (L) to the repurchaseCondensed Financial Statements herein for additional information on the adoption of pollution control revenue bonds.ASC 842. Also see Notes (B) and (F) to the Condensed Financial Statements under "Georgia Power – Nuclear Construction" and "DOE Loan Guarantee Borrowings," respectively, herein for additional information regarding Plant Vogtle Units 3 and 4 and the related Amended and Restated Loan Guarantee Agreement.
Capital Requirements and Contractual Obligations
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Georgia Power in Item 7 of the Form 10-K for a description
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of Georgia Power's capital requirements and contractual obligations. Subsequent to March 31, 2018, Georgia Power redeemed all $250 million aggregate principal amount of its Series 2008B 5.40% Senior Notes due June 1, 2018. An additional $507Approximately $973 million will be required through March 31, 20192020 to fund maturities of long-term debt. See "Sources of Capital" herein for additional information. Also see FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Nuclear Construction" for additional information regarding Plant Vogtle Units 3 and 4.
The construction program is 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 generating plants, including unit retirements and replacements and adding or changing fuel sources at existing generating units, to meet regulatory requirements; changes in FERC rules and regulations; Georgia PSC approvals; changes in the expected environmental compliance program; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; storm impacts; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered. The construction program also includes Plant Vogtle Units 3 and 4, which includes components based on new technology that only recently began initial operation in the global nuclear industry at this scale and which may be subject to additional revised cost estimates during construction. The ability to control costs and avoid cost and schedule overruns during the development, construction, and operation of new facilities is subject to a number of factors, including, but not limited to, changes in labor costs, availability, and productivity,productivity; challenges with management of contractors, subcontractors, or vendors; adverse weather conditions,conditions; shortages, andincreased costs, or inconsistent quality of equipment, materials, and labor,labor; contractor or supplier delay,delay; non-performance under construction, operating, or other agreements,agreements; operational readiness, including specialized operator training and required site safety programs,
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
unforeseenprograms; engineering or design problems,problems; design and other licensing-based compliance matters, including the timely resolution of ITAAC and the related approvals by the NRC; challenges with start-up activities, (includingincluding major equipment failure and system integration),integration; and/or operational performance. See Note 32 to the financial statements of Georgiaunder "Georgia Power under "Retail Regulatory Matters – Nuclear Construction" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Georgia Power – Nuclear Construction" herein for information regarding additional factors that may impact construction expenditures.
Sources of Capital
Georgia Power plans to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily from operating cash flows, external security issuances, borrowings from financial institutions, equity contributions from Southern Company, and borrowings from the FFB. However, the amount, type, and timing of any future financings, if needed, will depend upon regulatory approvals, prevailing market conditions, and other factors. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" of Georgia Power in Item 7 of the Form 10-K for additional information.
In 2014, Georgia Power entered into a loan guarantee agreement with the DOE and, in March 2019, entered into the Amended and Restated Loan Guarantee Agreement, with the DOE, under which the proceeds of borrowings may be used to reimburse Georgia Power for Eligible Project Costs incurred in connection with its construction of Plant Vogtle Units 3 and 4.
Under the Amended and Restated Loan Guarantee Agreement, the DOE has agreed to guarantee the obligations of Georgia Power under note purchase agreements among the DOE, Georgia Power, and the FFB and related promissory notes which provide for two multi-advance term loan facilities (FFB Credit Facilities). Under the FFB Credit Facilities, Georgia Power may make term loan borrowings ofthrough the FFB in an amount up to $3.46approximately $5.130 billion, (not toprovided that total aggregate borrowings under the FFB Credit Facilities may not exceed 70% of (i) Eligible Project Costs) to be madeCosts minus (ii) approximately $1.492 billion (reflecting the amounts received by Georgia Power under a multi-advance credit facility (FFB Credit Facility) among Georgia Power, the DOE, andGuarantee Settlement Agreement less the FFB. As ofCustomer Refunds). At March 31, 2018,2019, Georgia Power had borrowed $2.6$3.46 billion under the FFB Credit Facility. In July 2017, Georgia Power entered into an amendmentFacilities.
See Note (F) to the Condensed Financial Statements under "DOE Loan Guarantee Agreement, which provides that further advances are conditioned upon the DOE's approval of any agreements entered into in replacement of the Vogtle 3 and 4 Agreement and satisfaction of certain other conditions.
BorrowingsIn September 2017, the DOE issued a conditional commitment to Georgia Power for up to approximately $1.67 billion of additional guaranteed loans under the Loan Guarantee Agreement. This conditional commitment expires on June 30, 2018, subject to any further extension approved by the DOE. Final approval and issuance of these additional loan guarantees by the DOE cannot be assured and are subject to the negotiation of definitive agreements, completion of due diligence by the DOE, receipt of any necessary regulatory approvals, and satisfaction of other conditions. See Note 6 to the financial statements of Georgia Power under "DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K" herein for additional information regarding the Amended and Restated Loan Guarantee Agreement, including applicable covenants,
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
events of default, mandatory prepayment events, and additional conditions to borrowing. Also see Note (B) to the Condensed Financial Statements under "Georgia Power – Nuclear Construction" herein for additional information regarding Plant Vogtle Units 3 and 4.
Georgia Power's current liabilities frequently exceed current assets because of scheduled maturities of long-term debt and the periodic use of short-term debt as a funding source, as well as significant seasonal fluctuations in cash needs. At March 31, 2019, Georgia Power intendsPower's current liabilities exceeded current assets by $1.4 billion primarily due to utilize operating cash flows, external security issuances, borrowings from financial institutions, equity contributions from Southern Company,long-term debt that is due within one year of $973 million and borrowings from the FFB to fund its short-term capital needs. Georgia Power has substantial cash flow from operating activities and access to the capital markets and financial institutions to meet liquidity needs.notes payable of $275 million.
At March 31, 2018,2019, Georgia Power had approximately $1.16 billion$9 million of cash and cash equivalents. Georgia Power's committed credit arrangement with banks was $1.75 billion at March 31, 2018 was $1.75 billion2019, of which $1.74 billion was unused. This credit arrangement expires in 2022.
This bank credit arrangement contains a covenant that limits debt levels and contains a cross-acceleration provision to other indebtedness (including guarantee obligations) of Georgia Power. Such cross-acceleration provision to other indebtedness would trigger an event of default if Georgia Power defaulted on indebtedness, the payment of which was then accelerated. At March 31, 2018,2019, Georgia Power was in compliance with this covenant. This bank credit arrangement does not contain a material adverse change clause at the time of borrowing.
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Subject to applicable market conditions, Georgia Power expects to renew or replace this credit arrangement as needed prior to expiration. In connection therewith, Georgia Power may extend the maturity date and/or increase or decrease the lending commitments thereunder.
See Note 68 to the financial statements of Georgia Power under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.
A portion of the $1.74 billion unused credit with banks is allocated to provide liquidity support to Georgia Power's pollution control revenue bonds and commercial paper program. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support as of March 31, 20182019 was approximately $550 million. In addition, at March 31, 2018,2019, Georgia Power had $192$345 million of pollution control revenue bonds outstanding that were required to be remarketed within the next 12 months. Subsequent to March 31, 2018,2019, Georgia Power purchased and held $55approximately $115 million of outstanding pollution control revenue bonds outstanding that were required to be remarketed within the next 12 months.remarketed.
Georgia Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper at the request and for the benefit of Georgia Power and the other traditional electric operating companies. Proceeds from such issuances for the benefit of Georgia Power are loaned directly to Georgia Power. The obligations of each traditional electric operating company under these arrangements are several and there is no cross-affiliate credit support. Short-term borrowings are included in notes payable in the balance sheets.
Details of short-term borrowings were as follows:
|
| | | | | | | | | | | |
| | | Short-term Debt During the Period(*) |
| | | Average Amount Outstanding | | Weighted Average Interest Rate | | Maximum Amount Outstanding |
| | | (in millions) | | | | (in millions) |
| Short-term bank debt | | $ | 50 |
| | 2.3 | % | | $ | 150 |
|
|
| | | | | | | | | | | | | | | | | |
| | Short-term Debt at March 31, 2019 | | 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) |
| Commercial paper | $ | 275 |
| | 2.8 | % | | $ | 437 |
| | 2.9 | % | | $ | 935 |
|
| |
| (*) | Average and maximum amounts are based upon daily balances during the three-month period ended March 31, 2018. No short-term debt was outstanding at March 31, 2018.2019. |
Georgia Power believes the need for working capital can be adequately met by utilizing the commercial paper program, lines of credit, short-term bank notes, and operating cash flows.
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Credit Rating Risk
At March 31, 2018,2019, Georgia Power 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 to BBB- and/or Baa3 or below. These contracts are for physical electricity purchases and sales, fuel purchases, fuel transportation and storage, energy price risk management, transmission, interest rate management, and construction of new generation at Plant Vogtle Units 3 and 4.
The maximum potential collateral requirements under these contracts at March 31, 20182019 were as follows:
|
| | | |
| Credit Ratings | Maximum Potential
Collateral
Requirements |
| | (in millions) |
| At BBB- and/or Baa3 | $ | 87 |
|
| Below BBB- and/or Baa3 | $ | 1,016 |
|
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
| | | |
| Credit Ratings | Maximum Potential
Collateral
Requirements |
| | (in millions) |
| At BBB- and/or Baa3 | $ | 92 |
|
| Below BBB- and/or Baa3 | $ | 1,102 |
|
Included in these amounts are certain agreements that could require collateral in the event that Georgia Power or Alabama Power (an affiliate of 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 Georgia Power to access capital markets and would be likely to impact the cost at which it does so.
On February 28, 2018, Fitch downgraded the senior unsecured long-term debt ratingAs a result of Georgia Power to A from A+ with a negative outlook.
While it is unclear how the credit rating agencies and the FERC may respond to the Tax Reform Legislation, certain financial metrics, such as the funds from operations to debt percentage, used by the credit rating agencies to assess Southern Company and its subsidiaries, including Georgia Power, may be negatively impacted. TheA settlement agreement between Georgia Power and the staff of the Georgia PSC regarding the retail rate impact of the Tax Reform Settlement AgreementLegislation, as approved by the Georgia PSC on April 3, 2018, is expected to help mitigate these potential adverse impacts to certain credit metrics by allowing a higher retail equity ratio until the conclusion of Georgia Power's next base rate case.case, which is scheduled to be filed by July 1, 2019. See Note 32 to the financial statements of Georgiaunder "Georgia Power under "Retail Regulatory Matters – Rate Plans" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Regulatory Matters – Georgia Power – Rate Plans" herein for additional information.
Financing Activities
In January 2018,2019, Georgia Power repaid its outstanding $150redeemed approximately $13 million, $20 million, and $100 million floating rate bank loans due May 31, 2018 and October 26, 2018, respectively.
In March 2018, Georgia Power purchased and held $104.6$75 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), First Series 20131992, Eighth Series 1994, and $173Second Series 1995, respectively.
In March 2019, Georgia Power made additional borrowings under the FFB Credit Facilities in an aggregate principal amount of $835 million at an interest rate of 3.213% through the final maturity date of February 20, 2044. The proceeds were used to reimburse Georgia Power for Eligible Project Costs relating to the construction of Plant Vogtle Units 3 and 4.
Also in March 2019, Georgia Power reoffered to the public the following pollution control revenue bonds that previously had been purchased and held by Georgia Power:
$173 million aggregate principal amount of Development Authority of Bartow County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Bowen Project), First Series 2009. Georgia Power may reoffer these bonds to the public at a later date.2009;
Subsequent to March 31, 2018, Georgia Power purchased and held $55approximately $105 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), FifthFirst Series 1994.2013; and
$65 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Second Series 2008.
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Subsequent to March 31, 2019, Georgia Power purchased and held the following pollution control revenue bonds, which may reoffer these bondsbe reoffered to the public at a later date.date:
Also subsequent to March 31, 2018, Georgia Power redeemed all $250$55 million aggregate principal amount of itsDevelopment Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Fourth Series 2008B 5.40% Senior Notes due June 1, 2018.1994;
$30 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Fourth Series 1995;
$20 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Ninth Series 1994; and
$10 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Second Series 1994.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Georgia Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.
GULF POWER COMPANY
GULF POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2018 | | 2017 |
| | (in millions) |
| Operating Revenues: | | | |
| Retail revenues | $ | 290 |
| | $ | 279 |
|
| Wholesale revenues, non-affiliates | 13 |
| | 17 |
|
| Wholesale revenues, affiliates | 28 |
| | 37 |
|
| Other revenues | 17 |
| | 17 |
|
| Total operating revenues | 348 |
| | 350 |
|
| Operating Expenses: | | | |
| Fuel | 82 |
| | 108 |
|
| Purchased power | 46 |
| | 34 |
|
| Other operations and maintenance | 76 |
| | 86 |
|
| Depreciation and amortization | 47 |
| | 18 |
|
| Taxes other than income taxes | 30 |
| | 27 |
|
| Loss on Plant Scherer Unit 3 | — |
| | 33 |
|
| Total operating expenses | 281 |
| | 306 |
|
| Operating Income | 67 |
| | 44 |
|
| Other Income and (Expense): | | | |
| Interest expense, net of amounts capitalized | (13 | ) | | (12 | ) |
| Other income (expense), net | 1 |
| | 2 |
|
| Total other income and (expense) | (12 | ) | | (10 | ) |
| Earnings Before Income Taxes | 55 |
| | 34 |
|
| Income taxes | 13 |
| | 14 |
|
| Net Income | 42 |
| | 20 |
|
| Dividends on Preference Stock | — |
| | 2 |
|
| Net Income After Dividends on Preference Stock | $ | 42 |
| | $ | 18 |
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2018 | | 2017 |
| | (in millions) |
| Net Income | $ | 42 |
| | $ | 20 |
|
| Other comprehensive income (loss): | | | |
| Qualifying hedges: | | | |
| Changes in fair value, net of tax of $- and $-, respectively | — |
| | (1 | ) |
| Total other comprehensive income (loss) | — |
| | (1 | ) |
| Comprehensive Income | $ | 42 |
| | $ | 19 |
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
GULF POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2018 | | 2017 |
| | (in millions) |
| Operating Activities: | | | |
| Net income | $ | 42 |
| | $ | 20 |
|
| Adjustments to reconcile net income to net cash provided from operating activities — | | | |
| Depreciation and amortization, total | 49 |
| | 20 |
|
| Loss on Plant Scherer Unit 3 | — |
| | 33 |
|
| Other, net | 1 |
| | 3 |
|
| Changes in certain current assets and liabilities — | | | |
| -Receivables | 46 |
| | (1 | ) |
| -Fossil fuel stock | (14 | ) | | 12 |
|
| -Other current assets | 5 |
| | 6 |
|
| -Accounts payable | (28 | ) | | (8 | ) |
| -Accrued taxes | 12 |
| | (4 | ) |
| -Accrued compensation | (21 | ) | | (23 | ) |
| -Over recovered regulatory clause revenues | (1 | ) | | (18 | ) |
| -Other current liabilities | 13 |
| | 10 |
|
| Net cash provided from operating activities | 104 |
| | 50 |
|
| Investing Activities: | | | |
| Property additions | (70 | ) | | (46 | ) |
| Cost of removal, net of salvage | (11 | ) | | (2 | ) |
| Change in construction payables | 12 |
| | (7 | ) |
| Other investing activities | (2 | ) | | (2 | ) |
| Net cash used for investing activities | (71 | ) | | (57 | ) |
| Financing Activities: | | | |
| Increase (decrease) in notes payable, net | 16 |
| | (168 | ) |
| Proceeds — | | | |
| Common stock issued to parent | — |
| | 175 |
|
| Capital contributions from parent company | 2 |
| | 4 |
|
| Payment of common stock dividends | (39 | ) | | (31 | ) |
| Other financing activities | (1 | ) | | 3 |
|
| Net cash used for financing activities | (22 | ) | | (17 | ) |
| Net Change in Cash, Cash Equivalents, and Restricted Cash | 11 |
| | (24 | ) |
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 28 |
| | 56 |
|
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 39 |
| | $ | 32 |
|
| Supplemental Cash Flow Information: | | | |
| Cash paid during the period for — | | | |
| Interest (net of $- and $- capitalized for 2018 and 2017, respectively) | $ | 1 |
| | $ | 2 |
|
| Noncash transactions — Accrued property additions at end of period | 38 |
| | 26 |
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Assets | | At March 31, 2018 | | At December 31, 2017 |
| | | (in millions) |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 39 |
| | $ | 28 |
|
| Receivables — | | | | |
| Customer accounts receivable | | 72 |
| | 76 |
|
| Unbilled revenues | | 53 |
| | 67 |
|
| Under recovered regulatory clause revenues | | 10 |
| | 27 |
|
| Affiliated | | 6 |
| | 14 |
|
| Other accounts and notes receivable | | 5 |
| | 7 |
|
| Accumulated provision for uncollectible accounts | | (1 | ) | | (1 | ) |
| Fossil fuel stock | | 77 |
| | 63 |
|
| Materials and supplies | | 59 |
| | 57 |
|
| Other regulatory assets, current | | 53 |
| | 56 |
|
| Other current assets | | 12 |
| | 21 |
|
| Total current assets | | 385 |
| | 415 |
|
| Property, Plant, and Equipment: | | | | |
| In service | | 5,227 |
| | 5,196 |
|
| Less: Accumulated provision for depreciation | | 1,494 |
| | 1,461 |
|
| Plant in service, net of depreciation | | 3,733 |
| | 3,735 |
|
| Construction work in progress | | 123 |
| | 91 |
|
| Total property, plant, and equipment | | 3,856 |
| | 3,826 |
|
| Deferred Charges and Other Assets: | | | | |
| Deferred charges related to income taxes | | 30 |
| | 31 |
|
| Other regulatory assets, deferred | | 493 |
| | 502 |
|
| Other deferred charges and assets | | 26 |
| | 23 |
|
| Total deferred charges and other assets | | 549 |
| | 556 |
|
| Total Assets | | $ | 4,790 |
| | $ | 4,797 |
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Liabilities and Stockholder's Equity | | At March 31, 2018 | | At December 31, 2017 |
| | | (in millions) |
| Current Liabilities: | | | | |
| Notes payable | | $ | 61 |
| | $ | 45 |
|
| Accounts payable — | | | | |
| Affiliated | | 45 |
| | 52 |
|
| Other | | 66 |
| | 75 |
|
| Customer deposits | | 35 |
| | 35 |
|
| Accrued taxes | | 22 |
| | 10 |
|
| Accrued interest | | 20 |
| | 9 |
|
| Accrued compensation | | 17 |
| | 39 |
|
| Deferred capacity expense, current | | 22 |
| | 22 |
|
| Asset retirement obligations, current | | 39 |
| | 37 |
|
| Other regulatory liabilities, current | | 72 |
| | — |
|
| Other current liabilities | | 26 |
| | 27 |
|
| Total current liabilities | | 425 |
| | 351 |
|
| Long-term Debt | | 1,285 |
| | 1,285 |
|
| Deferred Credits and Other Liabilities: | | | | |
| Accumulated deferred income taxes | | 536 |
| | 537 |
|
| Deferred credits related to income taxes | | 386 |
| | 458 |
|
| Employee benefit obligations | | 100 |
| | 102 |
|
| Deferred capacity expense | | 92 |
| | 97 |
|
| Asset retirement obligations, deferred | | 105 |
| | 105 |
|
| Other cost of removal obligations | | 215 |
| | 221 |
|
| Other regulatory liabilities, deferred | | 42 |
| | 43 |
|
| Other deferred credits and liabilities | | 68 |
| | 67 |
|
| Total deferred credits and other liabilities | | 1,544 |
| | 1,630 |
|
| Total Liabilities | | 3,254 |
| | 3,266 |
|
| Common Stockholder's Equity: | | | | |
| Common stock, without par value — | | | | |
| Authorized — 20,000,000 shares | | | | |
| Outstanding — 7,392,717 shares | | 678 |
| | 678 |
|
| Paid-in capital | | 597 |
| | 594 |
|
| Retained earnings | | 262 |
| | 259 |
|
| Accumulated other comprehensive loss | | (1 | ) | | — |
|
| Total common stockholder's equity | | 1,536 |
| | 1,531 |
|
| Total Liabilities and Stockholder's Equity | | $ | 4,790 |
| | $ | 4,797 |
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2018 vs. FIRST QUARTER 2017
OVERVIEW
Gulf Power operates as a vertically integrated utility providing electric service to retail customers within its traditional service territory located in northwest Florida and to wholesale customers in the Southeast.
Many factors affect the opportunities, challenges, and risks of Gulf Power's business of providing electric service. These factors include the ability to maintain a constructive regulatory environment, to maintain and grow energy sales and customers, and to effectively manage and secure timely recovery of costs. These costs include those related to projected long-term demand growth, stringent environmental standards, reliability, restoration following major storms, fuel, and capital expenditures. Gulf Power has various regulatory mechanisms that operate to address cost recovery. Effectively operating pursuant to these regulatory mechanisms and appropriately balancing required costs and capital expenditures with customer prices will continue to challenge Gulf Power for the foreseeable future.
As a continuation of a settlement agreement approved by the Florida PSC in April 2017 (2017 Gulf Power Rate Case Settlement Agreement), on March 26, 2018, the Florida PSC approved a stipulation and settlement agreement among Gulf Power and three intervenors addressing the retail revenue requirement effects of the Tax Reform Legislation (Gulf Power Tax Reform Settlement Agreement).
The Gulf Power Tax Reform Settlement Agreement results in annual reductions to Gulf Power's revenues of $18.2 million from base rates and $15.6 million from environmental cost recovery rates, implemented April 1, 2018, and also provides for a one-time refund of $69.4 million for the retail portion of unprotected (not subject to normalization) deferred tax liabilities through Gulf Power's fuel cost recovery rate over the remainder of 2018. As a result of the Gulf Power Tax Reform Settlement Agreement, the Florida PSC also approved an increase in Gulf Power's maximum equity ratio from 52.5% to 53.5% for all retail regulatory purposes.
As part of the Gulf Power Tax Reform Settlement Agreement, a limited scope proceeding to address protected deferred tax liabilities consistent with IRS normalization principles was initiated on April 30, 2018. Pending resolution of this proceeding, Gulf Power is deferring the related amounts for 2018 as a regulatory liability. Unless otherwise agreed to by the parties to the Gulf Power Tax Reform Settlement Agreement, amounts recorded in this regulatory liability will be refunded to retail customers in 2019 through Gulf Power's fuel cost recovery rates. The ultimate outcome of this matter cannot be determined at this time.
See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters – Retail Base Rate Cases" in Item 8 of the Form 10-K for additional information.
Gulf Power continues to focus on several key performance indicators including, but not limited to, customer satisfaction, plant availability, system reliability, and net income.
RESULTS OF OPERATIONS
Net Income
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $24 | | 133.3 |
Gulf Power's net income after dividends on preference stock for the first quarter 2018 was $42 million compared to $18 million for the corresponding period in 2017. The increase was primarily due to the first quarter 2017 write-down of $32.5 million ($20 million after tax) of Gulf Power's ownership of Plant Scherer Unit 3 in accordance with the 2017 Gulf Power Rate Case Settlement Agreement, an increase in retail revenues, and lower operations and maintenance expenses, partially offset by an increase in depreciation.
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters – Retail Base Rate Cases" in Item 8 of the Form 10-K for additional information regarding the 2017 Gulf Power Rate Case Settlement Agreement.
Retail Revenues
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $11 | | 3.9 |
In the first quarter 2018, retail revenues were $290 million compared to $279 million for the corresponding period in 2017.
Details of the changes in retail revenues were as follows:
|
| | | | | | |
| | First Quarter 2018 |
| | (in millions) | | (% change) |
| Retail – prior year | $ | 279 |
| | |
| Estimated change resulting from – | | | |
| Rates and pricing | 5 |
| | 1.8 |
|
| Sales growth | 1 |
| | 0.4 |
|
| Weather | 9 |
| | 3.1 |
|
| Fuel and other cost recovery | (4 | ) | | (1.4 | ) |
| Retail – current year | $ | 290 |
| | 3.9 | % |
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters" of Gulf Power in Item 7 and Note 1 to the financial statements of Gulf Power under "Revenues" and Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters" in Item 8 of the Form 10-K for additional information regarding Gulf Power's retail base rate case and cost recovery clauses, including Gulf Power's fuel cost recovery, purchased power capacity recovery, environmental cost recovery, and energy conservation cost recovery clauses.
Revenues associated with changes in rates and pricing increased in the first quarter 2018 when compared to the corresponding period in 2017 primarily due to an increase in retail base rates effective July 2017 in accordance with the 2017 Gulf Power Rate Case Settlement Agreement, partially offset by a reduction in revenues effective January 1, 2018 due to the Gulf Power Tax Reform Settlement Agreement.
Revenues attributable to changes in sales increased slightly in the first quarter 2018 when compared to the corresponding period in 2017. For the first quarter 2018, weather-adjusted KWH sales to residential customers increased 2.3% due to customer growth. Weather-adjusted KWH sales to commercial customers decreased 0.2% due to lower usage resulting from energy efficiency improvements in appliances and lighting, substantially offset by customer growth. KWH sales to industrial customers increased 3.9% for the first quarter 2018 primarily due to changes in customers' operations.
Fuel and other cost recovery revenues decreased in the first quarter 2018 when compared to the corresponding period in 2017, primarily due to lower recoverable costs under Gulf Power's fuel cost recovery clause. Fuel and other cost recovery provisions include fuel expenses, the energy component of purchased power costs, purchased power capacity costs, the difference between projected and actual costs and revenues related to energy conservation and environmental compliance, and a credit for certain wholesale revenues as a result of the 2017 Gulf Power Rate Case Settlement Agreement.
See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters – Cost Recovery Clauses" and " – Retail Base Rate Cases" in Item 8 of the Form 10-K for additional information regarding cost recovery
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
clauses and the 2017 Gulf Power Rate Case Settlement Agreement, respectively. Also see FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Retail Base Rate Case" herein for additional information regarding the Gulf Power Tax Reform Settlement Agreement.
Wholesale Revenues – Non-Affiliates
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $(4) | | (23.5) |
Wholesale revenues from sales to non-affiliates consist of long-term sales agreements to other utilities in Florida and Georgia and short-term opportunity sales. Capacity revenues from long-term sales agreements represent the greatest contribution to net income. The energy is generally sold at variable cost. Short-term opportunity sales are made at market-based rates that generally provide a margin above Gulf Power's variable cost of energy. Wholesale energy revenues from sales to non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared to the cost of Gulf 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.
In the first quarter 2018, wholesale revenues from sales to non-affiliates were $13 million compared to $17 million for the corresponding period in 2017. The decrease was primarily due to a 44.7% decrease in KWH sales primarily resulting from lower opportunity sales due to planned outages at Gulf Power generating units.
Wholesale Revenues – Affiliates
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $(9) | | (24.3) |
Wholesale revenues from sales to affiliated companies will vary depending on demand and the availability and cost of generating resources at each company. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since the revenue related to these energy sales generally offsets the cost of energy sold.
In the first quarter 2018, wholesale revenues from sales to affiliates were $28 million compared to $37 million for the corresponding period in 2017. The decrease was primarily due to a 53.0% decrease in KWH sales primarily resulting from lower availability due to planned outages at Gulf Power generating units. Partially offsetting this decrease was a 63.6% increase in the price of energy sold due to dispatching higher-priced generating resources driven by the cold weather in January 2018.
Fuel and Purchased Power Expenses
|
| | | | | | |
| | First Quarter 2018 vs. First Quarter 2017 |
| | (change in millions) | | (% change) |
| Fuel | $ | (26 | ) | | (24.1 | ) |
| Purchased power | 12 |
| | 35.3 |
|
| Total fuel and purchased power expenses | $ | (14 | ) | | |
In the first quarter 2018, total fuel and purchased power expenses were $128 million compared to $142 million for the corresponding period in 2017. The decrease was primarily the result of a $10 million net decrease related to the volume of KWHs generated and purchased and a $4 million decrease related to the lower average cost of fuel and purchased power.
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and purchased power transactions do not have a significant impact on earnings since energy and capacity expenses are generally offset by energy and capacity revenues through Gulf Power's fuel and purchased power capacity cost recovery clauses and long-term wholesale contracts. See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters – Cost Recovery Clauses – Retail Fuel Cost Recovery" and " – Purchased Power Capacity Recovery" in Item 8 of the Form 10-K for additional information.
Details of Gulf Power's generation and purchased power were as follows:
|
| | | |
| | First Quarter 2018 | | First Quarter 2017 |
Total generation (in millions of KWHs) | 1,775 | | 2,322 |
Total purchased power (in millions of KWHs) | 1,622 | | 1,459 |
Sources of generation (percent) – | | | |
| Coal | 37 | | 53 |
| Gas | 63 | | 47 |
Cost of fuel, generated (in cents per net KWH) – | | | |
| Coal | 3.14 | | 3.27 |
| Gas | 2.97 | | 3.24 |
Average cost of fuel, generated (in cents per net KWH) | 3.03 | | 3.26 |
Average cost of purchased power (in cents per net KWH)(*) | 4.56 | | 4.57 |
| |
(*) | Average cost of purchased power includes fuel purchased by Gulf Power for tolling agreements where power is generated by the provider. |
Fuel
In the first quarter 2018, fuel expense was $82 million compared to $108 million for the corresponding period in 2017. The decrease was primarily due to a 46.5% decrease in the volume of KWHs generated by Gulf Power's coal-fired generation resources due to planned outages in the first quarter 2018.
Purchased Power
In the first quarter 2018, purchased power expense was $46 million compared to $34 million for the corresponding period in 2017. The increase was primarily due to an increase of 11.2% in the volume of KWHs purchased as a result of higher purchases from affiliates to serve higher territorial load.
Energy purchases from non-affiliates and 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. Affiliate purchases are made in accordance with the IIC or other contractual agreements, as approved by the FERC.
Other Operations and Maintenance Expenses
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $(10) | | (11.6) |
In the first quarter 2018, other operations and maintenance expenses were $76 million compared to $86 million for the corresponding period in 2017. The decrease was primarily due to decreases of $3 million in environmental compliance expenses at generating facilities, $2 million in energy services expenses, and $2 million in routine and planned maintenance expenses at distribution facilities.
Expenses from energy services did not have a significant impact on earnings since they were generally offset by associated revenues. Environmental compliance expenses did not have a significant impact on earnings since they were offset by environmental revenues through Gulf Power's environmental cost recovery clause. See Note 3 to the
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
financial statements of Gulf Power under "Retail Regulatory Matters – Cost Recovery Clauses – Environmental Cost Recovery" in Item 8 of the Form 10-K for additional information.
Depreciation and Amortization
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $29 | | 161.1 |
In the first quarter 2018, depreciation and amortization was $47 million compared to $18 million for the corresponding period in 2017. The increase was primarily due to $25.5 million in depreciation credits recorded in the first quarter 2017 as authorized in a settlement agreement approved by the Florida PSC in 2013. See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters – Retail Base Rate Cases" in Item 8 of the Form 10-K for additional information.
Loss on Plant Scherer Unit 3
|
| | |
First Quarter 2018 vs. First Quarter 2017 |
(change in millions) | | (% change) |
$(33) | | N/M |
N/M - Not meaningful
In the first quarter 2017, Gulf Power recorded a $32.5 million write-down related to its ownership of Plant Scherer Unit 3 in accordance with the 2017 Gulf Power Rate Case Settlement Agreement. See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters – Retail Base Rate Cases" in Item 8 of the Form 10-K for additional information.
Income Taxes
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $(1) | | (7.1) |
In the first quarter 2018, income taxes were $13 million compared to $14 million for the corresponding period in 2017. The decrease was primarily due to the lower corporate income tax rate resulting from the Tax Reform Legislation substantially offset by the increase in pre-tax net income related to the first quarter 2017 write-down associated with Plant Scherer Unit 3. See Note (H) to the Condensed Financial Statements under "Effective Tax Rate" herein for additional information. Also see Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters – Retail Base Rate Cases" in Item 8 of the Form 10-K for more information regarding the 2017 Gulf Power Rate Case Settlement Agreement.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Gulf Power's future earnings potential. The level of Gulf Power's future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Gulf Power's business of providing electric service. These factors include Gulf Power's ability to maintain a constructive regulatory environment that continues to allow for the timely recovery of prudently-incurred costs during a time of increasing costs and limited projected demand growth over the next several years. Future earnings will be driven primarily by customer growth. Earnings will also depend upon maintaining and growing sales, considering, among other things, the adoption and/or penetration rates of increasingly energy-efficient technologies due to changes in the minimum allowable equipment efficiencies along with the continuation of changes in customer behavior, both of which could contribute to a net reduction in customer usage. Earnings are subject to a variety of other factors. These factors include weather, competition, energy conservation practiced by customers, the
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
use of alternative energy sources by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth or decline in Gulf Power's service territory. Demand for electricity is primarily driven by the pace of economic growth that may be affected by changes in regional and global economic conditions, which may impact future earnings. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Gulf Power in Item 7 of the Form 10-K.
Environmental Matters
Gulf Power's operations are regulated by state and federal environmental agencies through a variety of laws and regulations governing air, water, land, and protection of other natural resources. Gulf Power maintains comprehensive environmental compliance and greenhouse gas (GHG) strategies to assess upcoming requirements and compliance costs associated with these environmental laws and regulations. The costs, including capital expenditures and operations and maintenance costs, required to comply with environmental laws and regulations and to achieve stated goals may impact future unit retirement and replacement decisions, results of operations, cash flows, and financial condition. Related costs may result from the installation of additional environmental controls, closure and monitoring of CCR facilities, unit retirements, and adding or changing fuel sources for certain existing units, as well as related upgrades to the transmission system. A major portion of these costs are expected to be recovered through existing ratemaking provisions. The ultimate impact of environmental laws and regulations and the GHG goals discussed below will depend on various factors, such as state adoption and implementation of requirements, the availability and cost of any deployed control technology, and the outcome of pending and/or future legal challenges.
New or revised environmental laws and regulations could affect many areas of Gulf Power's operations. The impact of any such changes cannot be determined at this time. Environmental compliance costs could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis or through long-term wholesale agreements. The State of Florida has statutory provisions that allow a utility to petition the Florida PSC for recovery of prudent environmental compliance costs that are not being recovered through base rates or any other recovery mechanism. Gulf Power's current long-term wholesale agreements contain provisions that permit charging the customer with costs incurred as a result of changes in environmental laws and regulations. Further, increased costs that are recovered through regulated rates could contribute to reduced demand for electricity, which could negatively affect results of operations, cash flows, and financial condition. Additionally, many commercial and industrial customers may also be affected by existing and future environmental requirements, which for some may have the potential to ultimately affect their demand for electricity. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters," "Retail Regulatory Matters – Cost Recovery Clauses – Environmental Cost Recovery," and "Other Matters" of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under "Environmental Matters" in Item 8 of the Form 10-K for additional information, including a discussion on the State of Florida's statutory provisions on environmental cost recovery.
Environmental Laws and Regulations
Coal Combustion Residuals
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Environmental Laws and Regulations – Coal Combustion Residuals" of Gulf Power in Item 7 of the Form 10-K for additional information regarding the Disposal of Coal Combustion Residuals from Electric Utilities rule (CCR Rule).
Consistent with the EPA's announced plans to reconsider certain portions of the CCR Rule, on March 15, 2018, the EPA published the first of two proposed coal ash rules it plans to finalize by no later than December 2019. The impact of any changes to the CCR Rule will depend on the content of the final rule and the outcome of any legal challenges and cannot be determined at this time.
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Global Climate Issues
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Global Climate Issues" of Gulf Power in Item 7 of the Form 10-K for additional information.
Through 2017, the Southern Company system has achieved an estimated GHG emission reduction of 36% since 2007. In April 2018, Southern Company established an intermediate goal of a 50% reduction in carbon emissions from 2007 levels by 2030 and a long-term goal of low- to no-carbon operations by 2050. To achieve these goals, the Southern Company system expects to continue growing its renewable energy portfolio, optimize technology advancements to modernize its transmission and distribution systems, increase the use of natural gas for generation, invest in energy efficiency, and continue research and development efforts focused on technologies to lower GHG emissions. The Southern Company system's ability to achieve these goals also will be dependent on many external factors, including supportive national energy policies, low natural gas prices, and the development, deployment, and advancement of relevant energy technologies. The ultimate outcome of this matter cannot be determined at this time.
Retail Regulatory Matters
Gulf Power's rates and charges for service to retail customers are subject to the regulatory oversight of the Florida PSC. Gulf Power's rates are a combination of base rates and several separate cost recovery clauses for specific categories of costs. These separate cost recovery clauses address such items as fuel and purchased energy costs, purchased power capacity costs, energy conservation and demand side management programs, and the costs of compliance with environmental laws and regulations. Costs not addressed through one of the specific cost recovery clauses are recovered through base rates. See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters" in Item 8 of the Form 10-K for additional information. The recovery balance of each regulatory clause for Gulf Power is reported in Note (B) to the Condensed Financial Statements herein.
Retail Base Rate Case
As a continuation of the 2017 Gulf Power Rate Case Settlement Agreement, on March 26, 2018, the Florida PSC approved the Gulf Power Tax Reform Settlement Agreement, a stipulation and settlement agreement among Gulf Power and three intervenors, addressing the retail revenue requirement effects of the Tax Reform Legislation.
The Gulf Power Tax Reform Settlement Agreement results in annual reductions to Gulf Power's revenues of $18.2 million from base rates and $15.6 million from environmental cost recovery rates, implemented April 1, 2018, and also provides for a one-time refund of $69.4 million for the retail portion of unprotected (not subject to normalization) deferred tax liabilities through Gulf Power's fuel cost recovery rate over the remainder of 2018. As a result of the Gulf Power Tax Reform Settlement Agreement, the Florida PSC also approved an increase in Gulf Power's maximum equity ratio from 52.5% to 53.5% for all retail regulatory purposes.
As part of the Gulf Power Tax Reform Settlement Agreement, a limited scope proceeding to address protected deferred tax liabilities consistent with IRS normalization principles was initiated on April 30, 2018. Pending resolution of this proceeding, Gulf Power is deferring the related amounts for 2018 as a regulatory liability. Unless otherwise agreed to by the parties to the Gulf Power Tax Reform Settlement Agreement, amounts recorded in this regulatory liability will be refunded to retail customers in 2019 through Gulf Power's fuel cost recovery rates. The ultimate outcome of this matter cannot be determined at this time.
See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters – Retail Base Rate Cases" in Item 8 of the Form 10-K for additional information.
Income Tax Matters
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters" of Gulf Power in Item 7 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk," Note (B) to the Condensed Financial Statements under "Regulatory Matters – Gulf Power," and Note
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(H) to the Condensed Financial Statements herein for information regarding the Tax Reform Legislation and related regulatory actions.
Other Matters
Gulf Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Gulf Power is subject to certain claims and legal actions arising in the ordinary course of business. Gulf Power's business activities are subject to extensive governmental regulation related to public health and the environment, such as regulation of air emissions and water discharges. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements, such as standards for air, water, land, and protection of other natural resources, has occurred throughout the U.S. This litigation has included claims for damages alleged to have been caused by CO2 and other emissions, CCR, and alleged exposure to hazardous materials, and/or requests for injunctive relief in connection with such matters.
The ultimate outcome of such pending or potential litigation or regulatory matters cannot be predicted at this time; however, for current proceedings not specifically reported in Note (B) to the Condensed Financial Statements herein, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Gulf Power's financial statements. See Note (B) to the Condensed Financial Statements herein for a discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Gulf Power prepares its financial statements in accordance with GAAP. Significant accounting policies are described in Note 1 to the financial statements of Gulf Power 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 Gulf Power's results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of Gulf Power in Item 7 of the Form 10-K for a complete discussion of Gulf Power's critical accounting policies and estimates.
Recently Issued Accounting Standards
See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Recently Issued Accounting Standards" of Gulf Power in Item 7 of the Form 10-K for additional information regarding ASU No. 2016-02, Leases (Topic 842). See Note (A) to the Condensed Financial Statements herein for information regarding Gulf Power's recently adopted accounting standards.
FINANCIAL CONDITION AND LIQUIDITY
Overview
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Gulf Power in Item 7 of the Form 10-K for additional information. Gulf Power's financial condition remained stable at March 31, 2018. Gulf Power intends to continue to monitor its access to short-term and long-term capital markets as well as bank credit agreements to meet future capital and liquidity needs. See "Capital Requirements and Contractual Obligations," "Sources of Capital," and "Financing Activities" herein for additional information.
Net cash provided from operating activities totaled $104 million for the first three months of 2018 compared to $50 million for the corresponding period in 2017. The $54 million increase was primarily due to increased fuel cost recovery and the timing of accounts receivable collections. Net cash used for investing activities totaled $71 million in the first three months of 2018 primarily due to property additions to utility plant. Net cash used for financing
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
activities totaled $22 million for the first three months of 2018 primarily due to the payment of a common stock dividend, partially offset by an increase in notes payable. Cash flows from financing activities vary from period to period based on capital needs and the maturity or redemption of securities.
Significant balance sheet changes for the first three months of 2018 include the reclassification of $72 million to other regulatory liabilities, current from deferred credits related to income taxes as a result of the Gulf Power Tax Reform Settlement Agreement. See FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Retail Base Rate Case" herein for additional information regarding the Gulf Power Tax Reform Settlement Agreement.
Capital Requirements and Contractual Obligations
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Gulf Power in Item 7 of the Form 10-K for a description of Gulf Power's capital requirements and contractual obligations. There are no scheduled maturities of long-term debt through March 31, 2019. See "Financing Activities" herein for additional information.
The construction program is 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; storm impacts; changes in environmental laws and regulations; the outcome of any legal challenges to environmental rules; changes in generating plants, including unit retirements and replacements and adding or changing fuel sources at existing generating units, to meet regulatory requirements; changes in the expected environmental compliance programs; changes in FERC rules and regulations; Florida PSC approvals; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.
Sources of Capital
Gulf Power plans to obtain the funds required to meet its future capital needs from sources similar to those used in the past, which were primarily from operating cash flows, external security issuances, borrowings from financial institutions, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" of Gulf Power in Item 7 of the Form 10-K for additional information.
At March 31, 2018, Gulf Power's current liabilities exceeded current assets by $40 million. Gulf Power's current liabilities may exceed current assets because of scheduled maturities of long-term debt and the periodic use of short-term debt as a funding source, as well as significant seasonal fluctuations in cash needs.
Gulf Power intends to utilize operating cash flows, external security issuances, and borrowings from financial institutions to fund its short-term capital needs. Gulf Power has substantial cash flow from operating activities and access to the capital markets and financial institutions to meet short-term liquidity needs.
At March 31, 2018, Gulf Power had approximately $39 million of cash and cash equivalents. Committed credit arrangements with banks at March 31, 2018 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Expires | | | | | | Executable Term Loans | | Expires Within One Year |
| 2018 | | 2019 | | 2020 | | Total | | Unused | | One Year | | Two Years | | Term Out | | No Term Out |
| (in millions) |
| $ | 20 |
| | $ | 25 |
| | $ | 235 |
| | $ | 280 |
| | $ | 280 |
| | $ | 45 |
| | $ | — |
| | $ | 20 |
| | $ | — |
|
See Note 6 to the financial statements of Gulf Power under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Most of these bank credit arrangements contain covenants that limit debt levels and contain cross-acceleration provisions to other indebtedness (including guarantee obligations) of Gulf Power. Such cross-acceleration provisions to other indebtedness would trigger an event of default if Gulf Power defaulted on indebtedness, the payment of which was then accelerated. At March 31, 2018, Gulf Power was in compliance with all such covenants. A portion ($40 million) of the bank credit arrangements contain material adverse change clauses at the time of borrowings.
Subject to applicable market conditions, Gulf Power expects to renew or replace its bank credit arrangements, as needed, prior to expiration. In connection therewith, Gulf Power may extend the maturity dates and/or increase or decrease the lending commitments thereunder.
Most of the unused credit arrangements with banks are allocated to provide liquidity support to Gulf Power's pollution control revenue bonds and commercial paper program. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support as of March 31, 2018 was approximately $82 million. In addition, at March 31, 2018, Gulf Power had approximately $75 million of fixed rate pollution control revenue bonds outstanding that were required to be remarketed within the next 12 months.
Gulf Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper at the request and for the benefit of Gulf Power and the other traditional electric operating companies. Proceeds from such issuances for the benefit of Gulf Power are loaned directly to Gulf Power. The obligations of each traditional electric operating company under these arrangements are several and there is no cross-affiliate credit support. Short-term borrowings are included in notes payable on the balance sheets.
Details of short-term borrowings were as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | Short-term Debt at March 31, 2018 | | 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) |
| Commercial paper | | $ | 61 |
| | 2.4 | % | | $ | 40 |
| | 2.0 | % | | $ | 68 |
|
| |
(*) | Average and maximum amounts are based upon daily balances during the three-month period ended March 31, 2018. |
Gulf Power believes the need for working capital can be adequately met by utilizing the commercial paper program, lines of credit, short-term bank loans, and operating cash flows.
Credit Rating Risk
At March 31, 2018, Gulf Power 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 to BBB- and/or Baa3 or below. These contracts are for physical electricity purchases and sales, fuel transportation and storage, and energy price risk management.
The maximum potential collateral requirements under these contracts at March 31, 2018 were as follows:
|
| | | |
| Credit Ratings | Maximum Potential Collateral Requirements |
| | (in millions) |
| At BBB- and/or Baa3 | $ | 147 |
|
| Below BBB- and/or Baa3 | $ | 479 |
|
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Included in these amounts are certain agreements that could require collateral in the event that 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 Gulf Power to access capital markets and would be likely to impact the cost at which it does so.
While it is unclear how the credit rating agencies and the FERC may respond to the Tax Reform Legislation, certain financial metrics, such as the funds from operations to debt percentage, used by the credit rating agencies to assess Southern Company and its subsidiaries, including Gulf Power, may be negatively impacted. The Gulf Power Tax Reform Settlement Agreement is expected to help mitigate these potential adverse impacts to Gulf Power's credit metrics by allowing a maximum equity ratio of 53.5% for all retail regulatory purposes. See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Regulatory Matters – Gulf Power" herein for additional information.
Financing Activities
Gulf Power did not issue or redeem any securities during the three months ended March 31, 2018.
In addition to any financings that may be necessary to meet capital requirements, contractual obligations, and storm recovery, Gulf Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.
MISSISSIPPI POWER COMPANY
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
| | | | For the Three Months
Ended March 31, | For the Three Months
Ended March 31, |
| | 2018 | | 2017 | 2019 | | 2018 |
| | (in millions) | (in millions) |
| Operating Revenues: | | | | | | |
| Retail revenues | $ | 194 |
| | $ | 200 |
| $ | 203 |
| | $ | 194 |
|
| Wholesale revenues, non-affiliates | 63 |
| | 62 |
| 57 |
| | 68 |
|
| Wholesale revenues, affiliates | 34 |
| | 5 |
| 22 |
| | 34 |
|
| Other revenues | 11 |
| | 5 |
| 5 |
| | 6 |
|
| Total operating revenues | 302 |
| | 272 |
| 287 |
| | 302 |
|
| Operating Expenses: | | | | | | |
| Fuel | 98 |
| | 78 |
| 93 |
| | 98 |
|
| Purchased power | 9 |
| | 8 |
| 3 |
| | 9 |
|
| Other operations and maintenance | 75 |
| | 76 |
| 59 |
| | 75 |
|
| Depreciation and amortization | 41 |
| | 40 |
| 48 |
| | 41 |
|
| Taxes other than income taxes | 28 |
| | 26 |
| 26 |
| | 28 |
|
| Estimated loss on Kemper IGCC | 44 |
| | 108 |
| 2 |
| | 44 |
|
| Total operating expenses | 295 |
| | 336 |
| 231 |
| | 295 |
|
| Operating Income (Loss) | 7 |
| | (64 | ) | 56 |
| | 7 |
|
| Other Income and (Expense): | | | | | | |
| Allowance for equity funds used during construction | — |
| | 35 |
| |
| Interest expense, net of amounts capitalized | (19 | ) | | (19 | ) | (17 | ) | | (19 | ) |
| Other income (expense), net | 1 |
| | 1 |
| 5 |
| | 1 |
|
| Total other income and (expense) | (18 | ) | | 17 |
| (12 | ) | | (18 | ) |
| Loss Before Income Taxes | (11 | ) | | (47 | ) | |
| Earnings (Loss) Before Income Taxes | | 44 |
| | (11 | ) |
| Income taxes (benefit) | (4 | ) | | (27 | ) | 7 |
| | (4 | ) |
| Net Loss | (7 | ) | | (20 | ) | |
| Dividends on Preferred Stock | — |
| | — |
| |
| Net Loss After Dividends on Preferred Stock | $ | (7 | ) | | $ | (20 | ) | |
| Net Income (Loss) | | $ | 37 |
| | $ | (7 | ) |
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
| | | | For the Three Months
Ended March 31, | For the Three Months
Ended March 31, |
| | 2018 | | 2017 | 2019 | | 2018 |
| | (in millions) | (in millions) |
| Net Loss | $ | (7 | ) | | $ | (20 | ) | |
| Net Income (Loss) | | $ | 37 |
| | $ | (7 | ) |
| Other comprehensive income (loss): |
| |
|
| |
|
| Qualifying hedges: | | | | | | |
| Changes in fair value, net of tax of $(1) and $-, respectively | (1 | ) | | 1 |
| |
| Changes in fair value, net of tax of $- and $(1), respectively | | — |
| | (1 | ) |
| Total other comprehensive income (loss) | (1 | ) | | 1 |
| — |
| | (1 | ) |
| Comprehensive Loss | $ | (8 | ) | | $ | (19 | ) | |
| Comprehensive Income (Loss) | | $ | 37 |
| | $ | (8 | ) |
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) | | | | For the Three Months
Ended March 31, | For the Three Months
Ended March 31, |
| | 2018 | | 2017 | 2019 | | 2018 |
| | (in millions) | (in millions) |
| Operating Activities: | | | | | | |
| Net loss | $ | (7 | ) | | $ | (20 | ) | |
| Adjustments to reconcile net loss to net cash used for operating activities — | | | | |
| Net income (loss) | | $ | 37 |
| | $ | (7 | ) |
| Adjustments to reconcile net income (loss) to net cash used for operating activities — | | | | |
| Depreciation and amortization, total | 44 |
| | 49 |
| 50 |
| | 44 |
|
| Deferred income taxes | 155 |
| | (47 | ) | (8 | ) | | 155 |
|
| Allowance for equity funds used during construction | — |
| | (35 | ) | |
| Estimated loss on Kemper IGCC | 37 |
| | 108 |
| 6 |
| | 37 |
|
| Other, net | 3 |
| | (3 | ) | (10 | ) | | 3 |
|
| Changes in certain current assets and liabilities — | | | | | | |
| -Receivables | (129 | ) | | 5 |
| 11 |
| | (129 | ) |
| -Other current assets | (12 | ) | | 13 |
| 7 |
| | (12 | ) |
| -Accounts payable | (21 | ) | | (35 | ) | (38 | ) | | (21 | ) |
| -Accrued taxes | (110 | ) | | (46 | ) | (62 | ) | | (110 | ) |
| -Accrued compensation | (22 | ) | | (22 | ) | (22 | ) | | (22 | ) |
| -Over recovered regulatory clause revenues | 9 |
| | (12 | ) | |
| -Other current liabilities | (9 | ) | | 5 |
| 6 |
| | — |
|
| Net cash used for operating activities | (62 | ) | | (40 | ) | (23 | ) | | (62 | ) |
| Investing Activities: | | | | | | |
| Property additions | (33 | ) | | (186 | ) | (45 | ) | | (33 | ) |
| Payments pursuant to LTSAs | (9 | ) | | 1 |
| |
| Construction payables | | (8 | ) | | (2 | ) |
| Other investing activities | (10 | ) | | (5 | ) | (10 | ) | | (17 | ) |
| Net cash used for investing activities | (52 | ) | | (190 | ) | (63 | ) | | (52 | ) |
| Financing Activities: | | | | | | |
| Increase (decrease) in notes payable, net | (4 | ) | | 9 |
| |
| Decrease in notes payable, net | | — |
| | (4 | ) |
| Proceeds — | | | | | | |
| Senior notes | 600 |
| | — |
| — |
| | 600 |
|
| Short-term borrowings | 300 |
| | 4 |
| — |
| | 300 |
|
| Pollution control revenue bonds | | 43 |
| | — |
|
| Redemptions — Other long-term debt | (900 | ) | | — |
| — |
| | (900 | ) |
| Return of capital | | (38 | ) | | — |
|
| Other financing activities | (5 | ) | | (1 | ) | — |
| | (5 | ) |
| Net cash provided from (used for) financing activities | (9 | ) | | 12 |
| 5 |
| | (9 | ) |
| Net Change in Cash, Cash Equivalents, and Restricted Cash | (123 | ) | | (218 | ) | (81 | ) | | (123 | ) |
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 248 |
| | 224 |
| 293 |
| | 248 |
|
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 125 |
| | $ | 6 |
| $ | 212 |
| | $ | 125 |
|
| Supplemental Cash Flow Information: | | | | | | |
| Cash paid during the period for — | | | | | | |
Interest (paid $21 and $25, net of $- and $12 capitalized for 2018
and 2017, respectively) | $ | 21 |
| | $ | 13 |
| |
| Interest (net of $- and $- capitalized for 2019 and 2018, respectively) | | $ | 13 |
| | $ | 21 |
|
| Income taxes, net | 19 |
| | — |
| — |
| | 19 |
|
| Noncash transactions — Accrued property additions at end of period | 30 |
| | 78 |
| 27 |
| | 30 |
|
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
| | | Assets | | At March 31, 2018 | | At December 31, 2017 | | At March 31, 2019 | | At December 31, 2018 |
| | | (in millions) | | (in millions) |
| Current Assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 125 |
| | $ | 248 |
| | $ | 212 |
| | $ | 293 |
|
| Receivables — | | | | | | | | |
| Customer accounts receivable | | 26 |
| | 36 |
| | 29 |
| | 34 |
|
| Unbilled revenues | | 35 |
| | 41 |
| | 37 |
| | 41 |
|
| Income taxes receivable, current | | 144 |
| | 4 |
| |
| Affiliated | | 25 |
| | 16 |
| | 16 |
| | 21 |
|
| Other accounts and notes receivable | | 9 |
| | 12 |
| | 36 |
| | 31 |
|
| Fossil fuel stock | | 21 |
| | 17 |
| | 23 |
| | 20 |
|
| Materials and supplies, current | | 51 |
| | 44 |
| |
| Other regulatory assets, current | | 123 |
| | 125 |
| |
| Materials and supplies | | | 52 |
| | 53 |
|
| Other regulatory assets | | | 102 |
| | 116 |
|
| Other current assets | | 2 |
| | 9 |
| | 6 |
| | 19 |
|
| Total current assets | | 561 |
| | 552 |
| | 513 |
| | 628 |
|
| Property, Plant, and Equipment: | | | | | | | | |
| In service | | 4,780 |
| | 4,773 |
| | 4,821 |
| | 4,900 |
|
| Less: Accumulated provision for depreciation | | 1,344 |
| | 1,325 |
| | 1,467 |
| | 1,429 |
|
| Plant in service, net of depreciation | | 3,436 |
| | 3,448 |
| | 3,354 |
| | 3,471 |
|
| Construction work in progress | | 93 |
| | 84 |
| | 110 |
| | 103 |
|
| Total property, plant, and equipment | | 3,529 |
| | 3,532 |
| | 3,464 |
| | 3,574 |
|
| Other Property and Investments | | 30 |
| | 30 |
| | 123 |
| | 24 |
|
| Deferred Charges and Other Assets: | | | | | | | | |
| Deferred charges related to income taxes | | 35 |
| | 35 |
| | 33 |
| | 33 |
|
| Other regulatory assets, deferred | | 449 |
| | 437 |
| | 487 |
| | 474 |
|
| Accumulated deferred income taxes | | 98 |
| | 247 |
| | 148 |
| | 150 |
|
| Other deferred charges and assets | | 10 |
| | 33 |
| | 17 |
| | 3 |
|
| Total deferred charges and other assets | | 592 |
| | 752 |
| | 685 |
| | 660 |
|
| Total Assets | | $ | 4,712 |
| | $ | 4,866 |
| | $ | 4,785 |
| | $ | 4,886 |
|
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
| | | Liabilities and Stockholder's Equity | | At March 31, 2018 | | At December 31, 2017 | | At March 31, 2019 | | At December 31, 2018 |
| | | (in millions) | | (in millions) |
| Current Liabilities: | | | | | | | | |
| Securities due within one year | | $ | 214 |
| | $ | 989 |
| | $ | 339 |
| | $ | 40 |
|
| Notes payable | | 300 |
| | 4 |
| |
| Accounts payable — | | | | | | | | |
| Affiliated | | 47 |
| | 59 |
| | 52 |
| | 60 |
|
| Other | | 78 |
| | 96 |
| | 50 |
| | 90 |
|
| Accrued taxes — | | | | | |
| Accrued income taxes | | — |
| | 40 |
| |
| Other accrued taxes | | 31 |
| | 101 |
| |
| Accrued taxes | | | 33 |
| | 95 |
|
| Accrued interest | | | 20 |
| | 15 |
|
| Accrued compensation | | 18 |
| | 39 |
| | 16 |
| | 38 |
|
| Accrued plant closure costs | | 61 |
| | 35 |
| | 26 |
| | 29 |
|
| Asset retirement obligations, current | | 36 |
| | 37 |
| |
| Asset retirement obligations | | | 28 |
| | 34 |
|
| Over recovered regulatory clause liabilities | | | 14 |
| | 14 |
|
| Other current liabilities | | 67 |
| | 63 |
| | 55 |
| | 40 |
|
| Total current liabilities | | 852 |
| | 1,463 |
| | 633 |
| | 455 |
|
| Long-term Debt | | 1,567 |
| | 1,097 |
| | 1,280 |
| | 1,539 |
|
| Deferred Credits and Other Liabilities: | | | | | | | | |
| Accumulated deferred income taxes | | | 373 |
| | 378 |
|
| Deferred credits related to income taxes | | 391 |
| | 372 |
| | 367 |
| | 382 |
|
| Employee benefit obligations | | 115 |
| | 116 |
| | 111 |
| | 115 |
|
| Asset retirement obligations, deferred | | 134 |
| | 137 |
| | 127 |
| | 126 |
|
| Other cost of removal obligations | | 177 |
| | 178 |
| | 186 |
| | 185 |
|
| Other regulatory liabilities, deferred | | 78 |
| | 79 |
| | 80 |
| | 81 |
|
| Other deferred credits and liabilities | | 14 |
| | 33 |
| | 18 |
| | 16 |
|
| Total deferred credits and other liabilities | | 909 |
| | 915 |
| | 1,262 |
| | 1,283 |
|
| Total Liabilities | | 3,328 |
| | 3,475 |
| | 3,175 |
| | 3,277 |
|
| Redeemable Preferred Stock | | 33 |
| | 33 |
| |
| Common Stockholder's Equity: | | | | | |
| Common stock, without par value — | | | | | |
| Authorized — 1,130,000 shares | | | | | |
| Outstanding — 1,121,000 shares | | 38 |
| | 38 |
| |
| Paid-in capital | | 4,531 |
| | 4,529 |
| |
| Accumulated deficit | | (3,213 | ) | | (3,205 | ) | |
| Accumulated other comprehensive loss | | (5 | ) | | (4 | ) | |
| Total common stockholder's equity | | 1,351 |
| | 1,358 |
| |
Common Stockholder's Equity (See accompanying statements) | | | 1,610 |
| | 1,609 |
|
| Total Liabilities and Stockholder's Equity | | $ | 4,712 |
| | $ | 4,866 |
| | $ | 4,785 |
| | $ | 4,886 |
|
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY (UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Number of
Common
Shares
Issued | | Common
Stock | | Paid-In
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Total |
| | (in millions) |
| Balance at December 31, 2017 | 1 |
| | $ | 38 |
| | $ | 4,529 |
| | $ | (3,205 | ) | | $ | (4 | ) | | $ | 1,358 |
|
Net loss after dividends on
preferred stock | — |
| | — |
| | — |
| | (7 | ) | | — |
| | (7 | ) |
| Capital contributions from parent company | — |
| | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Other | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Balance at March 31, 2018 | 1 |
| | $ | 38 |
| | $ | 4,531 |
| | $ | (3,213 | ) | | $ | (5 | ) | | $ | 1,351 |
|
| | | | | | | | | | | | |
| Balance at December 31, 2018 | 1 |
| | $ | 38 |
| | $ | 4,546 |
| | $ | (2,971 | ) | | $ | (4 | ) | | $ | 1,609 |
|
| Net income | — |
| | — |
| | — |
| | 37 |
| | — |
| | 37 |
|
| Return of capital to parent company | — |
| | — |
| | (38 | ) | | — |
| | — |
| | (38 | ) |
| Capital contributions from parent company | — |
| | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
| Balance at March 31, 2019 | 1 |
| | $ | 38 |
| | $ | 4,510 |
| | $ | (2,934 | ) | | $ | (4 | ) | | $ | 1,610 |
|
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 20182019 vs. FIRST QUARTER 20172018
OVERVIEW
Mississippi Power operates as a vertically integrated utility providing electric service to retail customers within its traditional service territory located within the State of Mississippi and to wholesale customers in the Southeast.
Many factors affect the opportunities, challenges, and risks of Mississippi Power's business of providing electric service. These factors include Mississippi Power's ability to maintain and grow energy sales and number of customers and to operate in a constructive regulatory environment that provides timely recovery of prudently-incurred costs. These costs include those related to reliability, fuel, andprojected long-term demand growth, stringent environmental standards, as well as ongoingincluding CCR rules, reliability, fuel, capital and operations and maintenance expenditures, including expanding and improving transmission and distribution facilities, and restoration following major storms. Appropriately balancing required costs and capital expenditures with customer prices will continue to challenge Mississippi Power for the foreseeable future.
During the first quarter 2018, Mississippi Power recorded chargesis scheduled to income of $44 million ($33 million after tax), primarily resulting fromfile a base rate case in the abandonment andfourth quarter 2019 (Mississippi Power 2019 Base Rate Case).
On March 28, 2019, Mississippi Power filed a request with the FERC for a decrease in wholesale base revenues under the MRA tariff as agreed upon in a settlement agreement reached with its wholesale customers resolving all matters related closure activities for the mine and gasifier-related assets atto the Kemper County energy facility. Additional closure costs forfacility similar to the mineretail rate settlement agreement approved by the Mississippi PSC in February 2018 and gasifier-related assets, including ash disposal, currently estimated to cost up to $50reflecting the impacts of the Tax Reform Legislation. The MRA settlement agreement provides that base rates will decrease $3.7 million pre-tax (excluding salvage), are expectedannually, effective January 1, 2019. Mississippi Power expects the matter to be incurred duringresolved in the remainder of 2018 andsecond quarter 2019. In addition, period costs, including, but not limited to, costs for compliance and safety, ARO accretion, and property taxes for the mine and gasifier-related assets, are estimated at $4 million for the remainder of 2018, $4 million in 2019, and $1 million annually beginning in 2020. The ultimate outcome of this matter cannot be determined at this time.
For additional information on the Kemper County energy facility, see See Note 32 to the financial statements of Mississippi Power under "Kemper County Energy Facility""FERC Matters" in Item 8 of the Form 10-K and FUTURE EARNINGS POTENTIAL – "Kemper County Energy Facility" and Note (B) to the Condensed Financial Statements under "Kemper County Energy Facility" herein.for additional information.
Mississippi Power continues to focus on several key performance indicators. In recognition that Mississippi Power's long-term financial success is dependent upon how well it satisfies its customers' needs, Mississippi Power's retail base rate mechanism, PEP, includes performance indicators that directly tie customer service indicators to Mississippi Power's allowed ROE. Mississippi Power also focuses on broader measures of customer satisfaction, plant availability, system reliability, and net income.
RESULTS OF OPERATIONS
Net Income (Loss)
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $44 | | N/M |
N/M - Not meaningful
Mississippi Power's net income after dividends on preferred stock.
On February 7, 2018, Mississippi Power revised its annual projected PEP filing, requesting anfor the first quarter 2019 was $37 million compared to a loss of $7 million for the corresponding period in 2018. The increase in annual retail revenues of $26 million. On February 14, 2018, Mississippi Power submitted its 2018 ECO Plan filing, requesting an increasenet income is primarily attributable to lower charges associated with the Kemper IGCC and a decrease in annual retail revenue of $17 million. These filings include the effects of the Tax Reform Legislation. The Mississippi PSC is expected to rule on these requests in mid-2018. The ultimate outcome of these matters cannot be determined at this time.
On April 10, 2018, the Mississippi PSC stated its intent to begin an operations review process for investor-owned utilities in Mississippi and instructed its legal staff and the Mississippi Public Utilities Staff (MPUS) to prepare an order and request for proposals for a review of Mississippi Power. Mississippi Power expects that the review will include its cost recovery framework and an analysis of potential participation in a regional transmission organization. The ultimate outcome of this matter cannot be determined at this time.
See FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters" herein for additional information.
In March 2018, Mississippi Power issued $300 million aggregate principal amount of Series 2018A Floating Rate Senior Notes due March 27, 2020 bearing interest based on three-month LIBOR and $300 million aggregate principal amount of Series 2018B 3.95% Senior Notes due March 30, 2028. In March 2018, Mississippi Power also entered into a $300 million short-term floating rate bank loan bearing interest based on one-month LIBOR, of which $125 million was repaid subsequent to March 31, 2018. Mississippi Power used the proceeds from these financings to repay the entire $900 million principal amount of its unsecured term loan.maintenance expenses.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Income (Loss)Retail Revenues
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $13 | | 65.0 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $9 | | 4.6 |
Mississippi Power's net loss after dividends on preferred stock forIn the first quarter 2018 was $72019, retail revenues were $203 million compared to $20$194 million for the corresponding period in 2017. The change was related to lower pre-tax charges associated with the Kemper County energy facility, partially offset by the cessation of AFUDC equity related to the Kemper County energy facility in the second quarter 2017.
See Note 3 to the financial statements of Mississippi Power under "Kemper County Energy Facility" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Kemper County Energy Facility" herein for additional information.
Retail Revenues
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $(6) | | (3.0) |
In the first quarter 2018, retail revenues were $194 million compared to $200 million for the corresponding period in 2017.2018.
Details of the changes in retail revenues were as follows:
| | | | First Quarter 2018 | First Quarter 2019 |
| | (in millions) | | (% change) | (in millions) | | (% change) |
| Retail – prior year | $ | 200 |
| | | $ | 194 |
| | |
| Estimated change resulting from – | | | | | | |
| Rates and pricing | (5 | ) | | (2.5 | ) | 15 |
| | 7.7 | % |
| Sales decline | (1 | ) | | (0.5 | ) | |
| Sales growth | | 1 |
| | 0.5 |
|
| Weather | 5 |
| | 2.5 |
| (9 | ) | | (4.6 | ) |
| Fuel and other cost recovery | (5 | ) | | (2.5 | ) | 2 |
| | 1.0 |
|
| Retail – current year | $ | 194 |
| | (3.0 | )% | $ | 203 |
| | 4.6 | % |
Revenues associated with changes in rates and pricing decreasedincreased in the first quarter 20182019 when compared to the corresponding period in 20172018 primarily due to anincreases in PEP and ECO Plan rates that became effective for the first billing cycle of September 2018, partially offset by a rate decrease related to the Kemper County energy facility that became effective for the first billing cycle of $5 million implemented in the second quarter 2017.April 2018 and a new tolling arrangement accounted for as a sales-type lease. See Note 32 to the financial statements of Mississippiunder "Mississippi Power under "Retail Regulatory Matters– Performance Evaluation Plan," " – Environmental Compliance Overview Plan"Plan," and " – Kemper County Energy Facility – Rate Recovery" in Item 8 of the Form 10-K and Note (L) to the Condensed Financial Statements herein for additional information.
Revenues attributable to changes in sales decreased forincreased in the first quarter 20182019 compared to the corresponding period in 2017.2018. Weather-adjusted residential KWH sales increased 0.3%1.5% in 2018 primarilythe first quarter 2019 due to increased customer growth.usage. Weather-adjusted commercial KWH sales decreased 0.3%3.4% due to decreased customer usage. Industrial KWH sales decreased 3.9% primarily due to decreased customer usage related to energy efficiency, largely offset by customer growth. Industrial KWH sales increased 1.2% primarily due to increased usage by several large industrial customers.
Revenues associated with weather decreased in the first quarter 2019 compared to the corresponding period in 2018 primarily due to milder weather.
Fuel and other cost recovery revenues decreasedincreased in the first quarter 20182019 when compared to the corresponding period in 20172018 primarily as a result of lowerhigher recoverable fuel costs. Recoverable fuel costs include fuel and purchased power expenses reduced by the fuel 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,
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
Wholesale Revenues – Non-Affiliates
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $1 | | 1.6 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(11) | | (16.2) |
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's system
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "FERC Matters" of Mississippi Power in Item 7 of the Form 10-K and FUTURE EARNINGS POTENTIAL – "FERC Matters""FERC Matters" herein for additional information.
In the first quarter 2018,2019, wholesale revenues from sales to non-affiliates were $63$57 million compared to $62$68 million for the corresponding period in 2017. The increase was2018. This decrease primarily resulted from a $6 million decrease due to lower market-based contract capacity and energy sales and fewer opportunity sales and a $5 million increasedecrease in cost-based electric tariff revenues due to weather impacts, partially offset by a decrease of $4 million related to a refund of transmission revenues.decreased customer usage and milder weather.
Wholesale Revenues – Affiliates
|
| | |
First Quarter 2018 vs. First Quarter 2017 |
(change in millions) | | (% change) |
$29 | | N/M |
N/M - Not meaningful |
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(12) | | (35.3) |
Wholesale revenues from sales to affiliated companies will vary depending on demand and the availability and cost of generating resources at each company. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost.
In the first quarter 2018,2019, wholesale revenues from sales to affiliates were $34$22 million compared to $5$34 million for the corresponding period in 2017. The increase2018. This decrease was primarily due to a $16$19 million decrease associated with lower natural gas prices, partially offset by a $7 million increase associated with higher natural gas prices and a $13 million increase in KWH sales due to the dispatch of Mississippi Power's lower cost generation resources to serve the Southern Company system's territorial load. The KWH sales increase is partially related to Mississippi Power's generation outages which decreased the amount of KWH available to dispatch in 2017.
Other Revenues
|
| | |
First Quarter 2018 vs. First Quarter 2017 |
(change in millions) | | (% change) |
$6 | | N/M |
N/M - Not meaningful
In the first quarter 2018, other revenues were $11 million compared to $5 million for the corresponding period in 2017. The increase was primarily due to a $5 million increase in transmission revenues.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and Purchased Power Expenses
| | | | First Quarter 2018 vs. First Quarter 2017 | First Quarter 2019 vs. First Quarter 2018 |
| | (change in millions) | | (% change) | (change in millions) | | (% change) |
| Fuel | $ | 20 |
| | 25.6 | $ | (5 | ) | | (5.1) |
| Purchased power | 1 |
| | 12.5 | (6 | ) | | (66.7) |
| Total fuel and purchased power expenses | $ | 21 |
| | $ | (11 | ) | |
In the first quarter 2018,2019, total fuel and purchased power expenses were $107$96 million compared to $86$107 million for the corresponding period in 2017.2018. The increasedecrease was primarily due to a $20 million increase in the volumelower average costs of KWHs generatednatural gas and a $1 million increase in the cost of purchased power.
Fuel and purchased power energy transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Mississippi Power's fuel cost recovery clause.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of Mississippi Power's generation and purchased power were as follows:
| | | | First Quarter 2018 | | First Quarter 2017 | First Quarter 2019 | | First Quarter 2018 |
Total generation (in millions of KWHs) | 4,003 | | 3,161 | 3,950 | | 4,003 |
Total purchased power (in millions of KWHs)(*) | 194 | | 242 | |
Total purchased power (in millions of KWHs) | | 207 | | 194 |
Sources of generation (percent) – | | | | | |
| Coal | 4 | | 9 | 4 | | 4 |
| Gas | 96 | | 91 | 96 | | 96 |
Cost of fuel, generated (in cents per net KWH) – | | |
| Coal | 3.62 | | 3.33 | 4.42 | | 3.62 |
| Gas | 2.60 | | 2.65 | 2.46 | | 2.60 |
Average cost of fuel, generated (in cents per net KWH) | 2.65 | | 2.71 | 2.53 | | 2.65 |
Average cost of purchased power (in cents per net KWH)(*) | 4.74 | | 3.33 | |
Average cost of purchased power (in cents per net KWH) | | 1.62 | | 4.74 |
| |
(*) | Includes energy produced during the test period for the Kemper IGCC, which is accounted for in accordance with FERC guidance. |
Fuel
In the first quarter 2018, total2019, fuel expense was $98$93 million compared to $78$98 million for the corresponding period in 2017.2018. The increasedecrease was primarily due to a 29% increase5.6% decrease in the volumeaverage cost of KWHs generated primarily as a result of higher sales.natural gas.
Purchased Power
In the first quarter 2018, total2019, purchased power expense was $9$3 million compared to $8$9 million for the corresponding period in 2017.2018. The increasedecrease was primarily due to a $3 million, or 42.7%, increase66% decrease in the average cost per KWH purchased partially offset byas a $2 million, or 19.6%, decreaseresult of colder weather in the volume of KWHs purchasedfirst quarter 2018 as compared to 2017.the corresponding period in 2019.
Energy purchases will vary depending on the market prices of wholesale energy as compared to the cost of the Southern Company system's generation, demand for energy within the Southern Company system's service territory, and the availability of the Southern Company system's generation. These purchases are made in accordance with the IIC or other contractual agreements, as approved by the FERC.
Other Operations and Maintenance Expenses
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(16) | | (21.3) |
In the first quarter 2019, other operations and maintenance expenses were $59 million compared to $75 million for the corresponding period in 2018. The decrease was primarily due to decreases of $9 million in generation planned outage expenses and $4 million in employee compensation and benefit expenses related to an employee attrition plan recorded in 2018.
Depreciation and Amortization
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $7 | | 17.1 |
In the first quarter 2019, depreciation and amortization was $48 million compared to $41 million for the corresponding period in 2018. The increase was primarily related to $6 million of amortization associated with ECO
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Taxes Other Than Income Taxes
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $2 | | 7.7 |
InPlan regulatory assets. See Note 2 to the first quarter 2018, taxes other than income taxes were $28 million compared to $26 millionfinancial statements under "Mississippi Power – Environmental Compliance Overview Plan" in Item 8 of the Form 10-K for the corresponding period in 2017. The increase was primarily due to higher ad valorem taxes.
The retail portion of ad valorem taxes is recoverable under Mississippi Power's ad valorem tax cost recovery clause and, therefore, does not affect net income.additional information.
Estimated Loss on Kemper IGCC
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $(64) | | (59.3) |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(42) | | (95.5) |
EstimatedIn the first quarter 2019, estimated losses on the Kemper IGCC ofwere $2 million compared to $44 million were recordedfor the corresponding period in the first quarter 2018, resulting from thelower charges related to abandonment and related closure activities for the mine and gasifier-related assets recorded in 2019 as compared to $108 million for the corresponding period in 2017 related to revisions to the estimated construction costs prior to the June 2017 project suspension.2018.
See Note 32 to the financial statements of Mississippiunder "Mississippi Power under "Kemper– Kemper County Energy Facility" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Kemper"Mississippi Power – Kemper County Energy Facility"Facility" herein for additional information.
Allowance for Equity Funds Used During ConstructionOther Income (Expense), Net
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $(35) | | (100.0) |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $4 | | N/M |
N/M - Not meaningful
In the first quarter 2018, AFUDC equity2019, other income (expense), net was immaterial$5 million compared to $35$1 million for the corresponding period in 2017.2018. The decrease resulted from suspension of the Kemper IGCC construction in June 2017.
increase was primarily due to higher interest income associated with a new tolling arrangement accounted for as a lease. See Note 3 to the financial statements of Mississippi Power under "Kemper County Energy Facility" in Item 8 of the Form 10-K and Note (B)(L) to the Condensed Financial Statements under "Kemper County Energy Facility" herein for additional information.
Interest Expense, Net of Amounts Capitalized
In the first quarter 2018, interest expense, net of amounts capitalized was flat compared to the corresponding period in 2017 reflecting a $12 million reduction in AFUDC debt due to the Kemper IGCC project suspension in June 2017, largely offset by a $9 million decrease in interest expense as a result of a decrease in average outstanding debt and the reversal of tax reserves in 2017 and a $3 million decrease due to the completion of Kemper IGCC carrying cost amortization in 2017.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Taxes (Benefit)
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $23 | | 85.2 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $11 | | 275.0 |
In the first quarter 2018,2019, income taxes were $7 million compared to an income tax benefit wasof $4 million compared to $27 million for the corresponding period in 2017. The decrease2018. This change was primarily due to higher pre-tax earnings primarily due to lower estimated losses on the Kemper IGCC, net of the related non-deductible AFUDC equity in 2018 due to the Kemper IGCC project suspension. The decrease also reflects increases resulting from higher pre-tax earnings, partially offset by an increase in the reversalflowback of tax reserves in 2017 andexcess deferred income taxes as a result of a settlement agreement reached with wholesale customers under the impact of the Tax Reform Legislation.
MRA tariff. See Note (H)(B) to the Condensed Financial Statements under "Mississippi Power" herein for additional information.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Mississippi Power's future earnings potential. The level of Mississippi Power's future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Mississippi Power's business of providing electric service. These factors include Mississippi Power's ability to recover its prudently-incurred costs in a timely manner during a time of increasing costs and limited projected demand growth over the next several years. Another factor is Mississippi Power'sits ability to prevail against legal challenges associated with the Kemper County energy facility. Future earnings will be driven primarily by continued customer growth.growth and the weak pace of growth in electricity use per customer, especially in residential and commercial markets. Earnings 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, both of which could contribute to a net reduction in customer usage. Earnings are subject to a variety of other factors. These factors include weather, competition, developing new and maintaining existing energy contracts and associated load requirements
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
with other utilities and other wholesale customers, energy conservation practiced by customers, the use of alternative energy sources by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth or decline in Mississippi Power's service territory. Demand for electricity is primarily driven by the pace of economic growth that may be affected by changes in regional and global economic conditions, which may impact future earnings.
For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Mississippi Power in Item 7 of the Form 10-K.
Environmental Matters
Mississippi Power's operations are regulated by state and federal environmental agencies through a variety of laws and regulations governing air, water, land, and protection of other natural resources. Mississippi Power maintains comprehensive environmental compliance and greenhouse gas (GHG)GHG strategies to assess upcoming requirements and compliance costs associated with these environmental laws and regulations. The costs, including capital expenditures, and operations and maintenance costs, and costs reflected in ARO liabilities, required to comply with environmental laws and regulations and to achieve stated goals may impact future electric generating unit retirement and replacement decisions, results of operations, cash flows, andand/or financial condition. Related costs may result from the installation of additional environmental controls, closure and monitoring of CCR facilities, unit retirements, and adding or changing fuel sources for certain existing units, as well as related upgrades to theMississippi Power's transmission system.and distribution systems. A major portion of these costs areis expected to be recovered through existing ratemaking provisions.retail and wholesale rates. The ultimate impact of environmental laws and regulations and the GHG goals discussed below will depend on various factors, such as state adoption and implementation of requirements, the availability and cost of any deployed control technology, fuel prices, and the outcome of pending and/or future legal challenges.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
New or revised environmental laws and regulations could affect many areas of Mississippi Power's operations. The impact of any such changes cannot be determined at this time. Environmental compliance costs could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis or through long-term wholesale agreements. Further, increased costs that are recovered through regulated rates could contribute to reduced demand for electricity, which could negatively affect results of operations, cash flows, andand/or financial condition. Additionally, many commercial and industrial customers may also be affected by existing and future environmental requirements, which for some may have the potential to ultimately affect their demand for electricity. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" of Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under "Environmental Matters" in Item 8 of the Form 10-K for additional information.
Environmental Laws and Regulations
Coal Combustion ResidualsFERC Matters
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Environmental Laws and Regulations – Coal Combustion Residuals" of Mississippi PowerNote 2 to the financial statements under "FERC Matters" in Item 7 of the Form 10-K for additional information regarding the Disposal of Coal Combustion Residuals from Electric Utilities rule (CCR Rule).
Consistent with the EPA's announced plans to reconsider certain portions of the CCR Rule, on March 15, 2018, the EPA published the first of two proposed coal ash rules it plans to finalize by no later than December 2019. The impact of any changes to the CCR Rule will depend on the content of the final rule and the outcome of any legal challenges and cannot be determined at this time.
Global Climate Issues
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Global Climate Issues" of Mississippi Power in Item 78 of the Form 10-K for additional information.
Through 2017,Municipal and Rural Association Tariff
On March 28, 2019, Mississippi Power filed a request with the Southern Company system has achieved an estimated GHG emission reductionFERC for a decrease in wholesale base revenues under the MRA tariff as agreed upon in a settlement agreement reached with its wholesale customers resolving all matters related to the Kemper County energy facility similar to the retail rate settlement agreement approved by the Mississippi PSC in February 2018 and reflecting the impacts of 36% since 2007. In April 2018, Southern Company established an intermediate goal of a 50% reductionthe Tax Reform Legislation. The MRA settlement agreement provides that base rates will decrease $3.7 million annually, effective January 1, 2019. Mississippi Power expects the matter to be resolved in carbon emissions from 2007 levels by 2030 and a long-term goal of low- to no-carbon operations by 2050. To achieve these goals, the Southern Company system expects to continue growing its renewable energy portfolio, optimize technology advancements to modernize its transmission and distribution systems, increase the use of natural gas for generation, invest in energy efficiency, and continue research and development efforts focused on technologies to lower GHG emissions. The Southern Company system's ability to achieve these goals also will be dependent on many external factors, including supportive national energy policies, low natural gas prices, and the development, deployment, and advancement of relevant energy technologies.second quarter 2019. The ultimate outcome of this matter cannot be determined at this time.
Open Access Transmission Tariff
On March 25, 2019, the Alabama Municipal Electric Authority and Cooperative Energy and SCS and the traditional electric operating companies (including Mississippi Power) filed a formal settlement agreement with the FERC
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
agreeing to a rate reduction based on a 10.6% ROE, with a retroactive effective date of May 10, 2018, and a five-year moratorium on these parties seeking changes to the OATT formula rate. The ultimate outcome of this matter cannot be determined at this time; however, if approved by the FERC Matters
See Note 3 toas filed, the OATT settlement would not have a material impact on the financial statements of Mississippi Power under "FERC Matters – Cooperative Energy Power Supply Agreement" in Item 8 of the Form 10-K for additional information regarding Cooperative Energy's network integration transmission service agreement (NITSA) with SCS.
On March 23, 2018, the FERC accepted the amendment to the NITSA between Cooperative Energy and SCS, effective April 1, 2018.Power.
Retail Regulatory Matters
Mississippi Power's rates and charges for service to retail customers are subject to the regulatory oversight of the Mississippi PSC. Mississippi Power's rates are a combination of base rates under PEP and several separate cost recovery clauses for specific categories of costs. These separate cost recovery clauses address such items as fuel and purchased power, energy efficiency programs, ad valorem taxes, property damage, and the costs of compliance with
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
environmental laws and regulations. Costs not addressed through one of the specific cost recovery clauses are expected to be recovered through Mississippi Power's base rates.
On April 10, 2018, the Mississippi PSC stated its intent to begin an operations review process for investor-owned utilities in Mississippi and instructed its legal staff and the MPUS to prepare an order and request for proposals for a review of Mississippi Power. Mississippi Power expects thatis scheduled to file a base rate case in the review will include its cost recovery framework and an analysis of potential participation in a regional transmission organization. The ultimate outcome of this matter cannot be determined at this time.fourth quarter 2019.
See Note 32 to the financial statements of Mississippi Power under "Retail Regulatory Matters" and "Kemper County Energy Facility""Mississippi Power" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Regulatory Matters – Mississippi Power" herein for additional information.
Performance Evaluation Plan
On February 7, 2018, Mississippi Power revised its annual projected PEP filing for 2018 to reflect the impacts of the Tax Reform Legislation. The revised filing requests an increase of $26 million in annual revenues, based on a performance adjusted ROE of 9.33% and an increased equity ratio of 55%. The Mississippi PSC is expected to rule on this request in mid-2018.
On March 22, 2018, Mississippi Power submitted its annual PEP lookback filing for 2017, which reflected no surcharge or refund.
The ultimate outcome of these matters cannot be determined at this time.
Environmental Compliance Overview Plan
On February 14, 2018, Mississippi Power submitted its ECO Plan filing for 2018, including the effects of the Tax Reform Legislation, which requested the maximum 2% annual increase in revenues, or approximately $17 million, primarily related to the carryforward from the prior year. Approximately $13 million of related revenue requirements in excess of the 2% maximum, along with related carrying costs, remains deferred for inclusion in the 2019 filing. The Mississippi PSC is expected to rule on this request in mid-2018. The ultimate outcome of this matter cannot be determined at this time.
Fuel Cost Recovery
At March 31, 2018, the amount of over-recovered retail fuel costs included in other regulatory liabilities, current on the condensed balance sheet was approximately $3 million compared to an approximately $6 million under-recovered balance in other accounts and notes receivable at December 31, 2017.
Ad Valorem Tax Adjustment
On March 23, 2018, Mississippi Power submitted its annual ad valorem tax adjustment factor filing for 2018, which included an annual rate increase of 0.8%, or $7 million in annual retail revenues, primarily due to increased assessments. The ultimate outcome of this matter cannot be determined at this time.
Kemper County Energy Facility
For additional information on the Kemper County energy facility, seeSee Note 32 to the financial statements of Mississippiunder "Mississippi Power under "Kemper– Kemper County Energy Facility" in Item 8 of the Form 10-K.10-K for additional information.
As the mining permit holder, for the Kemper County energy facility, Liberty Fuels Company, LLC has a legal obligation to perform mine reclamation, and Mississippi Power has a contractual obligation to fund all reclamation activities. MineAs a result of the abandonment of the Kemper IGCC, final mine reclamation began in the first quarter 2018.2018 and is expected to be substantially completed in 2020, with monitoring expected to continue through 2027. See Note 16 to the financial statements of Mississippi Power under "Asset Retirement Obligations and Other Costs of Removal" and "Variable Interest Entities" in Item 8 of the Form 10-K for additional information.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the first quarter 2018,2019, Mississippi Power recorded pre-tax charges to income of $44$2 million ($331 million after tax), primarily resulting from the abandonment and related closure activities and ongoing period costs, net of sales proceeds, for the mine and gasifier-related assets at the Kemper County energy facility. Additional closure costs for the mine and gasifier-related assets, including ash disposal, currently estimated to costat up to $50$10 million pre-tax (excluding salvage)salvage, net of dismantlement costs), are expected tomay be incurred duringthrough the remainderfirst half of 2018 and 2019.2020. In addition, period costs, including, but not limited to, costs for compliance and safety, ARO accretion, and property taxes for the mine and gasifier-related assets, are estimated at $4$11 million for the remainder of 2018, $4 million in 2019 and $1$2 million to $6 million annually beginning in 2020.2020 through 2023.
In addition, Mississippi Power constructed the CO2 pipeline for the planned transport of captured CO2 for use in enhanced oil recovery and is currently evaluating its options regarding the final disposition of the CO2 pipeline, including removal of the pipeline. This evaluation is expected to be complete later in 2019. If Mississippi Power ultimately decides to remove the CO2 pipeline, the cost of removal would have a material impact on Mississippi Power's financial statements.
In December 2018, Mississippi Power filed with the DOE its request for property closeout certification under the contract related to the $387 million of grants received. Mississippi Power and the DOE are currently in discussions regarding the requested closeout and property disposition, which may require payment to the DOE for a portion of certain property that is to be retained by Mississippi Power. In connection with the DOE closeout discussions, on April 29, 2019, the Civil Division of the Department of Justice informed Southern Company and Mississippi Power of an investigation related to the Kemper County energy facility. The ultimate outcome of this matterthese matters cannot be determined at this time.
The combined cycle and associated common facilities portions of the Kemper County energy facility were dedicated as Plant Ratcliffetime; however, they could have a material impact on April 27, 2018.
Income Tax Matters
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters" of Mississippi Power in Item 7 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk," Note (B) to the Condensed Financial Statements under "Regulatory Matters – Mississippi Power," and Note (H) to the Condensed Financial Statements herein for information regarding the Tax Reform Legislation and related regulatory actions.Power's financial statements.
Other Matters
Mississippi Power is involved in various other matters that could affect future earnings, including matters being litigated and regulatory matters that could affect future earnings.matters. In addition, Mississippi Power is subject to certain claims and legal actions arising
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
in the ordinary course of business. Mississippi Power's business activities are subject to extensive governmental regulation related to public health and the environment, such as regulationlaws and regulations governing air, water, land, and protection of air emissions and water discharges.other natural resources. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements, such as standards for air, water, land,laws and protection of other natural resources,regulations, has occurred throughout the U.S. This litigation has included claims for damages alleged to have been caused by CO2 and other emissions, CCR, and alleged exposure to hazardous materials, and/or requests for injunctive relief in connection with such matters.
The ultimate outcome of such pending or potential litigation or regulatory matters cannot be predicted at this time; however, for current proceedings not specifically reported in NoteNotes (B) and (C) to the Condensed Financial Statements herein, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Mississippi Power's financial statements. See NoteNotes (B) and (C) to the Condensed Financial Statements herein for a discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
In conjunction with Southern Company's sale of Gulf Power, Mississippi Power and Gulf Power have committed to seek a restructuring of their 50% undivided ownership interests in Plant Daniel such that each of them would, after the restructuring, own 100% of a generating unit. On January 15, 2019, Gulf Power provided notice to Mississippi Power that Gulf Power will retire its share of the generating capacity of Plant Daniel on January 15, 2024. Mississippi Power has the option to purchase Gulf Power's ownership interest for $1 on January 15, 2024, provided that Mississippi Power exercises the option no later than 120 days prior to that date. Mississippi Power is assessing the potential operational and economic effects of Gulf Power's notice. The ultimate outcome of these matters remains subject to completion of Mississippi Power's evaluations and applicable regulatory approvals, including by the FERC and the Mississippi PSC, and cannot be determined at this time. See Note (K) to the Condensed Financial Statements under "Southern Company" herein for information regarding the sale of Gulf Power.
Litigation
See Note 2 to the financial statements under "Mississippi Power – Kemper County Energy Facility" in Item 8 of the Form 10-K for additional information.
In 2016, a complaint againstMay 2018, Southern Company and Mississippi Power wasreceived a notice of dispute and arbitration demand filed by Martin Product Sales, LLC (Martin) based on two agreements, both related to Kemper IGCC byproducts for which Mississippi Power provided termination notices in Harrison County Circuit Court (Circuit Court) by Biloxi Freezing & Processing Inc., Gulfside Casino Partnership,2017. Martin alleges breach of contract, breach of good faith and John Carlton Dean, which was amendedfair dealing, fraud and refiled to include, among other things, Southern Companymisrepresentation, and civil conspiracy and makes a claim for damages in the amount of approximately $143 million, as a defendant. The individual plaintiff alleges thatwell as additional unspecified damages, attorney's fees, costs, and interest. In the first quarter 2019, Mississippi Power and Southern Company violatedfiled motions to dismiss.
In November 2018, Ray C. Turnage and 10 other individual plaintiffs filed a putative class action complaint against Mississippi Power and the three current members of the Mississippi Unfair Trade Practices Act. AllPSC in the U.S. District Court for the Southern District of Mississippi. Mississippi Power received Mississippi PSC approval in 2013 to charge a mirror CWIP rate premised upon including in its rate base pre-construction and construction costs for the Kemper IGCC prior to placing the Kemper IGCC into service. The Mississippi Supreme Court reversed that approval and ordered Mississippi Power to refund the amounts paid by customers under the previously-approved mirror CWIP rate. The plaintiffs have allegedallege that the initial approval process, and the amount approved, were improper. They also allege that Mississippi Power underpaid customers in the refund process by applying an incorrect interest rate. The plaintiffs seek to recover, on behalf of themselves and Southern Company concealed, falsely represented,their putative class, actual damages, punitive damages, pre-judgment interest, post-judgment interest, attorney's fees, and failedcosts. In response to fully disclose important facts concerning the cost and schedule of the Kemper County energy facility and that these alleged breaches have unjustly enriched Mississippi Power and Southern Company.the Mississippi PSC each filing a motion to dismiss, the plaintiffs filed an amended complaint on March 14, 2019. The amended complaint included four additional plaintiffs seek unspecified actual damages and punitive damages; ask the Circuit Court to appoint a receiver to oversee, operate, manage,additional claims for gross negligence, reckless conduct, and otherwise control all affairs relating to the Kemper County energy facility; ask the Circuit Court to revoke any licenses or certificates authorizing Mississippi Power or Southern Company to engage in any business related to the Kemper County energy facility in Mississippi; and seek attorney's fees, costs, and interest. The plaintiffs also seek an injunction to prevent any Kemper County energy facility costs from being charged to customers through electric rates. In June 2017, the Circuit Court ruled in favor of motions by Southern Company andintentional wrongdoing. Mississippi Power and dismissed the Mississippi PSC have each filed a motion to dismiss the amended complaint.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
case. In July 2017, the plaintiffs filed notice of an appeal. Mississippi Power believes thisthese legal challenge haschallenges have no merit; however, an adverse outcome in this proceedingeither of these proceedings could have a material impact on Mississippi Power's results of operations, financial condition, and liquidity. Mississippi Power intends to vigorously defend itself in this matter and theThe ultimate outcome of this matterthese matters cannot be determined at this time.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Mississippi Power prepares its financial statements in accordance with GAAP. Significant accounting policies are described in NoteNotes 1, 5, and 6 to the financial statements of Mississippi Power 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 Mississippi Power's results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of Mississippi Power in Item 7 of the Form 10-K for a complete discussion of Mississippi Power's critical accounting policies and estimates.
Kemper County Energy Facility Closure Costs
During the first quarter 2018, Mississippi Power recorded charges to income of $44 million ($33 million after tax), primarily resulting from the abandonment and related closure activities for the mine and gasifier-related assets at the Kemper County energy facility. Additional closure costs for the mine and gasifier-related assets, including ash disposal, currently estimated to cost up to $50 million pre-tax (excluding salvage), are expected to be incurred during the remainder of 2018 and 2019. In addition, period costs, including, but not limited to, costs for compliance and safety, ARO accretion, and property taxes for the mine and gasifier-related assets, are estimated at $4 million for the remainder of 2018, $4 million in 2019, and $1 million annually beginning in 2020. The ultimate outcome of this matter cannot be determined at this time.
See Note 3 to the financial statements of Mississippi Power under "Kemper County Energy Facility" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Kemper County Energy Facility" herein for additional information.
Recently Issued Accounting Standards
See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Recently Issued Accounting Standards" of Mississippi Power in Item 7 of the Form 10-K for additional information regarding ASU No. 2016-02, Leases (Topic 842). See Note (A) to the Condensed Financial Statements herein for information regarding Mississippi Power's recently adopted accounting standards.
FINANCIAL CONDITION AND LIQUIDITY
Overview
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Mississippi Power in Item 7 of the Form 10-K for additional information.
Mississippi Power's cash requirements primarily consist of funding ongoing operations, common stock dividends, capital expenditures, and debt maturities. Capital expenditures and other investing activities include investments to maintain existing generation facilities, to comply with environmental regulations including adding environmental modifications to certain existing generating units and closures of ash ponds, to expand and improve transmission and distribution facilities, and for restoration following major storms.
In March 2018, Mississippi Power issued $300 million aggregate principal amount of Series 2018A Floating Rate Senior Notes due March 27, 2020 bearing interest based on three-month LIBOR and $300 million aggregate principal amount of Series 2018B 3.95% Senior Notes due March 30, 2028. In March 2018, Mississippi Power also
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
entered into a $300 million short-term floating rate bank loan bearing interest based on one-month LIBOR, of which $125 million was repaid subsequent to March 31, 2018. Mississippi Power used the proceeds from these financings to repay the entire $900 million principal amount of its unsecured term loan.
Net cash used for operating activities totaled $62$23 million for the first three months of 2018, an increase2019, a decrease of $22$39 million as compared to the corresponding period in 2017.2018. The increasedecrease in net cash used for operating activities is primarily due to the timing of collections of receivables and payments of taxes other than income taxes, partially offset by a decrease in income taxes related to the Kemper County energy facilitylower income tax and the Tax Reform Legislation.ad valorem tax payments in 2019. Net cash used for investing activities totaled $52$63 million for the first three months of 20182019 primarily due to gross property additions related to steam production, distribution and transmission.transmission facilities. Net cash used forprovided from financing activities totaled $9$5 million for the first three months of 20182019 primarily due to redemptions$43 million of long-term debt,pollution control revenue bonds reoffered to the public, partially offset by the issuancea return of senior notes and short-term borrowings.capital to Southern Company. Cash flows from financing activities vary from period to period based on capital needs and the maturity or redemption of securities.
Significant balance sheet changes for the first three months of 20182019 include increasesa decrease of $470$259 million in long-term debt, primarily due to the issuancereclassification of $300 million in unsecured senior notes and $296 million in notes payable primarily due to the issuance of a short-term bank loan. Other significant changes include an increase of $140 million in income taxes receivable and a decrease of $149 million in accumulated deferred income taxes, primarily due to tax refunds expected in 2018, as well as a decrease of $775 million in securities due within one year, partially offset by $43 million in securities reoffered to the public; a decrease of $62 million in accrued taxes primarily due to the repaymentpayment of ad valorem taxes; and a $900decrease of $81 million unsecured term loan.in cash and cash equivalents. Other significant changes include a decrease of $79 million in plant in service and an increase of $99 million in other property and investments primarily due to a new tolling arrangement, effective January 1, 2019, accounted for as a sales-type lease. See Note (L) to the Condensed Financial Statements herein for additional information.
Capital Requirements and Contractual Obligations
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Mississippi Power in Item 7 of the Form 10-K for a description of Mississippi Power's capital requirements and contractual obligations. Approximately $125$300 million
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
will be required through March 31, 20192020 to fund maturities of long-term debt and $300 million will be required to fund maturities of short-term debt. In addition, Mississippi Power has $40 million of tax-exempt variable rate demand obligations that are supported by short-term credit facilities and $50 million of index rate revenue bonds that are required to be remarketed over the next 12 months. See "Sources of Capital" herein for additional information.
The construction program is 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; storm impacts; changes in environmental laws and regulations; the outcome of any legal challenges to environmental rules; changes in generating plants, including unit retirements and replacements and adding or changing fuel sources at existing electric generating units, to meet regulatory requirements; changes in FERC rules and regulations; Mississippi PSC approvals; changes in the expected environmental compliance program; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.
Sources of Capital
Mississippi Power plans to obtain the funds required for construction and other purposesto meet its future capital needs from operating cash flows, lines of credit, bank term loans, external securitysecurities issuances, borrowings from financial institutions, including commercial paper (toto the extent itMississippi Power is eligible to participate), monetization of income tax deductions associated with the abandonment of the gasifier portion of the Kemper County energy facility,participate, and equity contributions from Southern Company. TheHowever, the amount, type, and timing of any future financingsfinancing, if needed, will depend upon regulatory approval, prevailing market conditions, regulatory approval, and other factors. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" in Item 7 of the Form 10-K for additional information.
As of March 31, 2018,2019, Mississippi Power's current liabilities exceeded current assets by approximately $291$120 million primarily as a result of $425$339 million of long-term debt maturities. Mississippi Power intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements to meet future capital and liquidity needs.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
that is due within one year.
At March 31, 2018,2019, Mississippi Power had approximately $125$212 million of cash and cash equivalents. CommittedMississippi Power's committed credit arrangements with banks totaled $100 million at March 31, 2018 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Expires | | | | Executable Term Loans | | Expires Within One Year |
| 2018 | | Total | | Unused | | One Year | | Two Years | | Term Out | | No Term Out |
| (in millions) |
| $ | 100 |
| | $ | 100 |
| | $ | 100 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 100 |
|
See Note 68 to the financial statements of Mississippi Power under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.
All of these bank credit arrangements as well as Mississippi Power's term loan agreement, contain covenants that limit debt levels and typically contain cross accelerationcross-acceleration provisions to other indebtedness (including guarantee obligations) of Mississippi Power. Such cross-acceleration provisions to other indebtedness would trigger an event of default if Mississippi Power defaulted on indebtedness, the payment of which was then accelerated. At March 31, 2018,2019, Mississippi Power was in compliance with all such covenants. None of the bank credit arrangements contain material adverse change clauses at the time of borrowing.
Subject to applicable market conditions, Mississippi Power expects to seek to renew or replace its credit arrangements as needed, prior to expiration. In connection therewith, Mississippi Power may extend the maturity dates and/or increase or decrease the lending commitments thereunder.
A portion of the $100 million unused credit arrangements with banks is allocated to provide liquidity support to Mississippi Power's variable rate revenue bonds. The amount of variable rate revenue bonds outstanding requiring liquidity support as of March 31, 20182019 was approximately $40 million. In addition,
Short-term debt, including the average amount and maximum amount outstanding, was immaterial at March 31, 2018, 2019 and during the three-month period ended March 31, 2019.
Mississippi Power had approximately $50 millionbelieves the need for working capital can be adequately met by utilizing lines of index rate revenue bonds outstanding that were requiredcredit, short-term bank notes, commercial paper to be remarketed within the next 12 months.
Short-term borrowings are included in notes payable in the balance sheets. Details of short-term borrowings were as follows:
|
| | | | | | | | | | | | | | | | |
| | | Short-term Debt at March 31, 2018 | | 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) |
| Short-term bank debt | | $ | 300 |
| | 3.6% | | $ | 10 |
| | 3.6% | | $ | 300 |
|
| |
(*) | Average and maximum amounts are based upon daily balances during the three-month period ended March 31, 2018. |
Credit Rating Risk
At March 31, 2018,extent Mississippi Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.
In October 2017, Mississippi Power executed agreements with its largest retail customer, Chevron,is eligible to continue providing retail service to the Chevron refinery in Pascagoula, Mississippi through 2038. The agreements grant Chevron a security interest in the co-generation assets, with a net book value of approximately $92 million, located at the refinery that is exercisable upon the occurrence of (i) certain bankruptcy events or (ii)participate, operating cash flows, and other events of defaultcash.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
coupled with specific reductions in steam output at the facility and a downgradeCredit Rating Risk
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk" of Mississippi Power'sPower in Item 7 of the Form 10-K for additional information.
At March 31, 2019, Mississippi Power did not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating to below investment grade by two of the three rating agencies.downgrade.
There are certain contracts that have required or could require collateral, but not accelerated payment, in the event of a credit rating change to BBB and/or Baa2 or below. These contracts are for physical electricity purchases and sales, fuel transportation and storage, energy price risk management, and transmission. At March 31, 2018,2019, the maximum potential collateral requirements at a rating below BBB- and/or Baa3 equaled approximately $198$281 million.
Included in these amounts are certain agreements that could require collateral in the event that either Alabama Power or Georgia Power (affiliate companies of Mississippi 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 Mississippi Power to access capital markets or at a minimumand would be likely to impact the cost at which it does so.
On February 26, 2018, Moody's revised its rating outlook for Mississippi Power from stable to positive.
On March 14, 2018, S&P upgraded the senior unsecured long-term debt ratingAs a result of Mississippi Power to A- from BBB+ with a negative outlook.
While it is unclear how the credit rating agencies, the FERC, and the Mississippi PSC may respond to the Tax Reform Legislation, certain financial metrics, such as the funds from operations to debt percentage, used by the credit rating agencies to assess Southern Company and its subsidiaries, including Mississippi Power, may be negatively impacted. ToThe settlement agreement approved by the Mississippi PSC in August 2018 with respect to the 2018 PEP filings and all unresolved PEP filings for prior years is expected to help mitigate the resultingthese potential adverse impacts by allowing Mississippi Power has proposed to increase its equity ratio to 55%.retain the excess deferred taxes resulting from the Tax Reform Legislation until the conclusion of the Mississippi Power 2019 Base Rate Case. See Note 32 to the financial statements of Mississippi Power under "Retail Regulatory Matters""Mississippi Power" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Regulatory Matters – "Mississippi Power"Power" herein for additional information.
Financing Activities
In March 2018,2019, Mississippi Power issued $300reoffered to the public $43 million aggregate principal amount of Mississippi Business Finance Corporation Pollution Control Revenue Refunding Bonds, Series 2018A Floating Rate Senior Notes due March 27, 2020 bearing interest based on three-month LIBOR2002, that previously had been purchased and $300 million aggregate principal amount of Series 2018B 3.95% Senior Notes due March 30, 2028. In March 2018,held by Mississippi Power also entered into a $300 million short-term floating rate bank loan bearing interest based on one-month LIBOR, of which $125 million was repaid subsequent to March 31, 2018. Mississippi Power used the proceeds from these financings to repay the entire $900 million principal amount of its unsecured term loan.Power.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Mississippi Power plans, when economically feasible, to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.
SOUTHERN POWER COMPANY
AND SUBSIDIARY COMPANIES
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
| | | | For the Three Months
Ended March 31, | For the Three Months
Ended March 31, |
| | 2018 | | 2017 | 2019 | | 2018 |
| | (in millions) | (in millions) |
| Operating Revenues: | | | | | | |
| Wholesale revenues, non-affiliates | $ | 424 |
| | $ | 347 |
| $ | 352 |
| | $ | 424 |
|
| Wholesale revenues, affiliates | 83 |
| | 100 |
| 87 |
| | 83 |
|
| Other revenues | 2 |
| | 3 |
| 4 |
| | 2 |
|
| Total operating revenues | 509 |
| | 450 |
| 443 |
| | 509 |
|
| Operating Expenses: | | | | | | |
| Fuel | 169 |
| | 132 |
| 145 |
| | 169 |
|
| Purchased power | 61 |
| | 30 |
| 24 |
| | 61 |
|
| Other operations and maintenance | 93 |
| | 92 |
| 84 |
| | 93 |
|
| Depreciation and amortization | 114 |
| | 119 |
| 119 |
| | 114 |
|
| Taxes other than income taxes | 12 |
| | 12 |
| 11 |
| | 12 |
|
| Total operating expenses | 449 |
| | 385 |
| 383 |
| | 449 |
|
| Operating Income | 60 |
| | 65 |
| 60 |
| | 60 |
|
| Other Income and (Expense): | | | | | | |
| Interest expense, net of amounts capitalized | (47 | ) | | (50 | ) | (44 | ) | | (47 | ) |
| Other income (expense), net | 3 |
| | (1 | ) | 2 |
| | 3 |
|
| Total other income and (expense) | (44 | ) | | (51 | ) | (42 | ) | | (44 | ) |
| Earnings Before Income Taxes | 16 |
| | 14 |
| 18 |
| | 16 |
|
| Income taxes (benefit) | (99 | ) | | (52 | ) | (9 | ) | | (99 | ) |
| Net Income | 115 |
| | 66 |
| 27 |
| | 115 |
|
| Net loss attributable to noncontrolling interests | (6 | ) | | (4 | ) | (29 | ) | | (6 | ) |
| Net Income Attributable to Southern Power | $ | 121 |
| | $ | 70 |
| $ | 56 |
| | $ | 121 |
|
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2018 | | 2017 |
| | (in millions) |
| Net Income | $ | 115 |
| | $ | 66 |
|
| Other comprehensive income (loss): | | | |
| Qualifying hedges: | | | |
| Changes in fair value, net of tax of $16 and $(4), respectively | 48 |
| | (8 | ) |
Reclassification adjustment for amounts included in net income,
net of tax of $(8) and $(3), respectively | (24 | ) | | (4 | ) |
| Total other comprehensive income (loss) | 24 |
| | (12 | ) |
| Comprehensive Income | 139 |
| | 54 |
|
| Comprehensive loss attributable to noncontrolling interests | (6 | ) | | (4 | ) |
| Comprehensive Income Attributable to Southern Power | $ | 145 |
| | $ | 58 |
|
The accompanying notes as they relate to Southern Power are an integral part of these condensed consolidated financial statements.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2018 | | 2017 |
| | (in millions) |
| Operating Activities: | | | |
| Net income | $ | 115 |
| | $ | 66 |
|
| Adjustments to reconcile net income to net cash provided from operating activities — | | | |
| Depreciation and amortization, total | 122 |
| | 127 |
|
| Deferred income taxes | (50 | ) | | 36 |
|
| Amortization of investment tax credits | (14 | ) | | (14 | ) |
| Deferred revenues | (14 | ) | | (27 | ) |
| Other, net | 15 |
| | 5 |
|
| Changes in certain current assets and liabilities — | | | |
| -Receivables | 48 |
| | (7 | ) |
| -Prepaid income taxes | (32 | ) | | (21 | ) |
| -Other current assets | 5 |
| | (6 | ) |
| -Accounts payable | (43 | ) | | (38 | ) |
| -Accrued taxes | 9 |
| | (40 | ) |
| -Other current liabilities | (12 | ) | | 15 |
|
| Net cash provided from operating activities | 149 |
| | 96 |
|
| Investing Activities: | | | |
| Business acquisitions | (46 | ) | | (1,004 | ) |
| Property additions | (121 | ) | | (69 | ) |
| Change in construction payables | 25 |
| | (125 | ) |
| Payments pursuant to LTSAs | (18 | ) | | (31 | ) |
| Other investing activities | 7 |
| | (2 | ) |
| Net cash used for investing activities | (153 | ) | | (1,231 | ) |
| Financing Activities: | | | |
| Increase in notes payable, net | 29 |
| | 171 |
|
| Distributions to noncontrolling interests | (13 | ) | | (18 | ) |
| Capital contributions from noncontrolling interests | 8 |
| | 71 |
|
| Payment of common stock dividends | (78 | ) | | (79 | ) |
| Other financing activities | — |
| | (12 | ) |
| Net cash provided from (used for) financing activities | (54 | ) | | 133 |
|
| Net Change in Cash, Cash Equivalents, and Restricted Cash | (58 | ) | | (1,002 | ) |
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 140 |
| | 1,112 |
|
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 82 |
| | $ | 110 |
|
| Supplemental Cash Flow Information: | | | |
| Cash paid (received) during the period for — | | | |
| Interest (net of $5 and $2 capitalized for 2018 and 2017, respectively) | $ | 29 |
| | $ | 28 |
|
| Income taxes, net | (39 | ) | | (1 | ) |
| Noncash transactions — Accrued property additions at end of period | 57 |
| | 53 |
|
The accompanying notes as they relate to Southern Power are an integral part of these condensed consolidated financial statements.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Assets | | At March 31, 2018 | | At December 31, 2017 |
| | | (in millions) |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 82 |
| | $ | 129 |
|
| Receivables — | | | | |
| Customer accounts receivable | | 126 |
| | 117 |
|
| Affiliated | | 28 |
| | 50 |
|
| Other | | 69 |
| | 98 |
|
| Materials and supplies | | 218 |
| | 278 |
|
| Prepaid income taxes | | 82 |
| | 50 |
|
| Other current assets | | 35 |
| | 36 |
|
| Total current assets | | 640 |
| | 758 |
|
| Property, Plant, and Equipment: | | | | |
| In service | | 13,803 |
| | 13,755 |
|
| Less: Accumulated provision for depreciation | | 1,989 |
| | 1,910 |
|
| Plant in service, net of depreciation | | 11,814 |
| | 11,845 |
|
| Construction work in progress | | 634 |
| | 511 |
|
| Total property, plant, and equipment | | 12,448 |
| | 12,356 |
|
| Other Property and Investments: | | | | |
Intangible assets, net of amortization of $54 and $47
at March 31, 2018 and December 31, 2017, respectively | | 404 |
| | 411 |
|
| Total other property and investments | | 404 |
| | 411 |
|
| Deferred Charges and Other Assets: | | | | |
| Prepaid LTSAs | | 103 |
| | 118 |
|
| Accumulated deferred income taxes | | 911 |
| | 925 |
|
| Income taxes receivable, non-current | | 76 |
| | 72 |
|
| Other deferred charges and assets | | 600 |
| | 566 |
|
| Total deferred charges and other assets | | 1,690 |
| | 1,681 |
|
| Total Assets | | $ | 15,182 |
| | $ | 15,206 |
|
The accompanying notes as they relate to Southern Power are an integral part of these condensed consolidated financial statements.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Liabilities and Stockholders' Equity | | At March 31, 2018 | | At December 31, 2017 |
| | | (in millions) |
| Current Liabilities: | | | | |
| Securities due within one year | | $ | 770 |
| | $ | 770 |
|
| Notes payable | | 134 |
| | 105 |
|
| Accounts payable — | | | | |
| Affiliated | | 56 |
| | 102 |
|
| Other | | 130 |
| | 103 |
|
| Other current liabilities | | 145 |
| | 152 |
|
| Total current liabilities | | 1,235 |
| | 1,232 |
|
| Long-term Debt | | 5,108 |
| | 5,071 |
|
| Deferred Credits and Other Liabilities: | | | | |
| Accumulated deferred income taxes | | 142 |
| | 199 |
|
| Accumulated deferred ITCs | | 1,872 |
| | 1,884 |
|
| Other deferred credits and liabilities | | 267 |
| | 322 |
|
| Total deferred credits and other liabilities | | 2,281 |
| | 2,405 |
|
| Total Liabilities | | 8,624 |
| | 8,708 |
|
| Common Stockholder's Equity: | | | | |
| Common stock, par value $0.01 per share — | | | | |
| Authorized — 1,000,000 shares | | | | |
| Outstanding — 1,000 shares | | — |
| | — |
|
| Paid-in capital | | 3,663 |
| | 3,662 |
|
| Retained earnings | | 1,519 |
| | 1,478 |
|
| Accumulated other comprehensive income (loss) | | 27 |
| | (2 | ) |
| Total common stockholder's equity | | 5,209 |
| | 5,138 |
|
| Noncontrolling interests | | 1,349 |
| | 1,360 |
|
| Total stockholders' equity | | 6,558 |
| | 6,498 |
|
| Total Liabilities and Stockholders' Equity | | $ | 15,182 |
| | $ | 15,206 |
|
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2019 | | 2018 |
| | (in millions) |
| Net Income | $ | 27 |
| | $ | 115 |
|
| Other comprehensive income (loss): | | | |
| Qualifying hedges: | | | |
| Changes in fair value, net of tax of $(10) and $16, respectively | (29 | ) | | 48 |
|
Reclassification adjustment for amounts included in net income,
net of tax of $8 and $(8), respectively | 25 |
| | (24 | ) |
| Total other comprehensive income (loss) | (4 | ) | | 24 |
|
| Comprehensive Income | 23 |
| | 139 |
|
| Comprehensive loss attributable to noncontrolling interests | (29 | ) | | (6 | ) |
| Comprehensive Income Attributable to Southern Power | $ | 52 |
| | $ | 145 |
|
The accompanying notes as they relate to Southern Power are an integral part of these condensed consolidated financial statements.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2019 | | 2018 |
| | (in millions) |
| Operating Activities: | | | |
| Net income | $ | 27 |
| | $ | 115 |
|
| Adjustments to reconcile net income to net cash provided from operating activities — | | | |
| Depreciation and amortization, total | 125 |
| | 122 |
|
| Deferred income taxes | 17 |
| | (50 | ) |
| Amortization of investment tax credits | (14 | ) | | (14 | ) |
| Other, net | (7 | ) | | 2 |
|
| Changes in certain current assets and liabilities — | | | |
| -Receivables | 10 |
| | 48 |
|
| -Prepaid income taxes | (9 | ) | | (32 | ) |
| -Other current assets | 3 |
| | 5 |
|
| -Accounts payable | (32 | ) | | (43 | ) |
| -Accrued compensation | (15 | ) | | (13 | ) |
| -Other current liabilities | 5 |
| | 9 |
|
| Net cash provided from operating activities | 110 |
| | 149 |
|
| Investing Activities: | | | |
| Business acquisitions | (2 | ) | | (46 | ) |
| Property additions | (66 | ) | | (121 | ) |
| Change in construction payables | (7 | ) | | 25 |
|
| Payments pursuant to LTSAs | (15 | ) | | (18 | ) |
| Other investing activities | 11 |
| | 7 |
|
| Net cash used for investing activities | (79 | ) | | (153 | ) |
| Financing Activities: | | | |
| Increase in notes payable, net | 5 |
| | 29 |
|
| Distributions to noncontrolling interests | (36 | ) | | (13 | ) |
| Capital contributions from noncontrolling interests | 3 |
| | 8 |
|
| Payment of common stock dividends | (51 | ) | | (78 | ) |
| Net cash used for financing activities | (79 | ) | | (54 | ) |
| Net Change in Cash, Cash Equivalents, and Restricted Cash | (48 | ) | | (58 | ) |
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 181 |
| | 140 |
|
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 133 |
| | $ | 82 |
|
| Supplemental Cash Flow Information: | | | |
| Cash paid (received) during the period for — | | | |
| Interest (net of $4 and $5 capitalized for 2019 and 2018, respectively) | $ | 28 |
| | $ | 29 |
|
| Income taxes, net | 1 |
| | (39 | ) |
| Noncash transactions — Accrued property additions at end of period | 19 |
| | 57 |
|
The accompanying notes as they relate to Southern Power are an integral part of these condensed consolidated financial statements.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Assets | | At March 31, 2019 | | At December 31, 2018 |
| | | (in millions) |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 133 |
| | $ | 181 |
|
| Receivables — | | | | |
| Customer accounts receivable | | 120 |
| | 111 |
|
| Affiliated | | 33 |
| | 55 |
|
| Other | | 116 |
| | 116 |
|
| Materials and supplies | | 218 |
| | 220 |
|
| Prepaid income taxes | | 1,190 |
| | 25 |
|
| Other current assets | | 37 |
| | 37 |
|
| Total current assets | | 1,847 |
| | 745 |
|
| Property, Plant, and Equipment: | | | | |
| In service | | 13,284 |
| | 13,271 |
|
| Less: Accumulated provision for depreciation | | 2,288 |
| | 2,171 |
|
| Plant in service, net of depreciation | | 10,996 |
| | 11,100 |
|
| Construction work in progress | | 409 |
| | 430 |
|
| Total property, plant, and equipment | | 11,405 |
| | 11,530 |
|
| Other Property and Investments: | | | | |
Intangible assets, net of amortization of $67 and $61
at March 31, 2019 and December 31, 2018, respectively | | 340 |
| | 345 |
|
| Other investments | | 2 |
| | — |
|
| Total other property and investments | | 342 |
| | 345 |
|
| Deferred Charges and Other Assets: | | | | |
| Operating lease right-of-use assets, net of amortization | | 372 |
| | — |
|
| Prepaid LTSAs | | 102 |
| | 98 |
|
| Accumulated deferred income taxes | | 17 |
| | 1,186 |
|
| Income taxes receivable, non-current | | 33 |
| | 30 |
|
| Assets held for sale | | 644 |
| | 576 |
|
| Other deferred charges and assets | | 342 |
| | 373 |
|
| Total deferred charges and other assets | | 1,510 |
| | 2,263 |
|
| Total Assets | | $ | 15,104 |
| | $ | 14,883 |
|
The accompanying notes as they relate to Southern Power are an integral part of these condensed consolidated financial statements.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Liabilities and Stockholders' Equity | | At March 31, 2019 | | At December 31, 2018 |
| | | (in millions) |
| Current Liabilities: | | | | |
| Securities due within one year | | $ | 599 |
| | $ | 599 |
|
| Notes payable | | 105 |
| | 100 |
|
| Accounts payable — | | | | |
| Affiliated | | 69 |
| | 92 |
|
| Other | | 66 |
| | 77 |
|
| Accrued income taxes | | 11 |
| | 6 |
|
| Accrued interest | | 44 |
| | 36 |
|
| Liabilities held for sale | | 9 |
| | 15 |
|
| Other current liabilities | | 111 |
| | 106 |
|
| Total current liabilities | | 1,014 |
| | 1,031 |
|
| Long-term Debt | | 4,396 |
| | 4,418 |
|
| Deferred Credits and Other Liabilities: | | | | |
| Accumulated deferred income taxes | | 107 |
| | 105 |
|
| Accumulated deferred ITCs | | 1,817 |
| | 1,832 |
|
| Operating lease obligations | | 371 |
| | — |
|
| Other deferred credits and liabilities | | 181 |
| | 213 |
|
| Total deferred credits and other liabilities | | 2,476 |
| | 2,150 |
|
| Total Liabilities | | 7,886 |
| | 7,599 |
|
Total Stockholders' Equity (See accompanying statements) | | 7,218 |
| | 7,284 |
|
| Total Liabilities and Stockholders' Equity | | $ | 15,104 |
| | $ | 14,883 |
|
The accompanying notes as they relate to Southern Power are an integral part of these condensed consolidated financial statements.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Paid-In
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Total Common
Stockholders' Equity | | Noncontrolling Interests | | Total |
| | (in millions) |
| Balance at December 31, 2017 | $ | 3,662 |
| | $ | 1,478 |
| | $ | (2 | ) | | $ | 5,138 |
| | $ | 1,360 |
| | $ | 6,498 |
|
| Net income attributable to Southern Power | — |
| | 121 |
| | — |
| | 121 |
| | — |
| | 121 |
|
| Capital contributions from parent company | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Other comprehensive income (loss) | — |
| | — |
| | 24 |
| | 24 |
| | — |
| | 24 |
|
| Cash dividends on common stock | — |
| | (78 | ) | | — |
| | (78 | ) | | — |
| | (78 | ) |
Capital contributions from
noncontrolling interests | — |
| | — |
| | — |
| | — |
| | 9 |
| | 9 |
|
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | (13 | ) | | (13 | ) |
Net income (loss) attributable
to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | (6 | ) | | (6 | ) |
| Other | — |
| | (2 | ) | | 5 |
| | 3 |
| | (1 | ) | | 2 |
|
| Balance at March 31, 2018 | $ | 3,663 |
| | $ | 1,519 |
| | $ | 27 |
| | $ | 5,209 |
| | $ | 1,349 |
| | $ | 6,558 |
|
| | | | | | | | | | | | |
| Balance at December 31, 2018 | $ | 1,600 |
| | $ | 1,352 |
| | $ | 16 |
| | $ | 2,968 |
| | $ | 4,316 |
| | $ | 7,284 |
|
| Net income attributable to Southern Power | — |
| | 56 |
| | — |
| | 56 |
| | — |
| | 56 |
|
| Capital contributions from parent company | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Other comprehensive income (loss) | — |
| | — |
| | (4 | ) | | (4 | ) | | — |
| | (4 | ) |
| Cash dividends on common stock | — |
| | (51 | ) | | — |
| | (51 | ) | | — |
| | (51 | ) |
Capital contributions from
noncontrolling interests | — |
| | — |
| | — |
| | — |
| | 3 |
| | 3 |
|
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | (41 | ) | | (41 | ) |
Net income (loss) attributable
to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | (29 | ) | | (29 | ) |
| Other | (1 | ) | | (1 | ) | | — |
| | (2 | ) | | 1 |
| | (1 | ) |
| Balance at March 31, 2019 | $ | 1,600 |
| | $ | 1,356 |
| | $ | 12 |
| | $ | 2,968 |
| | $ | 4,250 |
| | $ | 7,218 |
|
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 20182019 vs. FIRST QUARTER 20172018
OVERVIEW
Southern Power develops, constructs, acquires, owns, and manages power generation assets, including renewable energy projects, and sells electricity at market-based rates in the wholesale market. Southern Power continually seeks opportunities to execute its strategy to create value through various transactions including acquisitions, dispositions, and sales of assets,partnership interests, development and construction of new generating facilities, and entry into PPAs primarily with investor-owned utilities, independent power producers, municipalities, electric cooperatives, and other load-serving entities, as well as commercial and industrial customers. In general, Southern Power has committedcommits to the construction or acquisition of new generating capacity only after entering into or assuming long-term PPAs for the new facilities.
During the three months ended March 31, 2018,2019, Southern Power acquired and completed construction of the 20-MW Gaskell West 1 solar project and continued construction of the Cactus Flats100-MW Wildhorse Mountain wind facility, the 200-MW Reading wind facility, and the expansion of the 345-MW385-MW Mankato natural gas facility. See FUTURE EARNINGS POTENTIAL –"Acquisitions" and "Construction Projects" herein for additional information.
In November 2018, Southern Power is pursuing the sale of a 33% equity interest in a newly-formed holding company owning substantiallyentered into an agreement to sell all of its equity interests in Plant Mankato (including the 385-MW expansion currently under construction) for an aggregate purchase price of approximately $650 million. The completion of the disposition is subject to the expansion unit reaching commercial operation as well as various other customary conditions to closing, including FERC and state commission approvals. On April 17, 2019, Southern Power's solar facilities, including certain subsidiaries ownedPower entered into an agreement to sell all of its equity interests in partnership with various third parties. If successful, the saleNacogdoches biomass-fueled facility to Austin Energy for an aggregate purchase price of $460 million, subject to customary closing conditions and working capital adjustments. Each of these sales is expected to close in mid-2018. Themid-2019; however, the ultimate outcome of this matterthese matters cannot be determined at this time.
At March 31, 2018,2019, Southern Power had anPower's average investment coverage ratio for its generating assets (including Plants Mankato and Nacogdoches), based on the ratio of 92%investment under contract to total investment using the respective generation facilities' net book value (or expected in-service value for facilities under construction) as the investment amount, was 93% through 20222023 and 90%91% through 2027,2028, with an average remaining contract duration of approximately 15 years. These ratios include the PPAs and capacity associated with facilities currently under construction and acquisitions discussed herein. See FUTURE EARNINGS POTENTIAL – "Power Sales Agreements" herein for additional information.
See FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" herein for information regarding Southern Power's revised capital expenditure forecasts for 2018 through 2022.
Southern Power continues to focus on several key performance indicators, including, but not limited to, peak season equivalent forced outage rate, contract availability, and net income.
RESULTS OF OPERATIONS
Net Income Attributable to Southern Power
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $51 | | 72.9 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(65) | | (53.7) |
Net income attributable to Southern Power for the first quarter 20182019 was $121$56 million compared to $70$121 million for the corresponding period in 2017.2018. The increasedecrease was primarily due to net$50 million in state income tax benefits recorded in 2018 arising from athe reorganization of Southern Power's legal entities that own and operate itscertain solar facilities.facilities and a reduction in 2019 of $39 million in PTCs, partially offset by $28 million in HLBV income allocations to Southern Power related to tax equity partnerships entered into in 2018. See Notes 7 and 10 to the financial statements in Item 8 of the Form 10-K for additional information on the legal entity reorganization and the tax equity partnerships, respectively.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Revenues
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $59 | | 13.1 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(66) | | (13.0) |
Total operating revenues include PPA capacity revenues, which are derived primarily from long-term contracts involving natural gas and biomass generating 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 thean accessible wholesale market, and,or, to the extent thethose generation assets are part of the FERC-approved IIC, as approved by the FERC, it may sell power into the power pool.
Natural Gas and Biomass Capacity and Energy Revenue
Capacity revenues generally represent the greatest contribution to netoperating 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 a capacity charge. Customers either purchase the energy output of a dedicated renewable facility through an energy charge or pay a fixed price related to the energy generated from the respective facility and sold to the grid. As a result, Southern Power's ability to recover fixed and variable operations and maintenance expenses is dependent upon the level of energy generated from these facilities, which can be impacted by weather conditions, equipment performance, transmission constraints, and other factors.
See FUTURE EARNINGS POTENTIAL – "Power Sales Agreements" herein for additional information regarding Southern Power's PPAs.
Details of Southern Power's operating revenues were as follows:
| | | | First Quarter 2018 | | First Quarter 2017 | First Quarter 2019 | | First Quarter 2018 |
| | (in millions) | (in millions) |
| PPA capacity revenues | $ | 138 |
| | $ | 148 |
| $ | 127 |
| | $ | 138 |
|
| PPA energy revenues | 254 |
| | 198 |
| 227 |
| | 254 |
|
| Total PPA revenues | 392 |
| | 346 |
| 354 |
| | 392 |
|
| Non-PPA revenues | 115 |
| | 101 |
| 85 |
| | 115 |
|
| Other revenues | 2 |
| | 3 |
| 4 |
| | 2 |
|
| Total operating revenues | $ | 509 |
| | $ | 450 |
| $ | 443 |
| | $ | 509 |
|
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the first quarter 2018,2019, total operating revenues were $509$443 million, reflecting a $59$66 million, or 13%, increasedecrease from the corresponding period in 2017.2018. The increasedecrease in operating revenues was primarily due to the following:
PPA capacity revenues decreased $10$11 million, or 7%8%, primarily due to a decrease of $17 million attributable to the contractual expirationsale of an affiliatePlant Oleander and Plant Stanton Unit A (together, the Florida Plants) in December 2018, partially offset by a $5 million increase in new PPA capacity revenues from existing natural gas PPA.facilities.
PPA energy revenues increased $56decreased $27 million, or 28%11%, primarily due to $33a $22 million decrease in increased fuel costs that are contractually recovered through existing PPAs as well as an $18 million increase arising from newsales related to natural gas PPAs from existing facilities.
Non-PPA revenues increased $14facilities, driven by a $51 million or 14%, primarily due to andecrease in the average cost of fuel and purchased power, partially offset by a $29 million increase in the volume of KWHs sold fromdue to increased customer load.
Non-PPA revenues decreased $30 million, or 26%, due to a $21 million decrease in the volume of KWHs sold through short-term sales, primarily due to a reduction in uncovered natural gas capacity, through short-term sales.and an $8 million decrease in the market price of energy.
Fuel and Purchased Power Expenses
Fuel costs constitute one of the largest expenses for Southern Power. In addition, Southern Power purchases a portion of its electricity needs from the wholesale market including the power pool. Details of Southern Power's generation and purchased power were as follows:
| | | | First Quarter 2018 | First Quarter 2017 | First Quarter 2019 | First Quarter 2018 |
| | (in billions of KWHs) | (in billions of KWHs) |
| Generation | 9.8 | 9.7 | 10.1 |
| 9.8 |
|
| Purchased power | 0.9 | 0.9 | 0.7 |
| 0.9 |
|
| Total generation and purchased power | 10.7 | 10.6 | 10.8 |
| 10.7 |
|
| | | |
| Total generation and purchased power, excluding solar, wind, and tolling agreements | 6.7 | 4.9 | 6.6 |
| 6.7 |
|
Southern Power's PPAs for natural gas and biomass 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 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 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:
|
| | | | | |
| | First Quarter 2018 vs. First Quarter 2017 |
| | (change in millions) | | (% change) |
| Fuel | $ | 37 |
| | 28.0 |
| Purchased power | 31 |
| | N/M |
| Total fuel and purchased power expenses | $ | 68 |
| | |
N/M - Not meaningful |
| | | | | |
| | First Quarter 2019 vs. First Quarter 2018 |
| | (change in millions) | | (% change) |
| Fuel | $ | (24 | ) | | (14.2) |
| Purchased power | (37 | ) | | (60.7) |
| Total fuel and purchased power expenses | $ | (61 | ) | | |
In the first quarter 2018,2019, total fuel and purchased power expenses increased $68decreased $61 million, or 42%27%, compared to the corresponding period in 2017.2018. Fuel expense increaseddecreased $24 million primarily due to a decrease associated with the average cost of fuel per KWH generated. Purchased power expense decreased $37 million primarily due to a $60 million increase in the volume of KWHs generated, excluding solar, wind, and tolling agreements, partially offset by a $23 million$24
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
million decrease in the average cost of natural gas per KWH generated. Purchased power expense increased $31 million primarily due to an increase inassociated with the average cost of purchased power.power and a $13 million decrease associated with the volume of KWHs purchased.
Other Operations and Maintenance Expenses
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(9) | | (9.7) |
In the first quarter 2019, other operations and maintenance expenses were $84 million compared to $93 million for the corresponding period in 2018. The decrease was primarily due to lower scheduled outage and maintenance expenses and the recovery of legal costs related to the Roserock settlement agreement. See Note (C) to the Condensed Financial Statements under "General Litigation Matters – Southern Power" herein for additional information.
Income (Expense), Taxes (Benefit)
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $90 | | 90.9 |
In the first quarter 2019, income tax benefit was $9 million compared to $99 million for the corresponding period in 2018. This change was primarily due to $50 million in tax benefits recorded in 2018 related to changes in state apportionment rates following the reorganization of Southern Power's legal entities that own and operate certain solar facilities and a $39 million reduction of tax benefits from wind PTCs primarily as a result of the sale of a noncontrolling tax equity interest in SP Wind. See Note (G) to the Condensed Financial Statements herein for additional information.
Net Loss Attributable to Noncontrolling Interests
|
| | |
First Quarter 20182019 vs. First Quarter 20172018 |
| (change in millions) | | (% change) |
$423 | | N/M |
N/M - Not meaningful
In the first quarter 2018, other income2019, net loss attributable to noncontrolling interests was $3$29 million compared to other expense of $1$6 million for the corresponding period in 2017. The change includes a $19 million increase in currency losses arising from translation of €1.1 billion euro-denominated fixed-rate notes into U.S. dollars, fully offset by an equal amount from the foreign currency hedges reclassified from accumulated OCI into earnings. See Note (I) to the Condensed Financial Statements herein for additional information.
Income Taxes (Benefit)
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $(47) | | (90.4) |
In the first quarter 2018, income tax benefit was $99 million compared to $52 million for the corresponding period in 2017.2018. The increase was primarily due to income tax benefits arising from a reorganization of Southern Power's legal entities that own and operate substantially all of its solar facilities related to certain changestax equity partnerships entered into in state apportionment rates.
2018. See FUTURE EARNINGS POTENTIAL – "Income Tax Matters – Legal Entity Reorganization" and Note (H)7 to the Condensed Financial Statements hereinfinancial statements in Item 8 of the Form 10-K under "Southern Power" for additional information.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Southern Power's future earnings potential. Future earnings potential will be impacted by the sales of noncontrolling renewable facility interests and the sale of the Florida Plants in 2018 and the pending dispositions of Plants Mankato and Nacogdoches in 2019. The level of Southern Power's future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Southern Power's competitive wholesale business. These factors include: Southern Power's ability to achieve sales growth while containing costs; regulatory matters; creditworthiness of customers; total generating capacity available in Southern Power's market areas; the successful remarketing of capacity as current contracts expire; and Southern Power's ability to execute its growth strategy including successful additional investments inthrough the development or acquisition of renewable facilities and other energy projects, and to develop and construct generating facilities.projects.
In November 2018, Southern Power is pursuing the sale of a 33% equity interest in a newly-formed holding company owning substantiallyentered into an agreement with Northern States Power to sell all of its equity interests in Plant Mankato (including the solar facilities,385-MW expansion currently under construction) for an aggregate
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
purchase price of approximately $650 million. The completion of the disposition is subject to the expansion unit reaching commercial operation as well as various other customary conditions to closing, including certain subsidiaries ownedworking capital and timing adjustments. This transaction is subject to FERC and state commission approvals. On April 17, 2019, Southern Power entered into an agreement to sell all of its equity interests in partnership with various third parties. If successful, the saleNacogdoches biomass-fueled facility to Austin Energy for an aggregate purchase price of $460 million, subject to customary closing conditions and working capital adjustments. Each of these sales is expected to close in mid-2018. Themid-2019; however, the ultimate outcome of this matterthese matters cannot be determined at this time.
Demand for electricity is primarily driven by the pace of economic growth that may be affected by changes in regional and global economic conditions, as well as renewable portfolio standards, which may impact future earnings. Other factors that could influence future earnings include weather, transmission constraints, cost of generation from units within the power pool, and operational limitations. For additional information relating to these factors, see RISK FACTORS in Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Power in Item 7 of the Form 10-K.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Power Sales Agreements
See BUSINESS – "The Southern Company System – Southern Power" in Item 1 of the Form 10-K for additional information regarding Southern Power's PPAs. Generally, under the solar and wind generation PPAs, the purchasing party retains the right to keep or resell the renewable energy credits.
At March 31, 2018, Southern Power's average investment coverage ratio for its generating assets, based on the ratio of investment under contract to total investment using the respective generation facilities' net book value (or expected in-service value for facilities under construction) as the investment amount, was 92% through 2022 and 90% through 2027, with an average remaining contract duration of approximately 15 years.
Environmental Matters
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" of Southern Power in Item 7 of the Form 10-K for information on the development by federal and state environmental regulatory agencies of additional control strategies for emissions of air pollution from industrial sources, including electric generating facilities. Compliance with possible additional federal or state legislation or regulations related to global climate change, air quality, water quality, or other environmental and health concerns could also significantly affect Southern Power. While Southern Power's PPAs generally contain provisions that permit charging the counterparty with some of the new costs incurred as a result of changes in environmental laws and regulations, the full impact of any such legislative or regulatory changes cannot be determined at this time.
Acquisitions
During the three months ended March 31, 2018, one of Southern Power's wholly-owned subsidiaries acquired and completed construction of the Gaskell West 1 solar facility. Acquisition-related costs were expensed as incurred and were not material. See Note (J) to the Condensed Financial Statements under "Southern Power" herein and MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Southern Power in Item 7 of the Form 10-K for additional information.
|
| | | | | | | | |
Project Facility | Resource | Approximate Nameplate Capacity (MW)
| Location | Percentage Ownership | Actual COD | PPA Counterparties | PPA Contract Period |
Gaskell West 1 | Solar | 20 | Kern County, CA | 100% of Class B | (*) | March 2018 | Southern California Edison | 20 years |
| |
(*) | Southern Power owns 100% of the class B membership interests under a tax equity partnership agreement. |
The Gaskell West 1 facility did not have operating revenues or activities prior to completion of construction and the assets being placed in service during March 2018.
Construction Projects
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Acquisitions" and "Construction Projects" of Southern Power in Item 7 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" herein for additional information.
Construction Projects Completed and in Progress
During the three months ended March 31, 2018,2019, Southern Power continued construction of the projects set forth in the table below. Total aggregate construction costs, excluding the acquisition costs, are expected to be between $370$575 million and $415$640 million for the Plant Mankato expansion and Cactus Flatsthe Wildhorse Mountain and Reading facilities. At March 31, 2018,2019, total costs of construction costsincurred for these projects were $347 million and are included in CWIP, related to these projects totaled $273 million.except for the Plant Mankato expansion, which is included in assets held for sale in the financial statements. The ultimate outcome of these matters cannot be determined at this time.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
| | | | | | |
| Project Facility | Resource | Approximate Nameplate Capacity (MW) | Location | Actual/Expected COD | PPA Counterparties | PPA Contract Period |
Projects Under Construction as of March 31, 2018 |
Cactus FlatsMankato expansion(*)(a)
| Wind | 148 | Concho County, TX | Third quarter 2018 | General Motors, LLC
and
General Mills Operations, LLC | 12 years
and
15 years |
Mankato | Natural Gas | 345385 | Mankato, MN | Second quarterMay 2019 | Northern States Power Company | 20 years |
Wildhorse Mountain(b) | Wind | 100 | Pushmataha County, OK | Fourth quarter 2019 | Arkansas Electric Cooperative | 20 years |
Reading(c) | Wind | 200 | Osage and Lyon Counties, KS | Second quarter 2020 | Royal Caribbean Cruises LTD | 12 years |
| |
(*)(a) | In July 2017,November 2018, Southern Power entered into an agreement to sell all of its equity interests in Plant Mankato, including this expansion currently under construction. This transaction is subject to FERC and state commission approvals and is expected to close mid-2019. The ultimate outcome of this matter cannot be determined at this time. |
| |
| (b) | In May 2018, Southern Power purchased 100% of the Cactus Flats facility and commenced construction. Upon placing the facility in service,Wildhorse Mountain facility. Southern Power expects to close onmay enter into a tax equity partnership, agreement, subject to various customary conditions at closing, and willin which case it would then own 100% of the class B membership interests. The ultimate outcome of this matter cannot be determined at this time. |
| |
| (c) | In August 2018, Southern Power purchased 100% of the membership interests of the Reading facility from the joint development arrangement with Renewable Energy Systems Americas, Inc. described below. Southern Power may enter into a tax equity partnership, in which case it would then own 100% of the class B membership interests. The ultimate outcome of this matter cannot be determined at this time. |
Development Projects
During 2017, as part of its renewable development strategy, Southern Power purchasedcontinues to evaluate and refine the deployment of the wind turbine equipment from Siemens Gamesa Renewable Energy Inc.purchased in 2016 and Vestas-American Wind Technology, Inc.2017 to be used for variouspotential joint development and construction projects. Any wind projects reaching commercial operation by 2021 are expected to qualify for 80% PTCs.
During 2016, Southern Power entered into a joint development agreement with Renewable Energy Systems Americas, Inc. to develop and construct wind projects. In addition, in 2016, Southern Power purchased wind turbine equipment from Siemens Wind Power, Inc. and Vestas-American Wind Technology, Inc.as well as the amount of MW capacity to be usedconstructed. During the three months ended March 31, 2019, approximately $53 million of equipment was marketed for construction ofsale and, subsequent to March 31, 2019, was sold. At March 31, 2019, the facilities. Any wind projects reaching commercial operation by 2020 are expected to qualifyequipment was classified as held for 100% PTCs.sale on Southern Power's balance sheet.
The ultimate outcome of these matters cannot be determined at this time.
Income TaxOther Matters
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Other Matters" and "Power Sales Agreements – "Income Tax Matters"General" of Southern Power in Item 7 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk" and Note (H) to the Condensed Financial Statements herein for information regarding the Tax Reform Legislation.additional information.
Legal Entity Reorganization
In March 2018, Southern Power substantially completed a legal entity reorganization of various direct and indirect subsidiaries that own and operate substantially all of the solar facilities, including certain subsidiaries owned in partnership with various third parties. The reorganization resulted in net state tax benefits related to certain changes in apportionment rates totaling approximately $50 million, which were recorded in the first quarter 2018. In April 2018, Southern Power completed the final stage of the reorganization resulting in additional net state tax benefits of approximately $4 million. Southern Power is pursuing the sale of a 33% equity interest in the newly-formed holding company owning these solar facilities. If successful, the sale is expected to close in mid-2018. The ultimate outcome of this matter cannot be determined at this time.
Other Matters
Southern Power is involved in various other matters being litigated and regulatory matters that could affect future earnings.earnings, including matters being litigated, as well as other regulatory and business matters. In addition, Southern Power is subject to certain claims and legal actions arising in the ordinary course of business. Southern Power's business activities are subject to extensive governmental regulation related to public health and the environment, such as regulationlaws and regulations governing air, water, land, and protection of air emissions and water discharges.other natural resources. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements, such as standards for air, water, land,laws and protection of other natural resources,regulations, has occurred throughout the U.S. This litigation has included claims for damages alleged to have been
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
caused by CO2 and other emissions and alleged exposure to hazardous materials, and/or requests for injunctive relief in connection with such matters.
The ultimate outcome of such pending or potential litigation, regulatory matters, or regulatoryother business matters cannot be predicted at this time; however, for current proceedings not specifically reported in NoteNotes (B) and (C) to the Condensed Financial Statements herein, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Southern Power's financial statements.
During 2015, Southern Power indirectly acquiredowns a 51% membership interest in RE Roserock LLC (Roserock), the owner of the Roserock facility in Pecos County, Texas, which was under construction by Recurrent Energy, LLC and was subsequentlyTexas. Prior to the facility being placed in service in November 2016. Prior to placing the facility in service,2016, certain solar panels were damaged during installation. Whileinstallation by the facility currently is generating energy consistent with operational expectationsconstruction contractor, McCarthy Building Companies, Inc. (McCarthy), and PPA obligations, Southern Power is pursuing remedies under its insurance policies and other contracts to repair or replace thesecertain solar panels.panels were damaged by a hail event that also occurred during construction. In connection therewith, Southern Power is withholding paymentswithheld payment of approximately $26 million fromto the construction contractor, who haswhich placed a lien on the Roserock facility for the same amount. In May 2017, Roserock filed a lawsuit in the state district
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
court in Pecos County, Texas against XL Insurance America, Inc. (XL) and North American Elite Insurance Company (North American Elite) seeking recovery from an insurance policy for damages resulting from athe hail stormevent and certainMcCarthy's installation practices bypractices. In June 2018, the construction contractor, McCarthy Building Companies, Inc. (McCarthy). Alsocourt granted Roserock's motion for partial summary judgment, finding that the insurers were in May 2017, Roserock filed a separate lawsuit against McCarthy in the state district court in Travis County, Texas alleging breach of contract and breachin violation of warrantythe Texas Insurance Code for failing to pay any monies owed for the damages sustained at thehail claim. Separate lawsuits were filed between Roserock facility, which has since been moved toand McCarthy, as well as other parties, and that litigation was consolidated in the U.S. District Court for the Western District of Texas. AdditionallyOn April 18, 2019, Roserock and the parties to the state and federal lawsuits executed a settlement agreement and mutual release that resolves both lawsuits. Under the agreement, the lawsuits will be dismissed and McCarthy will release its lien following payments of all amounts (which are expected to occur in May 2017,2019). Roserock will pay $26 million to McCarthy filed a counter lawsuit against Roserock, Array Technologies, Inc., Canadian Solar (USA), Inc., XL,that was withheld and North American Eliteincluded in the U.S. District Court fororiginal construction costs and will receive funds that will cover all related legal costs and the Western Districtreplacement costs of Texas alleging, among other things, breachcertain solar panels. In addition, during the first quarter 2019, Roserock received a partial payment of contract, and requesting foreclosureapproximately $5 million in insurance proceeds toward the hail event. Any additional funds received in excess of mechanic's liens against Roserock. In July 2017, the U.S. District Court forinitial replacement costs are expected to be recognized as a gain when received by Roserock in the Western District of Texas consolidated the two pending lawsuits. In December 2017, the U.S. District Court for the Western District of Texas dismissed McCarthy's claims against Canadian Solar (USA), Inc. and dismissed cross-claims that XL and North American Elite had soughtsecond quarter 2019, but are not expected to bring against Roserock.have a material impact on Southern Power intends to vigorously pursue and defend these matters, the ultimate outcome of which cannot be determined at this time.Power's net income.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Southern Power prepares its consolidated financial statements in accordance with GAAP. Significant accounting policies are described in NoteNotes 1, 4, and 10 to the financial statements of Southern Power 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 Southern Power's results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of Southern Power in Item 7 of the Form 10-K for a complete discussion of Southern Power's critical accounting policies and estimates.
Recently Issued Accounting Standards
See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Recently Issued Accounting Standards" of Southern Power in Item 7 of the Form 10-K for additional information regarding ASU No. 2016-02, Leases (Topic 842). See Note (A) to the Condensed Financial Statements herein for information regarding Southern Power's recently adopted accounting standards.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
Overview
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Southern Power in Item 7 of the Form 10-K for additional information. Southern Power's financial condition remained stable at March 31, 2018.2019. Southern Power intends to continue to monitor its access to short-term and long-term capital markets as well as bank credit agreements as needed to meet future capital and liquidity needs. See "Sources of Capital" herein for additional information on lines of credit.
Southern Power also utilizes third-party tax equity partnerships, as one of the financing sources to fund its renewable growth strategy where the tax partner takes significantly all of the federal tax benefits.benefits, as a financing source. These tax equity partnerships are consolidated in Southern Power's financial statements and are accounted for using a hypothetical liquidation at book value (HLBV)HLBV methodology to allocate partnership gains and losses to Southern Power.losses. During the first three months of 2019, Southern Power has secured third-partydid not receive any material tax equity funding for the Gaskell West 1 project.amounts. See Note (A)1 to the Condensed Financial Statementsfinancial statements under "Hypothetical Liquidation at Book Value" hereinin Item 8 of the Form 10-K for additional information on the HLBV methodology.
In addition, Southern Power is pursuing the sale of a 33% equity interest in a newly-formed holding company owning substantially all of Southern Power's solar facilities, including certain subsidiaries owned in partnership with various third parties. If successful, the sale is expected to close in mid-2018. Proceeds from the sale may be used for debt redemptions, common stock dividends, working capital, and general corporate purposes as well as to support Southern Power's continuing growth strategy.
Net cash provided from operating activities totaled $110 million for the first three months of 2019 compared to $149 million for the first three months of 2018 compared to $96 million for the first three months of 2017.2018. The increasedecrease in net cash provided from operating activities was primarily due to a reduction in income tax refunds received and an increase in energy revenues. See FUTURE EARNINGS POTENTIAL – "Income Tax Matters – Bonus Depreciation" of Southern Power in Item 7 of the Form 10-K for additional information.refunds. Net cash used for investing activities totaled $153$79 million for the first three months of 20182019 primarily due to theongoing construction of generating facilities and payments for renewable acquisitions.activities. Net cash used for financing activities
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
totaled $54$79 million for the first three months of 20182019 primarily due to payment of a common stock dividend payment and distributions to noncontrolling interests, partially offset by a net increase in notes payable.interests. Cash flows from financing activities may vary from period to period based on capital needs and the maturity or redemption of securities.
Significant balance sheet changes for the first three months of 20182019 include a $123 million$1.2 billion increase in CWIP primarily due to the construction of the Cactus Flats wind facility and the Mankato natural gas expansion project, a $57 million decreaseprepaid income taxes, with an offsetting $1.2 billion reduction in accumulated deferred income taxestax assets, due to the expected utilization of tax credits for the 2019 tax year, a $372 million increase in operating lease right-of-use assets along with a corresponding increase in operating lease obligations of $371 million, due to the adoption of ASU No. 2016-02, a $68 million increase in assets held for sale due to wind turbine equipment and the continued construction of the Plant Mankato expansion, and a $66 million decrease in noncontrolling interests primarily due to a legal entity reorganization,HLBV income allocations to Southern Power and a $48 million increase in property, plant,distributions to partners. See Note (K) under "Southern Power" and equipment in-service primarily relatedNote (L) to the Gaskell West 1 project.Condensed Financial Statements herein for additional information on the Plant Mankato disposition and ASU No. 2016-02, respectively.
See FUTURE EARNINGS POTENTIAL – "Acquisitions," "Construction Projects," and "Income Tax Matters – Legal Entity Reorganization" herein for additional information.
Capital Requirements and Contractual Obligations
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Southern Power in Item 7 of the Form 10-K for a description of Southern Power's capital requirements and contractual obligations. Approximately $770$600 million will be required through March 31, 2020 to repayfund maturities of long-term debt through March 31, 2019.debt. See "Sources of Capital" herein for additional information.
Southern Power's construction program includes estimates for potential plant acquisitions and placeholder growth, new construction and development, capital improvements, and work to be performed under LTSAs and is subject to periodic review and revision. Post-tax reform, planned expenditures for plant acquisitions and placeholder growth are now expected to average approximately $0.5 billion per year for 2018 through 2022 and may vary materially due to market opportunities and Southern Power's ability to execute its growth strategy. Southern Power's capital expenditures for committed construction, capital improvements, and work to be performed under LTSAs remain unchanged and total approximately $0.9 billion for the five years ending 2022. Actual construction costs, including acquisitions, may vary
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
from these estimates because of numerous factors such as: changes in business conditions; changes in the expected environmental compliance program; changes in environmental laws and regulations; the outcome of any legal challenges to environmental rules; changes in FERC rules and regulations; changes in load projections; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; and the cost of capital. See FUTURE EARNINGS POTENTIAL – "Acquisitions" and "Construction Projects""Construction Projects" herein for additional information.
Sources of Capital
Southern Power plans to obtain the funds required for acquisitions, construction, development, debt maturities, and other purposes from operating cash flows, external securities issuances, borrowings from financial institutions, tax equity partnership contributions, divestitures, and equity contributions from Southern Company. Southern Power also plans to utilize funds resulting from any potential sale of a 33% equity interest in substantially all of its solar asset portfolio, if completed. However, the amount, type, and timing of any future financings, if needed, will depend upon prevailing market conditions, regulatory approval, and other factors. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" of Southern Power in Item 7 of the Form 10-K for additional information.
As of March 31, 2018, Southern Power's current liabilities exceededsometimes exceed current assets by $595 million due to long-term debt maturing in the next 12 months, the use of short-term debt as a funding source and construction payables, as well as fluctuations in cash needs due to both seasonality and the stage of acquisitions and construction projects.seasonality. Southern Power believes the need for working capital can be adequately met by utilizing the commercial paper program, the Facility (as defined below), bank term loans, the debt capital markets,borrowings from financial institutions, equity contributions from Southern Company, external securities issuances, and operating cash flows.
As of March 31, 2018,2019, Southern Power had cash and cash equivalents of approximately $82$133 million.
Southern Power's commercial paper program is used to finance acquisition and construction costs related to electric generating facilities and for general corporate purposes, and to financeincluding maturing debt. Commercial paper is included in notes payable on the condensed consolidated balance sheets.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of short-term borrowings were as follows:
|
| | | | | | | | | | | | | | | | |
| | Short-term Debt at March 31, 2018 | | 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) |
| Commercial paper | $ | 134 |
| 2.4 | % | | $ | 83 |
| | 2.0 | % | | $ | 145 |
|
|
| | | | | | | | | | | | | | | | |
| | Short-term Borrowings at March 31, 2019 | | Short-term Borrowings 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) |
| Commercial paper | $ | 5 |
| 2.8 | % | | $ | 3 |
| | 2.7 | % | | $ | 45 |
|
| Short-term loans | 100 |
| 3.1 | % | | 100 |
| | 3.1 | % | | 100 |
|
| Total | $ | 105 |
| 3.1 | % | | $ | 103 |
| | 3.1 | % | | |
| |
| (*) | Average and maximum amounts are based upon daily balances during the three-month period ended March 31, 2018.2019. |
At March 31, 2018,2019, Southern Power had a committed credit facility (Facility) of $750 million, of which $22$9 million has been used for letters of credit and $728$741 million remains unused. The Facility expires in 2022. Proceeds from the Facility may be used for working capital and general corporate purposes as well as liquidity support for Southern Power's commercial paper program. Subject to applicable market conditions, Southern Power expects to renew or replace the Facility, as needed, prior to expiration. In connection therewith, Southern Power may extend the maturity date and/or increase or decrease the lending commitment thereunder. See Note 68 to the financial statements of Southern Power under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.
The Facility, as well as Southern Power's term loan agreements, contains a covenant that limits the ratio of debt to capitalization (as defined in the Facility) to a maximum of 65% and contains a cross-default provision that is restricted only to indebtedness of Southern Power. For purposes of this definition, debt excludes any project debt incurred by certain subsidiaries of Southern Power to the extent such debt is non-recourse to Southern Power, and
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
capitalization excludes the capital stock or other equity attributable to such subsidiary. Southern Power is currently in compliance with all covenants in the Facility.
Southern Power also has a $120 million continuing letter of credit facility expiring in 20192021 for standby letters of credit. At March 31, 2018, $992019, $96 million has been used for letters of credit, primarily as credit support for PPA requirements, and $21$24 million remains unused.
In addition, at March 31, 2018,2019, Southern Power had $103 million of cash collateral posted related to PPA requirements.
Southern Power's subsidiaries do not borrow under the commercial paper program and are not parties to, and do not borrow under, the Facility or the continuing letter of credit facility.
Credit Rating Risk
Southern Power does 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 to BBB and/or Baa2, or below. These contracts are for physical electricity purchases and sales, fuel transportation and storage, energy price risk management, and transmission.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The maximum potential collateral requirements under these contracts at March 31, 20182019 were as follows:
| | | Credit Ratings | Maximum Potential
Collateral
Requirements | Maximum Potential
Collateral
Requirements |
| | (in millions) | (in millions) |
| At BBB and/or Baa2 | $ | 37 |
| $ | 29 |
|
| At BBB- and/or Baa3 | $ | 372 |
| $ | 339 |
|
At BB+ and/or Ba1(*) | $ | 959 |
| $ | 1,041 |
|
| |
| (*) | Any additional credit rating downgrades at or below BB- and/or Ba3 could increase collateral requirements up to an additional $38 million. |
Included in these amounts are certain agreements that could require collateral in the event that either Alabama Power or Georgia Power (affiliate companies of Southern 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 Southern Power to access capital markets and would be likely to impact the cost at which it does so.
In addition, Southern Power has a PPA that could require collateral, but not accelerated payment, in the event of a downgrade of Southern Power's credit. The PPA requires credit assurances without stating a specific credit rating. The amount of collateral required would depend upon actual losses resulting from a credit downgrade.
While it is unclear how the credit rating agencies may respond to the Tax Reform Legislation, certain financial metrics, such as the funds from operations to debt percentage, used by the credit rating agencies to assess Southern Company and its subsidiaries, including Southern Power, may be negatively impacted. Absent actions by Southern Power to mitigate the resulting impacts, which, among other alternatives, could include adjusting Southern Power's capital structure, Southern Power's credit ratings could be negatively affected.
Financing Activities
Southern Power did not issue or redeem any securities during the three months ended March 31, 2018. However, Southern Power received $5 million of third-party tax equity during the three months ended March 31, 2018 related to the Gaskell West 1 solar facility.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2019.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Southern Power plans 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 GAS
AND SUBSIDIARY COMPANIES
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
| | | | For the Three Months
Ended March 31, | For the Three Months
Ended March 31, |
| | 2018 | | 2017 | 2019 | | 2018 |
| | (in millions) | (in millions) |
| Operating Revenues: | | | | | | |
| Natural gas revenues (includes revenue taxes of $51 and $48, respectively) | $ | 1,631 |
| | $ | 1,521 |
| |
| Natural gas revenues (includes revenue taxes of $55 and $51, respectively) | | $ | 1,476 |
| | $ | 1,631 |
|
| Alternative revenue programs | (24 | ) | | 9 |
| (2 | ) | | (24 | ) |
| Other revenues | 32 |
| | 30 |
| — |
| | 32 |
|
| Total operating revenues | 1,639 |
| | 1,560 |
| 1,474 |
| | 1,639 |
|
| Operating Expenses: | | | | | | |
| Cost of natural gas | 720 |
| | 719 |
| 686 |
| | 720 |
|
| Cost of other sales | 7 |
| | 7 |
| — |
| | 7 |
|
| Other operations and maintenance | 276 |
| | 255 |
| 235 |
| | 276 |
|
| Depreciation and amortization | 129 |
| | 120 |
| 118 |
| | 129 |
|
| Taxes other than income taxes | 77 |
| | 70 |
| 82 |
| | 77 |
|
| Goodwill impairment | 42 |
| | — |
| — |
| | 42 |
|
| Total operating expenses | 1,251 |
| | 1,171 |
| 1,121 |
| | 1,251 |
|
| Operating Income | 388 |
| | 389 |
| 353 |
| | 388 |
|
| Other Income and (Expense): | | | | | | |
| Earnings from equity method investments | 42 |
| | 39 |
| 48 |
| | 42 |
|
| Interest expense, net of amounts capitalized | (59 | ) | | (46 | ) | (59 | ) | | (59 | ) |
| Other income (expense), net | 12 |
| | 7 |
| 5 |
| | 12 |
|
| Total other income and (expense) | (5 | ) | | — |
| (6 | ) | | (5 | ) |
| Earnings Before Income Taxes | 383 |
| | 389 |
| 347 |
| | 383 |
|
| Income taxes | 104 |
| | 150 |
| 77 |
| | 104 |
|
| Net Income | $ | 279 |
| | $ | 239 |
| $ | 270 |
| | $ | 279 |
|
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
| | | | For the Three Months
Ended March 31, | For the Three Months
Ended March 31, |
| | 2018 | | 2017 | 2019 | | 2018 |
| | (in millions) | (in millions) |
| Net Income | $ | 279 |
| | $ | 239 |
| $ | 270 |
| | $ | 279 |
|
| Other comprehensive income (loss): | | | | | | |
| Qualifying hedges: | | | | | | |
| Changes in fair value, net of tax of $- and $(1), respectively | 1 |
| | (1 | ) | |
Reclassification adjustment for amounts included in net income,
net of tax of $1 and $-, respectively | 2 |
| | — |
| |
| Changes in fair value, net of tax of $- and $-, respectively | | — |
| | 1 |
|
Reclassification adjustment for amounts included in net income,
net of tax of $- and $1, respectively | | — |
| | 2 |
|
| Pension and other postretirement benefit plans: | | | | | | |
Reclassification adjustment for amounts included in net income,
net of tax of $- and $(1), respectively | (1 | ) | | (1 | ) | |
Reclassification adjustment for amounts included in net income,
net of tax of $- and $-, respectively | | (1 | ) | | (1 | ) |
| Total other comprehensive income (loss) | 2 |
| | (2 | ) | (1 | ) | | 2 |
|
| Comprehensive Income | $ | 281 |
| | $ | 237 |
| $ | 269 |
| | $ | 281 |
|
The accompanying notes as they relate to Southern Company Gas are an integral part of these condensed consolidated financial statements.
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| | | | For the Three Months
Ended March 31, | For the Three Months
Ended March 31, |
| | 2018 | | 2017 | 2019 | | 2018 |
| | (in millions) | (in millions) |
| Operating Activities: | | | | | | |
| Net income | $ | 279 |
| | $ | 239 |
| $ | 270 |
| | $ | 279 |
|
| Adjustments to reconcile net income to net cash provided from operating activities — | | | | | | |
| Depreciation and amortization, total | 129 |
| | 120 |
| 118 |
| | 129 |
|
| Deferred income taxes | 47 |
| | 46 |
| 42 |
| | 47 |
|
| Mark-to-market adjustments | (59 | ) | | (82 | ) | 45 |
| | (59 | ) |
| Goodwill impairment | 42 |
| | — |
| — |
| | 42 |
|
| Other, net | (2 | ) | | 26 |
| (20 | ) | | (2 | ) |
| Changes in certain current assets and liabilities — | | | | | | |
| -Receivables | 175 |
| | 115 |
| 238 |
| | 175 |
|
| -Natural gas for sale, net of temporary LIFO liquidation | 413 |
| | 411 |
| 363 |
| | 413 |
|
| -Prepaid income taxes | 21 |
| | 24 |
| |
| -Other current assets | 14 |
| | 19 |
| 59 |
| | 35 |
|
| -Accounts payable | (119 | ) | | (216 | ) | (353 | ) | | (119 | ) |
| -Accrued taxes | 28 |
| | 19 |
| 21 |
| | 28 |
|
| -Accrued compensation | (38 | ) | | (14 | ) | (50 | ) | | (38 | ) |
| -Other current liabilities | 48 |
| | 49 |
| (50 | ) | | 48 |
|
| Net cash provided from operating activities | 978 |
| | 756 |
| 683 |
| | 978 |
|
| Investing Activities: | | | | | | |
| Property additions | (268 | ) | | (301 | ) | (256 | ) | | (268 | ) |
| Cost of removal, net of salvage | (14 | ) | | (11 | ) | (12 | ) | | (14 | ) |
| Change in construction payables, net | (46 | ) | | (12 | ) | 1 |
| | (46 | ) |
| Investment in unconsolidated subsidiaries | (29 | ) | | (81 | ) | (10 | ) | | (29 | ) |
| Other investing activities | (4 | ) | | 2 |
| (13 | ) | | (4 | ) |
| Net cash used for investing activities | (361 | ) | | (403 | ) | (290 | ) | | (361 | ) |
| Financing Activities: | | | | | | |
| Decrease in notes payable, net | (483 | ) | | (234 | ) | (289 | ) | | (483 | ) |
| Payment of common stock dividends | (118 | ) | | (111 | ) | (118 | ) | | (118 | ) |
| Other financing activities | 6 |
| | 1 |
| 5 |
| | 6 |
|
| Net cash used for financing activities | (595 | ) | | (344 | ) | (402 | ) | | (595 | ) |
| Net Change in Cash, Cash Equivalents, and Restricted Cash | 22 |
| | 9 |
| (9 | ) | | 22 |
|
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 78 |
| | 24 |
| 70 |
| | 78 |
|
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 100 |
| | $ | 33 |
| $ | 61 |
| | $ | 100 |
|
| Supplemental Cash Flow Information: | | | | | | |
| Cash paid during the period for — | | | | |
| Interest (net of $1 and $3 capitalized for 2018 and 2017, respectively) | $ | 52 |
| | $ | 41 |
| |
| Cash paid (received) during the period for — | | | | |
| Interest (net of $2 and $1 capitalized for 2019 and 2018, respectively) | | $ | 55 |
| | $ | 52 |
|
| Income taxes, net | | (1 | ) | | — |
|
| Noncash transactions — Accrued property additions at end of period | 89 |
| | 53 |
| 98 |
| | 89 |
|
The accompanying notes as they relate to Southern Company Gas are an integral part of these condensed consolidated financial statements.
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| | | Assets | | At March 31, 2018 | | At December 31, 2017 | | At March 31, 2019 | | At December 31, 2018 |
| | | (in millions) | | (in millions) |
| Current Assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 94 |
| | $ | 73 |
| | $ | 57 |
| | $ | 64 |
|
| Receivables — | | | | | | | | |
| Energy marketing receivables | | 448 |
| | 607 |
| | 529 |
| | 801 |
|
| Customer accounts receivable | | 509 |
| | 400 |
| | 472 |
| | 370 |
|
| Unbilled revenues | | 210 |
| | 285 |
| | 179 |
| | 213 |
|
| Affiliated | | | 9 |
| | 11 |
|
| Other accounts and notes receivable | | 51 |
| | 103 |
| | 108 |
| | 142 |
|
| Accumulated provision for uncollectible accounts | | (36 | ) | | (28 | ) | | (27 | ) | | (30 | ) |
| Natural gas for sale | | 235 |
| | 595 |
| | 189 |
| | 524 |
|
| Prepaid expenses | | 66 |
| | 53 |
| | 99 |
| | 118 |
|
| Assets from risk management activities, net of collateral | | 145 |
| | 135 |
| | 108 |
| | 219 |
|
| Other regulatory assets, current | | 75 |
| | 94 |
| |
| Other regulatory assets | | | 46 |
| | 73 |
|
| Other current assets | | 51 |
| | 78 |
| | 42 |
| | 50 |
|
| Total current assets | | 1,848 |
| | 2,395 |
| | 1,811 |
| | 2,555 |
|
| Property, Plant, and Equipment: | | | | | | | | |
| In service | | 16,056 |
| | 15,833 |
| | 15,417 |
| | 15,177 |
|
| Less: Accumulated depreciation | | 4,670 |
| | 4,596 |
| | 4,466 |
| | 4,400 |
|
| Plant in service, net of depreciation | | 11,386 |
| | 11,237 |
| | 10,951 |
| | 10,777 |
|
| Construction work in progress | | 511 |
| | 491 |
| | 577 |
| | 580 |
|
| Total property, plant, and equipment | | 11,897 |
| | 11,728 |
| | 11,528 |
| | 11,357 |
|
| Other Property and Investments: | | | | | | | | |
| Goodwill | | 5,925 |
| | 5,967 |
| | 5,015 |
| | 5,015 |
|
| Equity investments in unconsolidated subsidiaries | | 1,504 |
| | 1,477 |
| | 1,557 |
| | 1,538 |
|
Other intangible assets, net of amortization of $136 and $120
at March 31, 2018 and December 31, 2017, respectively | | 264 |
| | 280 |
| |
Other intangible assets, net of amortization of $153 and $145
at March 31, 2019 and December 31, 2018, respectively | | | 93 |
| | 101 |
|
| Miscellaneous property and investments | | 20 |
| | 21 |
| | 20 |
| | 20 |
|
| Total other property and investments | | 7,713 |
| | 7,745 |
| | 6,685 |
| | 6,674 |
|
| Deferred Charges and Other Assets: | | | | | | | | |
| Operating lease right-of-use assets, net of amortization | | | 86 |
| | — |
|
| Other regulatory assets, deferred | | 878 |
| | 901 |
| | 657 |
| | 669 |
|
| Other deferred charges and assets | | 232 |
| | 218 |
| | 185 |
| | 193 |
|
| Total deferred charges and other assets | | 1,110 |
| | 1,119 |
| | 928 |
| | 862 |
|
| Total Assets | | $ | 22,568 |
| | $ | 22,987 |
| | $ | 20,952 |
| | $ | 21,448 |
|
The accompanying notes as they relate to Southern Company Gas are an integral part of these condensed consolidated financial statements.
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| | | Liabilities and Stockholder's Equity | | At March 31, 2018 | | At December 31, 2017 | | At March 31, 2019 | | At December 31, 2018 |
| | | (in millions) | | (in millions) |
| Current Liabilities: | | | | | | | | |
| Securities due within one year | | $ | 177 |
| | $ | 157 |
| | $ | 354 |
| | $ | 357 |
|
| Notes payable | | 1,035 |
| | 1,518 |
| | 361 |
| | 650 |
|
| Energy marketing trade payables | | 437 |
| | 546 |
| | 532 |
| | 856 |
|
| Accounts payable | | 392 |
| | 446 |
| |
| Accounts payable — | | | | | |
| Affiliated | | | 31 |
| | 45 |
|
| Other | | | 391 |
| | 402 |
|
| Customer deposits | | 112 |
| | 128 |
| | 91 |
| | 133 |
|
| Accrued taxes — | | | | | | | | |
| Accrued income taxes | | 77 |
| | 40 |
| | 89 |
| | 66 |
|
| Other accrued taxes | | 76 |
| | 78 |
| | 72 |
| | 75 |
|
| Accrued interest | | 65 |
| | 51 |
| | 64 |
| | 55 |
|
| Accrued compensation | | 55 |
| | 74 |
| | 49 |
| | 100 |
|
| Liabilities from risk management activities, net of collateral | | 18 |
| | 69 |
| | 26 |
| | 76 |
|
| Other regulatory liabilities, current | | 179 |
| | 135 |
| |
| Temporary LIFO liquidation | | 54 |
| | — |
| |
| Other regulatory liabilities | | | 86 |
| | 79 |
|
| Other current liabilities | | 143 |
| | 159 |
| | 160 |
| | 130 |
|
| Total current liabilities | | 2,820 |
| | 3,401 |
| | 2,306 |
| | 3,024 |
|
| Long-term Debt | | 5,859 |
| | 5,891 |
| | 5,574 |
| | 5,583 |
|
| Deferred Credits and Other Liabilities: | | | | | | | | |
| Accumulated deferred income taxes | | 1,104 |
| | 1,089 |
| | 1,064 |
| | 1,016 |
|
| Deferred credits related to income taxes | | 1,083 |
| | 1,063 |
| | 926 |
| | 940 |
|
| Employee benefit obligations | | 413 |
| | 415 |
| | 351 |
| | 357 |
|
| Operating lease obligations | | | 71 |
| | — |
|
| Other cost of removal obligations | | 1,650 |
| | 1,646 |
| | 1,598 |
| | 1,585 |
|
| Accrued environmental remediation, deferred | | 333 |
| | 342 |
| |
| Accrued environmental remediation | | | 261 |
| | 268 |
|
| Other deferred credits and liabilities | | 107 |
| | 118 |
| | 63 |
| | 105 |
|
| Total deferred credits and other liabilities | | 4,690 |
| | 4,673 |
| | 4,334 |
| | 4,271 |
|
| Total Liabilities | | 13,369 |
| | 13,965 |
| | 12,214 |
| | 12,878 |
|
| Common Stockholder's Equity: | | | | | |
| Common stock, par value $0.01 per share — | | | | | |
| Authorized — 100 million shares | | | | | |
| Outstanding — 100 shares | | — |
| | — |
| |
| Paid in capital | | 9,228 |
| | 9,214 |
| |
| Accumulated deficit | | (55 | ) | | (212 | ) | |
| Accumulated other comprehensive income | | 26 |
| | 20 |
| |
| Total common stockholder's equity | | 9,199 |
| | 9,022 |
| |
Common Stockholder's Equity (See accompanying statements) | | | 8,738 |
| | 8,570 |
|
| Total Liabilities and Stockholder's Equity | | $ | 22,568 |
| | $ | 22,987 |
| | $ | 20,952 |
| | $ | 21,448 |
|
The accompanying notes as they relate to Southern Company Gas are an integral part of these condensed consolidated financial statements.
SOUTHERN COMPANY GAS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (UNAUDITED)
|
| | | | | | | | | | | | | | | |
| | Paid-In
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Total |
| | (in millions) |
| Balance at December 31, 2017 | $ | 9,214 |
| | $ | (212 | ) | | $ | 20 |
| | $ | 9,022 |
|
| Net income | — |
| | 279 |
| | — |
| | 279 |
|
| Capital contributions from parent company | 14 |
| | — |
| | — |
| | 14 |
|
| Other comprehensive income (loss) | — |
| | — |
| | 2 |
| | 2 |
|
| Cash dividends on common stock | — |
| | (118 | ) | | — |
| | (118 | ) |
| Other | — |
| | (4 | ) | | 4 |
| | — |
|
| Balance at March 31, 2018 | $ | 9,228 |
| | $ | (55 | ) | | $ | 26 |
| | $ | 9,199 |
|
| | | | | | | | |
| Balance at December 31, 2018 | $ | 8,856 |
| | $ | (312 | ) | | $ | 26 |
| | $ | 8,570 |
|
| Net income | — |
| | 270 |
| | — |
| | 270 |
|
| Capital contributions from parent company | 17 |
| | — |
| | — |
| | 17 |
|
| Other comprehensive income (loss) | — |
| | — |
| | (1 | ) | | (1 | ) |
| Cash dividends on common stock | — |
| | (118 | ) | | — |
| | (118 | ) |
| Balance at March 31, 2019 | $ | 8,873 |
| | $ | (160 | ) | | $ | 25 |
| | $ | 8,738 |
|
The accompanying notes as they relate to Southern Company Gas are an integral part of these condensed financial statements.
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 20182019 vs. FIRST QUARTER 20172018
OVERVIEW
Southern Company Gas is an energy services holding company whose primary business is the distribution of natural gas through utilities in sevenfour states – Nicor Gas in Illinois, Atlanta Gas Light in Georgia, Virginia New Jersey, Florida, Tennessee,Natural Gas in Virginia, and Maryland.Chattanooga Gas in Tennessee. Southern Company Gas and its subsidiaries areis also involved in several other complementary businesses.
Southern Company Gas hasmanages its business through four reportable segments – gas distribution operations, gas marketing services,pipeline investments, wholesale gas services, and gas midstream operationsmarketing services – and one non-reportable segment, – all other. For additional information on these segments, seeSee Note (L)(M) to the Condensed Financial Statements herein and "BUSINESS – The Southern Company System – Southern Company Gas" in Item 1 of the Form 10-K.10-K for additional information.
Many factors affect the opportunities, challenges, and risks of Southern Company Gas' business. These factors include the ability to maintain safety, to maintain constructive regulatory environments, to maintain and grow natural gas sales and number of customers, and to effectively manage and secure timely recovery of costs. These costs include those related to projected long-term demand growth, environmental standards, safety, reliability, resilience, natural gas, and capital expenditures, including updating and expanding the natural gas distribution systems. The natural gas distribution utilities have various regulatory mechanisms that operate to address cost recovery. Effectively operating pursuant to these regulatory mechanisms and appropriately balancing required costs and capital expenditures with customer prices will continue to challenge Southern Company Gas for the foreseeable future.
In October 2017,Nicor Gas filed a rate case in November 2018 and Atlanta Gas Light is required to file a rate case no later than June 3, 2019. These rate cases are both expected to conclude in 2019. The ultimate outcome of these matters cannot be determined at this time. See FUTURE EARNINGS POTENTIAL – "Regulatory Matters" herein and Note 2 to the financial statements under "Southern Company Gas – Rate Proceedings" in Item 8 of the Form 10-K for additional information.
During 2018, Southern Company Gas completed the following sales, resulting in approximately $2.7 billion in aggregate proceeds.
On June 4, 2018, Southern Company Gas completed the stock sale of Pivotal Home Solutions to American Water Enterprises LLC.
On July 1, 2018, a Southern Company Gas subsidiary, Pivotal Utility Holdings, entered into agreements forcompleted the salesales of the assets of two of its natural gas distribution utilities, Elizabethtown Gas and Elkton Gas, to South Jersey Industries, Inc. for a total cash purchase price of $1.7 billion. As of March 31, 2018, the net book value of the assets to be disposed of in the sale was approximately $1.5 billion, which includes approximately $0.5 billion of goodwill. The goodwill is not deductible for tax purposes and, as a result, a deferred tax liability has not yet been provided. Through the completion of the asset sales, Southern Company Gas intends to invest approximately $0.1 billion in capital additions required for ordinary business operations of these assets. The completion of each asset sale is subject to the satisfaction or waiver of certain conditions, including, among other customary closing conditions, the receipt of required regulatory approvals, including the FERC, the New Jersey BPU, and, with respect to the sale of Elkton Gas, the Maryland PSC. Southern Company Gas and South Jersey Industries, Inc. made joint filings in December 2017 and on January 16, 2018 with the New Jersey BPU and the Maryland PSC, respectively, requesting regulatory approval. The asset sales are expected to be completed by the end of the third quarter 2018.
On April 11,July 29, 2018, Southern Company Gas and its wholly-owned direct subsidiary, Pivotal Home Solutions entered into aNUI Corporation, completed the stock purchase agreement with American Water Enterprises LLC for the sale of Pivotal Home Solutions for a purchase priceUtility Holdings, which primarily consisted of approximately $365 million, including estimated working capital. In contemplationFlorida City Gas, to NextEra Energy.
See Note 15 to the financial statements in Item 8 of the transaction, a goodwill impairment charge of $42 million was recorded as of March 31, 2018. The remaining goodwill of $242 million is not deductibleForm 10-K under "Southern Company Gas" for tax purposes and, as a result, a deferred tax liability has not been provided. The completion of this transaction is subject to the satisfaction or waiver of certain conditions, including, among other customary closing conditions, approval from the Florida Office of Insurance Regulation and the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The transaction is expected to be completed by the end of the second quarter 2018.
The ultimate outcome ofadditional information on these matters cannot be determined at this time.dispositions.
Operating Metrics
Southern Company Gas continues to focus on several operating metrics, including Heating Degree Days, customer count, and volumes of natural gas sold. For additional information on these indicators, see MANAGEMENT'S
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DISCUSSION AND ANALYSIS – OVERVIEW – "Operating Metrics" of Southern Company Gas in Item 7 of the Form 10-K.
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. With the exception of Southern Company Gas' utilities in Illinois and Florida,Nicor Gas, Southern Company Gas has various regulatory mechanisms, such as
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
weather normalization and straight-fixed-variable rate design, which limit its exposure to weather changes within typical ranges in each of its utilities' respective service territory. However, the operating revenues from utility customers in Illinois and the gas marketing services customers primarily in Georgia and Illinois can be impacted by warmer- or colder-than-normal weather. Southern Company Gas utilizes weather hedges to reducelimit the negative earnings impactincome impacts in the event of warmer-than-normal weather, while retaining mosta significant portion of the earnings upsidepositive benefits of colder-than-normal weather for these businesses.
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 marketing services' customers are primarily located in Georgia, Illinois, and Ohio.
Southern Company Gas' natural gas volume metrics for gas distribution operations and gas marketing services illustrate the effects of weather and customer demand for natural gas. Wholesale gas services' physical sales volumes represent the daily average natural gas volumes sold to its customers.
See RESULTS OF OPERATIONS herein for additional information on these operating metrics.
Seasonality of Results
During the Heating Season, is the period from November through March when natural gas usage and operating revenues are generally higher as more customers are connected to the gas distribution systems and natural gas usage is higher in periods of colder weather. Occasionally in the summer, wholesale gas services' operating revenues are impacted due to peak usage by power generators in response to summer energy demands. Southern Company Gas' base operating expenses, excluding cost of natural gas, bad debt expense, and certain incentive compensation costs, are incurred relatively evenly throughout the year. Seasonality also affects the comparison of certain balance sheet items across quarters, including receivables, unbilled revenues, natural gas for sale, and notes payable. However, these items are comparable when reviewing Southern Company Gas' annual results. Operating results for the interim periods presented are not necessarily indicative of annual results and can vary significantly from quarter to quarter.
RESULTS OF OPERATIONS
Net Income
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $40 | | 16.7 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(9) | | (3.2) |
Net income forIn the first quarter 20182019, net income was $279$270 million compared to $239$279 million for the corresponding period in 2017. The2018. Excluding an $8 million net loss in the first quarter 2018 from the Southern Company Gas Dispositions, which includes the related goodwill impairment charge of $42 million recorded in contemplation of the sale of Pivotal Home Solutions, net income decreased $17 million. This decrease was driven by a $57 million decrease at wholesale gas services primarily due to significant natural gas price volatility during the first quarter 2018. Excluding the impacts of the Southern Company Gas Dispositions and wholesale gas services, net income increased $40 million. This increase was primarily due to additionala $52 million increase in revenues, net of gas costs and other cost recovery, primarily from infrastructure investments recovered through replacement programs less the associated increase in depreciation,and base rate changes as well as base ratecolder weather in Illinois in the first quarter 2019 compared to the corresponding period in 2018. Partially offsetting these increases higher commercial activity at wholesale gas services,were a $7 million contractor litigation settlement recorded in the first quarter 2018 and a decrease in income tax expense, partially offset by a goodwill impairment charge at gas marketing servicesincreased depreciation and revenues deferred as regulatory liabilities for expected adjustments to customer billings as a result of the regulatory treatment of Tax Reform Legislation impacts.amortization.
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Natural Gas Revenues, including Alternative Revenue Programs
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $77 | | 5.0 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(133) | | (8.3) |
In the first quarter 2018,2019, natural gas revenues, including alternative revenue programs, were $1.6$1.5 billion compared to $1.5$1.6 billion for the corresponding period in 2017.2018.
Details of the changes in natural gas revenues, including alternative revenue programs, were as follows:
| | | | | First Quarter 2018 | First Quarter 2019 |
| | | (in millions) | | (% change) | (in millions) | | (% change) |
| Natural gas – prior year | | $ | 1,530 |
| | | |
| Natural gas revenues – prior year | | $ | 1,607 |
|
|
|
|
| Estimated change resulting from – | | | | | | | |
| Infrastructure replacement programs and base rate increases | | 47 |
| | 3.0 | % | |
| Tax reform regulatory liabilities | | (37 | ) | | (2.4 | ) | |
| Infrastructure replacement programs and base rate changes | | 32 |
|
| 2.0 |
|
| Gas costs and other cost recovery | | 1 |
| | 0.1 |
| 62 |
|
| 3.9 |
|
| Weather | | 8 |
| | 0.5 |
| 7 |
|
| 0.4 |
|
| Wholesale gas services | | 35 |
| | 2.3 |
| (80 | ) |
| (5.0 | ) |
| Southern Company Gas Dispositions | | (167 | ) | | (10.4 | ) |
| Other | | 23 |
| | 1.5 |
| 13 |
|
| 0.8 |
|
| Natural gas – current year | | $ | 1,607 |
| | 5.0 | % | |
| Natural gas revenues – current year | | $ | 1,474 |
| | (8.3 | )% |
TheRevenues from infrastructure replacement programs and base rate changes increased in the first quarter 2019 compared to the corresponding period in 2018 primarily due to a $22 million increase in naturalat Nicor Gas and a $9 million increase at Atlanta Gas Light. These amounts include gas revenue primarily relates todistribution operations' continued infrastructure investments recovered through infrastructure replacement programs and increases in base rate revenues at gas distribution operations, an increase in commercial activity at wholesale gas services, colder weather, fixed and guaranteed bill revenue at gas marketing servicesincreases as a resultwell as the effect of adopting a new revenue recognition standard, and revenue from the Dalton Pipeline at gas midstream operations. These increases were partially offset by revenues deferred as regulatory liabilities for expected adjustments to customer billingsin 2018 as a result of the regulatory treatment of Tax Reform Legislation impacts.
Legislation. See Notes (A) and (B)Note 2 to the Condensed Financial Statements hereinfinancial statements under "Recently Adopted Accounting Standards"Southern Company Gas – Revenue" and "Regulatory Matters – Southern Company Gas," respectively,Rate Proceedings" in Item 8 of the Form 10-K for additional information. Also see "Segment Information – Wholesale Gas Services," " – Gas Marketing Services,"
Revenues associated with gas costs and " – Gas Midstream Operations" herein.
other cost recovery increased in the first quarter 2019 compared to the corresponding period in 2018 primarily due to higher natural gas prices and increased volumes of natural gas sold for the remaining four natural gas distribution utilities in the first quarter 2019. Natural gas distribution rates include provisions to adjust billings for fluctuations in natural gas costs. Therefore, gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas and do not affect net income from gas distribution operations. See "Cost of Natural Gas" herein for additional information. Revenue impacts from weather and customer growth are described further below.
Revenues increased due to colder weather in Illinois in the first quarter 2019 compared to the corresponding period in 2018. See the weather discussion herein for additional information.
Revenues from wholesale gas services decreased in the first quarter 2019 compared to the corresponding period in 2018 primarily due to decreased commercial activity, partially offset by derivative gains. See "Segment Information – Wholesale Gas Services" herein for additional information.
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During Heating Season, natural gas usage and operating revenues are generally higher. Weather typically does not have a significant net income impact other than during the Heating Season. The following table presents the Heating Degree Days information for Illinois and Georgia, the primary locations where Southern Company Gas' operations are impacted by weather.
| | | | | First Quarter | | 2018
vs.
2017 | | 2018
vs.
normal | | First Quarter | | 2019 vs. 2018 | 2019 vs. normal |
| | | Normal(*) | | 2018 | | 2017 | | colder | | (warmer) | | Normal(*) | 2019 | 2018 | | colder (warmer) |
| Illinois | | 3,070 |
| | 3,042 |
| | 2,560 |
| | 18.8 | % | | (0.9 | )% | | 3,045 |
| 3,297 |
| 3,042 |
| | 8.4 | % | 8.3 | % |
| Georgia | | 1,456 |
| | 1,364 |
| | 925 |
| | 47.5 | % | | (6.3 | )% | | 1,441 |
| 1,213 |
| 1,364 |
| | (11.1 | )% | (15.8 | )% |
| |
| (*) | Normal represents the 10-year average from January 1, 20082009 through March 31, 20172018 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. |
Southern Company Gas hedged its exposure to warmer-than-normal weather at Nicor Gas in Illinois; therefore, the weather-related negative pre-tax income impact onIllinois for gas distribution operations was limited to $2 million ($2 million after tax) and $6 million ($4 million after tax)in Illinois and Georgia for the first quarter 2018 and 2017, respectively. Southern Company Gas also hedged its exposure at gas marketing services to warmer-than-normalservices. The remaining impacts of weather on earnings are reflected in Georgia and Illinois; therefore, the weather-related negative pre-tax income impact on gas marketing services was limited to $3 million ($2 million after tax) and $7 million ($4 million after tax) for the first quarter 2018 and 2017, respectively.chart below.
|
| | | | | | | | | | | | | |
| | Gas Distribution Operations | | Gas Marketing Services |
| | First Quarter | | First Quarter |
| | 2019 | 2018 | | 2019 | 2018 |
| | (in millions) | | (in millions) |
| Pre-tax | $ | 2 |
| $ | (2 | ) | | $ | — |
| $ | (3 | ) |
| After tax | 2 |
| (2 | ) | | — |
| (2 | ) |
The following table provides the number of customers served by Southern Company Gas at March 31, 20182019 and 2017:2018:
| | | | March 31, | | | March 31, | | |
| | 2018 | | 2017 | | 2018 vs. 2017 | 2019 | | 2018 | | 2019 vs. 2018 |
| | (in thousands, except market share %) | | (% change) | (in thousands, except market share %) | | (% change) |
Gas distribution operations(a) | 4,654 |
| | 4,618 |
| | 0.8 | % | 4,276 |
| | 4,654 |
| | (8.1 | )% |
| Gas marketing services | | | | | | | | | | |
Energy customers(b) | 779 |
| | 661 |
| | 17.9 | % | 701 |
| | 779 |
| | (10.0 | )% |
| Market share of energy customers in Georgia | 29.2 | % | | 29.3 | % | |
|
| 28.8 | % | | 29.2 | % | |
|
|
Service contracts(c) | 1,175 |
| | 1,197 |
| | (1.8 | )% | |
| |
| (a) | Includes total customers of approximately 297,000 customers407,000 at March 31, 2018 related to Elizabethtown Gas, Elkton Gas, and Elkton Gas.Florida City Gas, which were sold in July 2018. See OVERVIEW herein and Note (J)15 to the Condensed Financial Statementsfinancial statements in Item 8 of the Form 10-K under "Southern Company Gas – Proposed Sale of Elizabethtown Gas and Elkton Gas" herein for additional information. |
| |
| (b) | Includes approximately 140,000Gas marketing services' customers as of March 31, 2018 that wereare primarily located in Georgia and Illinois. Also included are customers in Ohio contracted through an annual auction process to serve for 12 months beginning April 1 2017. |
| |
(c) | On April 11,of each year. At March 31, 2019 and 2018, Southern Company Gasthere were approximately 70,000 and its subsidiary Pivotal Home Solutions entered into a stock purchase agreement for the sale of Pivotal Home Solutions. See OVERVIEW herein and Note (J) to the Condensed Financial Statements under "Southern Company Gas – Proposed Sale of Pivotal Home Solutions" herein for additional information.140,000 contracted customers, respectively. |
Southern Company Gas anticipates overall customer growth trends at the remaining four natural gas distribution utilities in gas distribution operations to continue as it expects continued improvement in the new housing market and low natural gas prices. Southern Company Gas uses a variety of targeted marketing programs to attract new customers and to retain existing customers.
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Revenues
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(32) | | (100.0) |
Other revenues related to Pivotal Home Solutions, which was sold in June 2018. See Note 15 to the financial statements in Item 8 of the Form 10-K under "Southern Company Gas – Sale of Pivotal Home Solutions" for additional information.
Cost of Natural Gas
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $1 | | 0.1 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(34) | | (4.7) |
NaturalExcluding 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 84.0%87% of total cost of natural gas forin the first quarter 2018. For additional information, see2019. See MANAGEMENT'S DISCUSSION AND ANALYSIS – RESULTS OF OPERATIONS – "Cost of Natural Gas and Other Sales"Gas" of Southern Company Gas in Item 7 of the Form 10-K and "Natural Gas Revenues, including Alternative Revenue Programs" herein.herein for additional information.
In the first quarter 2018,2019, cost of natural gas was $720$686 million compared to $719$720 million for the corresponding period in 2017. The2018. Excluding a $79 million decrease related to the Southern Company Gas Dispositions that resulted in a decrease in the volume of natural gas sold as a result of fewer gas distribution operations customers, cost of natural gas increased $45 million. This increase reflects a 4.9% increase in natural gas prices and an increase in volumesthe volume of natural gas sold in 2018the first quarter 2019 primarily as a result of colder weather substantially offset by a 9% decrease in natural gas prices during the first quarter 2018Illinois compared to the corresponding period in 2017.
The following table details the volumes of natural gas sold during all periods presented.
|
| | | | | | | | |
| | First Quarter | | 2018
vs.
2017 |
| | 2018 | | 2017 | | % Change |
Gas distribution operations (mmBtu in millions) | | | | | |
| Firm | 314 |
| | 263 |
| | 19.4 | % |
| Interruptible | 25 |
| | 25 |
| | — | % |
| Total | 339 |
| | 288 |
| | 17.7 | % |
Gas marketing services (mmBtu in millions) | | | | | |
| Firm: | | | | | |
| Georgia | 16 |
| | 12 |
| | 33.3 | % |
| Illinois | 6 |
| | 5 |
| | 20.0 | % |
| Other emerging markets | 10 |
| | 5 |
| | 100.0 | % |
| Interruptible large commercial and industrial | 4 |
| | 4 |
| | — | % |
| Total | 36 |
| | 26 |
| | 38.5 | % |
Wholesale gas services (mmBtu in millions/day) | | | | | |
| Daily physical sales | 6.8 |
| | 6.7 |
| | 1.5 | % |
Other Operations and Maintenance Expenses
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $21 | | 8.2 |
In the first quarter 2018, other operations and maintenance expenses were $276 million compared to $255 million for the corresponding period in 2017. The increase was primarily related to a $16 million increase in compensation and benefit costs, a $12 million increase for the adoption of a new paid time off policy to align with the Southern Company system, and $2 million of expense associated with the pending sales of Elizabethtown Gas and Elkton Gas. These increases were partially offset by a $10 million decrease in cost recovery mechanisms primarily related2018.
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table details the volumes of natural gas sold during all periods presented.
|
| | | | | | |
| | First Quarter | 2019
vs.
2018 |
| | 2019 | 2018 |
Gas distribution operations (mmBtu in millions) | | | |
| Firm | 296 |
| 314 |
| (5.7 | )% |
| Interruptible | 25 |
| 25 |
| — | % |
Total(*) | 321 |
| 339 |
| (5.3 | )% |
Wholesale gas services (mmBtu in millions/day) | | | |
| Daily physical sales | 7.0 |
| 6.8 |
| 2.9 | % |
Gas marketing services (mmBtu in millions) | | |
|
| Firm: | | |
|
|
| Georgia | 15 |
| 16 |
| (6.3 | )% |
| Illinois | 6 |
| 6 |
| — | % |
| Other | 8 |
| 10 |
| (20.0 | )% |
| Interruptible large commercial and industrial | 4 |
| 4 |
| — | % |
| Total | 33 |
| 36 |
| (8.3 | )% |
| |
| (*) | Includes total volumes of natural gas sold of 26 mmBtu for the three months ended March 31, 2018 related to Elizabethtown Gas, Elkton Gas, and Florida City Gas, which were sold in July 2018. See Note 15 to the financial statements in Item 8 of the Form 10-K under "Southern Company Gas – Sale of Elizabethtown Gas and Elkton Gas" and " – Sale of Florida City Gas" for additional information. |
Cost of Other Sales
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(7) | | (100.0) |
Cost of other sales related to bad debt expense at gas distribution operations.Pivotal Home Solutions, which was sold in June 2018. See Note 15 to the financial statements in Item 8 of the Form 10-K under "Southern Company Gas – Sale of Pivotal Home Solutions" for additional information.
Other Operations and Maintenance Expenses
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(41) | | (14.9) |
In the first quarter 2019, other operations and maintenance expenses were $235 million compared to $276 million for the corresponding period in 2018. Excluding a $29 million decrease related to the Southern Company Gas Dispositions, other operations and maintenance expenses decreased $12 million. This decrease was primarily due to a one-time adjustment in the first quarter 2018 for the adoption of a new paid time off policy. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Other Matters" of Southern Company Gas in Item 7 of the Form 10-K for additional information on the new paid time off policy.information.
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Depreciation and Amortization
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $9 | | 7.5 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(11) | | (8.5) |
In the first quarter 2018,2019, depreciation and amortization was $129$118 million compared to $120$129 million for the corresponding period in 2017. The2018. Excluding a $16 million decrease related to the Southern Company Gas Dispositions, depreciation and amortization increased $5 million. This increase was primarily due to continued infrastructure investments recovered through replacement programs at gas distribution operations.
Taxes Other Than Income Taxes
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $7 | | 10.0 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $5 | | 6.5 |
In the first quarter 2018,2019, taxes other than income taxes were $77$82 million compared to $70$77 million for the corresponding period in 2017. The2018. Excluding a $3 million decrease related to the Southern Company Gas Dispositions, taxes other than income taxes increased $8 million. This increase primarily reflects an increaseincreases in Nicor Gas' invested capital tax and revenue tax expenses as a result of higher natural gas revenues as well as payroll taxes relatedat Nicor Gas, both of which are passed through directly to benefits under the new paid time off policy. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Other Matters" of Southern Company Gas in Item 7 of the Form 10-K for additional information on the new paid time off policy.customers.
Goodwill Impairment
|
| | |
First Quarter 20182019 vs. First Quarter 20172018 |
| (change in millions) | | (% change) |
$42(42) | | N/AM |
N/AM - Not applicablemeaningful
In the first quarter 2018, a $42 million goodwill impairment charge of $42 million was recorded in contemplation of the proposed sale of Pivotal Home Solutions.
See Note (A)15 to the Condensed Financial Statementsfinancial statements in Item 8 of the Form 10-K under "Goodwill and Other Intangible Assets" and"Southern Company Gas – Sale of Pivotal Home Solutions" for additional information.
Earnings from Equity Method Investments
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $6 | | 14.3 |
In the first quarter 2019, earnings from equity method investments were $48 million compared to $42 million for the corresponding period in 2018. This increase was primarily due to higher earnings from SNG as a result of rate increases implemented by SNG that became effective September 2018. See Note (J)(E) to the Condensed Financial Statements under "Southern Company Gas – Proposed Sale of Pivotal Home Solutions"" herein for additional information.
Interest Expense,Other Income (Expense), Net of Amounts Capitalized
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $13 | | 28.3 |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(7) | | (58.3) |
In the first quarter 2018, interest expense,2019, other income (expense), net of amounts capitalized was $59$5 million compared to $46$12 million for the corresponding period in 2017. The increase2018. This decrease was primarily due to additional interest expense on new debt issuances and additional commercial paper borrowings as well as a reductioncontractor litigation settlement in capitalized interest due to assets placed into service.the first quarter 2018. See
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Income (Expense), Net
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $5 | | 71.4 |
In the first quarter 2018, other income (expense), net was $12 million compared to $7 million for the corresponding period in 2017. The increase was primarily due to a $7 million gain from the settlement of a contractor litigation claim. See Note 32 to the financial statements of Southernunder "Southern Company Gas under "Regulatory Matters – PRP Settlement"Infrastructure Replacement Programs and Capital Projects – Atlanta Gas Light – PRP" in Item 8 of the Form 10-K for additional information on contractor litigation claims.information.
Income Taxes
|
| | |
| First Quarter 2018 vs. First Quarter 2017 |
| (change in millions) | | (% change) |
| $(46) | | (30.7) |
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(27) | | (26.0)% |
In the first quarter 2018,2019, income taxes were $104$77 million compared to $150$104 million for the corresponding period in 2017. The2018. Excluding a $13 million decrease related to the Southern Company Gas Dispositions, income taxes decreased $14 million. This decrease was primarily due to a lower federal income tax ratepre-tax earnings compared to the prior year and amortizationan increase in the flowback of excess deferred income taxes in 2019 primarily at Atlanta Gas Light as a result ofpreviously authorized by the Tax Reform Legislation, partially offset by higher pre-tax earnings.Georgia PSC. See Note (H)(G) to the Condensed Financial Statements herein under "Effective Tax Rate" herein"Southern Company Gas" for additional information.
Performance and Non-GAAP Measures
Adjusted operating margin is a non-GAAP measure that is calculated as operating revenues less cost of natural gas, cost of other sales, and revenue tax expense. Adjusted operating margin excludes other operations and maintenance expenses, depreciation and amortization, and taxes other than income taxes, and goodwill impairment, which are included in the calculation of operating income as calculated in accordance with GAAP and reflected in the statements of income. The presentation of adjusted operating margin is believed to provide useful information regarding the contribution resulting from base rate changes, infrastructure replacement programs and capital projects, and customer growth at gas distribution operations since the cost of natural gas and revenue tax expense can vary significantly and are generally billed directly to customers. Southern Company Gas further believes that utilizing adjusted operating margin at gas marketing services,pipeline investments, wholesale gas services, and gas midstream operationsmarketing services allows it to focus on a direct measure of adjusted operating marginperformance before overhead costs. The applicable reconciliation of operating income to adjusted operating margin is provided herein.
Adjusted operating margin should not be considered an alternative to, or a more meaningful indicator of, Southern Company Gas' operating performance than operating income as determined in accordance with GAAP. In addition, Southern Company Gas' adjusted operating margin may not be comparable to similarly titled measures of other companies.
| | | | First Quarter 2018 | | First Quarter 2017 | First Quarter 2019 | | First Quarter 2018 |
| | (in millions) | (in millions) |
| Operating Income | $ | 388 |
| | $ | 389 |
| $ | 353 |
| | $ | 388 |
|
Other operating expenses(a) | 524 |
| | 445 |
| 435 |
| | 524 |
|
Revenue taxes(b) | (50 | ) | | (47 | ) | (54 | ) | | (50 | ) |
| Adjusted Operating Margin | $ | 862 |
| | $ | 787 |
| $ | 734 |
| | $ | 862 |
|
| |
| (a) | Includes other operations and maintenance expenses, depreciation and amortization, taxes other than income taxes, and goodwill impairment. |
| |
| (b) | Nicor Gas' revenue tax expenses, which are passed through directly to customers. |
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Segment Information
Adjusted operating margin, operating expenses, and net income for each segment is illustratedare provided in the tablestable below. See Note (L)(M) to the Condensed Financial Statements under "Southern Company Gas" herein for additional information.
| | | | First Quarter 2018 |
| First Quarter 2017 | | | | | | | | | | | | | |
| Adjusted Operating |
| Operating |
| Net Income |
| Adjusted Operating |
| Operating |
|
| First Quarter 2019 |
| First Quarter 2018 |
| Margin(a) |
| Expenses(a)(b) |
| (Loss) |
| Margin(a) |
| Expenses(a) |
| Net Income | Adjusted Operating Margin(a) | | Operating Expenses(a) | | Net Income (Loss) | | Adjusted Operating Margin(a) | | Operating Expenses(a)(b) | | Net Income (Loss)(b) |
| (in millions) |
| (in millions) | (in millions) | | (in millions) |
| Gas distribution operations | $ | 557 |
|
| $ | 323 |
|
| $ | 149 |
|
| $ | 542 |
|
| $ | 315 |
|
| $ | 117 |
| $ | 524 |
|
| $ | 314 |
|
| $ | 133 |
|
| $ | 557 |
|
| $ | 323 |
|
| $ | 149 |
|
| Gas pipeline investments | | 8 |
|
| 3 |
|
| 32 |
|
| 8 |
|
| 3 |
|
| 27 |
|
| Wholesale gas services | | 84 |
|
| 19 |
|
| 47 |
|
| 163 |
|
| 22 |
|
| 104 |
|
| Gas marketing services | 128 |
|
| 95 |
|
| 13 |
|
| 105 |
|
| 53 |
|
| 31 |
| 115 |
|
| 31 |
|
| 61 |
|
| 128 |
|
| 95 |
|
| 13 |
|
| Wholesale gas services | 163 |
|
| 22 |
|
| 104 |
|
| 131 |
|
| 15 |
|
| 68 |
| |
| Gas midstream operations | 16 |
|
| 15 |
|
| 23 |
|
| 9 |
|
| 12 |
|
| 15 |
| |
| All other | 1 |
|
| 22 |
|
| (10 | ) |
| 2 |
|
| 5 |
|
| 8 |
| 6 |
|
| 17 |
|
| (3 | ) |
| 9 |
|
| 34 |
|
| (14 | ) |
| Intercompany eliminations | (3 | ) |
| (3 | ) |
| — |
|
| (2 | ) |
| (2 | ) |
| — |
| (3 | ) |
| (3 | ) |
| — |
|
| (3 | ) |
| (3 | ) |
| — |
|
| Consolidated | $ | 862 |
|
| $ | 474 |
|
| $ | 279 |
|
| $ | 787 |
|
| $ | 398 |
|
| $ | 239 |
| $ | 734 |
| | $ | 381 |
| | $ | 270 |
| | $ | 862 |
| | $ | 474 |
| | $ | 279 |
|
| |
| (a) | Adjusted operating margin and operating expenses are adjusted for Nicor GasGas' revenue tax expenses, which are passed through directly to customers. |
| |
| (b) | Operating expenses and net income for gas distribution operations and gas marketing services include a $42 million goodwill impairment charge related to the proposed saleimpacts of Pivotal Home Solutions. See Note (A) to the Condensed Financial Statements under "Goodwill and Other Intangible Assets" and Note (J) to the Condensed Financial Statements under "Southern Company Gas – Proposed Sale Dispositions. See Note 15 to the financial statements in Item 8 of Pivotal Home Solutions" hereinthe Form 10-K under "Southern Company Gas" for additional information. |
Gas Distribution Operations
Gas distribution operations is the largest component of Southern Company Gas' business and is subject to regulation and oversight by 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, 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 weather mechanisms, such as weather normalization mechanisms and weather derivative instruments, that limit its exposure to weather changes within typical ranges in its natural gas distribution utilities' service territories.
In July 2018, a Southern Company Gas subsidiary, Pivotal Utility Holdings, completed the sales of the assets of two of its natural gas distribution utilities, Elizabethtown Gas and Elkton Gas, to South Jersey Industries, Inc. In July 2018, Southern Company Gas and its wholly-owned direct subsidiary, NUI Corporation, completed the sale of Pivotal Utility Holdings, which primarily consisted of Florida City Gas, to NextEra Energy. See Note 15 to the financial statements in Item 8 of the Form 10-K under "Southern Company Gas" for additional information.
First Quarter 20182019 vs. First Quarter 20172018
In the first quarter 2018,2019, net income increased $32decreased $16 million, or 27.4%10.7%, compared to the corresponding period in 2017.2018. This increasedecrease primarily relates to an increase of $15a $33 million decrease in adjusted operating margin an increase of $4and a $7 million decrease in other income (expense), net, and a decrease in income tax expense of $27 million, partially offset by an increase of $8 million in operating expenses and an increase of $6 million in interest expense, net of amounts capitalized. The increase in adjusted operating margin primarily reflects $47 million in additional revenue from continued infrastructure investments recovered through replacement programs and base rate increases, partially offset by deferrals totaling $37 million as regulatory liabilities associated with the Tax Reform Legislation impacts. The increase in other income (expense), net primarily reflects a gain from the settlement of a contractor litigation claim in 2018. The decrease in income taxes is primarily due to a lower federal income tax rate and amortization of excess deferred taxes as a result of the Tax Reform Legislation. The increase in operating expenses primarily reflects additional depreciation due to additional assets placed in service and increased compensation and benefit costs, partially offset by a decrease of $16 million in cost recovery mechanisms primarily related to bad debt expense. The increaseincome tax expense and a $9 million decrease in operating expenses.
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Excluding an $89 million decrease attributable to the utilities sold during 2018, adjusted operating margin increased $56 million, which primarily reflects additional revenue from continued investments recovered through infrastructure replacement programs and base rate increases, the effect of revenues deferred in 2018 as a result of the Tax Reform Legislation, and colder weather in Illinois during the first quarter 2019 compared to the corresponding period in 2018. Excluding a $40 million decrease attributable to the utilities sold during 2018, operating expenses increased $31 million, which includes increased compensation and benefit costs, higher expenses passed through directly to customers, increased expenses for storage facilities, and additional depreciation primarily due to additional assets placed in service. The decrease in other income (expense), net is due to a contractor litigation settlement in the first quarter 2018. Excluding $6 million of interest expense includesattributable to the impact ofutilities sold during 2018, interest expense increased $7 million primarily from the issuance of first mortgage bonds at Nicor Gas. Excluding a $12 million decrease attributable to the utilities sold in 2018, income tax expense decreased $4 million, primarily due to an increase in the flowback of excess deferred income taxes in 2019, partially offset by higher pre-tax earnings.
Gas Pipeline Investments
Gas pipeline investments consists primarily of joint ventures in 2017natural gas pipeline investments including SNG, Atlantic Coast Pipeline, PennEast Pipeline, and a 50% joint ownership interest in the Dalton Pipeline. See Note (E) to the Condensed Financial Statements herein and Note 7 to the financial statements in Item 8 of the Form 10-K for additional information.
First Quarter 2019 vs. First Quarter 2018
In the first quarter 2019, net income increased $5 million, or 18.5%, compared to the corresponding period in 2018. This increase primarily relates to a $6 million increase in earnings from equity method investments largely due to higher earnings from SNG, partially offset by a $2 million increase in income tax expense due to higher pre-tax earnings.
Wholesale Gas Services
Wholesale gas services is involved in asset management and optimization, storage, transportation, producer and peaking services, natural gas supply, natural gas services, and wholesale gas marketing. Southern Company Gas has positioned the business to generate positive economic earnings on an annual basis even under low volatility market conditions that can result from a number of factors. When market price volatility increases, wholesale gas services is well positioned to capture significant value and generate stronger results. Operating expenses primarily reflect employee compensation and benefits.
First Quarter 2019 vs. First Quarter 2018
In the first quarter 2019, net income decreased $57 million, or 54.8%, compared to the corresponding period in 2018. This decrease primarily relates to a $79 million decrease in adjusted operating margin, partially offset by a decrease of $19 million in income tax expense and a $3 million decrease in operating expenses. Details of the decrease in adjusted operating margin are provided in the table below. The decrease in operating expenses primarily reflects lower compensation and benefit expense. The decrease in income tax expense was driven by lower pre-tax earnings.
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
| | | | | | |
| | First Quarter 2019 | First Quarter 2018 |
| | (in millions) |
| Commercial activity recognized | $ | 38 |
| $ | 172 |
|
| Gain on storage derivatives | 3 |
| 2 |
|
| Gain (loss) on transportation and forward commodity derivatives | 29 |
| (16 | ) |
| LOCOM adjustments, net of current period recoveries | (2 | ) | (3 | ) |
| Purchase accounting adjustments to fair value inventory and contracts | 16 |
| 8 |
|
| Adjusted operating margin | $ | 84 |
| $ | 163 |
|
Change in Commercial Activity
The commercial paper borrowingsactivity at wholesale gas services includes recognition of storage and transportation values that were generated in prior periods, which reflect the impact of prior period hedge gains and losses as associated physical transactions occur. The positive commercial activity recognized in the first quarter 2019 was primarily due to natural gas price volatility that resulted from intermittent cold weather throughout the period. The decrease in commercial activity in the first quarter 2019 compared to the corresponding period in 2018 was primarily due to significant natural gas price volatility that resulted from prolonged cold weather during the first quarter 2018.2018 coupled with low natural gas supply.
Change in Storage and Transportation Derivatives
Volatility in the natural gas market arises from a number of factors, such as weather fluctuations or changes in supply or demand for natural gas in different regions of the U.S. The volatility of natural gas commodity prices has a significant impact on Southern Company Gas' customer rates, long-term competitive position against other energy sources, and the ability of wholesale gas services to capture value from locational and seasonal spreads. Forward storage or time spreads applicable to the locations of wholesale gas services' specific storage positions in 2019 resulted in storage derivative gains. Transportation and forward commodity derivative gains in 2019 are primarily the result of narrowing transportation spreads due to supply constraints and increases in natural gas supply, which impacted forward prices at natural gas receipt and delivery points, primarily in the Northeast and Midwest regions.
Withdrawal Schedule and Physical Transportation Transactions
The expected natural gas withdrawals from storage and expected offset to prior hedge losses/gains associated with the transportation portfolio of wholesale gas services are presented in the following table, along with the net operating revenues expected at the time of withdrawal from storage and the physical flow of natural gas between contracted transportation receipt and delivery points. Wholesale gas services' expected net operating revenues exclude storage and transportation demand charges, as well as other variable fuel, withdrawal, receipt, and delivery charges, and exclude estimated profit sharing under asset management agreements. Further, the amounts that are realizable in future periods are based on the inventory withdrawal schedule, planned physical flow of natural gas between the transportation receipt and delivery points, and forward natural gas prices at March 31, 2019. A portion of wholesale gas services' storage inventory and transportation capacity is economically hedged with futures contracts, which results in the realization of substantially fixed net operating revenues.
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
| | | | | | | | | | |
| | Storage withdrawal schedule | | |
| | Total storage(a) | | Expected net operating gains(b) | | Physical transportation transactions – expected net operating losses(c) |
| | (in mmBtu in millions) | | (in millions) | | (in millions) |
| 2019 | 7 |
| | $ | 1 |
| | $ | (6 | ) |
| 2020 and thereafter | 1 |
| | 1 |
| | (23 | ) |
| Total at March 31, 2019 | 8 |
| | $ | 2 |
| | $ | (29 | ) |
| |
| (a) | At March 31, 2019, the WACOG of wholesale gas services' expected natural gas withdrawals from storage was $2.24 per mmBtu. |
| |
| (b) | Represents expected operating gains from planned storage withdrawals associated with existing inventory positions and could change as wholesale gas services adjusts its daily injection and withdrawal plans in response to changes in future market conditions and forward NYMEX price fluctuations. |
| |
| (c) | Represents the transportation derivative gains and losses that will be settled during the period and the physical transportation transactions that offset the derivative gains and losses previously recognized. |
The unrealized storage and transportation derivative gains do not change the underlying economic value of wholesale gas services' storage and transportation positions and will be reversed when the related transactions occur and are recognized. For more information on wholesale gas services' energy marketing and risk management activities, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" of Southern Company Gas in Item 7 of the Form 10-K.
Gas Marketing Services
Gas marketing services consists of several businesses that provideprovides energy-related products and services to natural gas markets including warranty sales.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.
First QuarterOn June 4, 2018, vs. First Quarter 2017
In the first quarter 2018, net income decreased $18 million, or 58.1%, compared to the corresponding period in 2017. This decrease was driven by a $42 million goodwill impairment charge recorded as of March 31, 2018 in contemplation ofSouthern Company Gas completed the sale of Pivotal Home Solutions.Solutions to American Water Enterprises LLC. See Note (A) to the Condensed Financial Statements under "Goodwill and Other Intangible Assets" and Note (J) to the Condensed Financial Statements under "Southern Company Gas – Proposed Sale of Pivotal Home Solutions" herein for additional information. Adjusted operating margin increased by $23 million due to $14 million for fixed and guaranteed bill revenue as a result of adopting a new revenue recognition standard, $4 million for colder weather in 2018, net of hedging, and $4 million from energy customers served beginning April 1, 2017 pursuant to the award of a natural gas supply agreement. See Note (A) under "Recently Adopted Accounting Standards" and Note (C) to the Condensed Financial Statements herein for additional information.
Wholesale Gas Services
Wholesale gas services is involved in asset management and optimization, storage, transportation, producer and peaking services, natural gas supply, natural gas services, and wholesale gas marketing. Southern Company Gas has positioned the business to generate positive economic earnings on an annual basis even under low volatility market conditions that can result from a number of factors. When market price volatility increases, wholesale gas services is well positioned to capture significant value and generate stronger results. Operating expenses primarily reflect employee compensation and benefits.
First Quarter 2018 vs. First Quarter 2017
In the first quarter 2018, net income increased $36 million, or 52.9%, compared to the corresponding period in 2017. This increase primarily relates to a $32 million increase in adjusted operating margin and a decrease of $11 million in income tax expense, partially offset by an increase of $7 million in operating expenses. Details of the increase in adjusted operating margin are provided in the table below. The decrease in income tax expense was driven by a lower federal income tax rate, partially offset by higher pretax earnings. The increase in operating expenses primarily reflects higher compensation and benefit expense.
|
| | | | | | | |
| | First Quarter 2018 | | First Quarter 2017 |
| | (in millions) |
| Commercial activity recognized | $ | 172 |
| | $ | 80 |
|
| Gain on storage derivatives | 2 |
| | 4 |
|
| Gain (loss) on transportation and forward commodity derivatives | (16 | ) | | 44 |
|
| LOCOM adjustments, net of current period recoveries | (3 | ) | | — |
|
| Purchase accounting adjustments to fair value inventory and contracts | 8 |
| | 3 |
|
| Adjusted operating margin | $ | 163 |
| | $ | 131 |
|
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Change in Commercial Activity
The increase in commercial activity in the first quarter 2018 compared to the corresponding period in 2017 was primarily due to natural gas price volatility that was generated by significantly colder weather. Also contributing to this increase was higher power generation volumes and decreased natural gas supply.
Change in Storage and Transportation Derivatives
Volatility in the natural gas market arises from a number of factors, such as weather fluctuations or changes in supply or demand for natural gas in different regions of the U.S. The volatility of natural gas commodity prices has a significant impact on Southern Company Gas' customer rates, long-term competitive position against other energy sources, and the ability of wholesale gas services to capture value from locational and seasonal spreads. In 2018, forward storage or time spreads applicable to the locations of wholesale gas services' specific storage positions resulted in storage derivative gains. Transportation and forward commodity derivative losses are primarily the result of widening transportation spreads due to colder weather, which impacted forward prices at natural gas receipt and delivery points, primarily in the Northeast and Midwest regions.
Withdrawal Schedule and Physical Transportation Transactions
The expected natural gas withdrawals from storage and expected offset to prior hedge losses/gains associated with the transportation portfolio of wholesale gas services are presented in the following table, along with the net operating revenues expected at the time of withdrawal from storage and the physical flow of natural gas between contracted transportation receipt and delivery points. Wholesale gas services' expected net operating revenues exclude storage and transportation demand charges, as well as other variable fuel, withdrawal, receipt, and delivery charges, and exclude estimated profit sharing under asset management agreements. Further, the amounts that are realizable in future periods are based on the inventory withdrawal schedule, planned physical flow of natural gas between the transportation receipt and delivery points, and forward natural gas prices at March 31, 2018. A portion of wholesale gas services' storage inventory and transportation capacity is economically hedged with futures contracts, which results in the realization of substantially fixed net operating revenues.
|
| | | | | | | | | | |
| | Storage withdrawal schedule | | |
| | Total storage
(WACOG $2.37) | | Expected net operating gains(a) | | Physical transportation transactions – expected net operating gains(b) |
| | (in mmBtu in millions) | | (in millions) | | (in millions) |
| 2018 | 17.6 |
| | $ | 3 |
| | $ | 4 |
|
| 2019 and thereafter | 2.5 |
| | 1 |
| | 12 |
|
| Total at March 31, 2018 | 20.1 |
| | $ | 4 |
| | $ | 16 |
|
| |
(a) | Represents expected operating gains from planned storage withdrawals associated with existing inventory positions and could change as wholesale gas services adjusts its daily injection and withdrawal plans in response to changes in future market conditions and forward NYMEX price fluctuations. |
| |
(b) | Represents the periods associated with the transportation derivative gains and (losses) during which the derivatives will be settled and the physical transportation transactions will occur that offset the derivative gains and losses that were previously recognized. |
The unrealized storage and transportation derivative gains do not change the underlying economic value of wholesale gas services' storage and transportation positions and will be reversed when the related transactions occur and are recognized. For more information on wholesale gas services' energy marketing and risk management activities, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" of Southern Company Gas in Item 7 of the Form 10-K.
Gas Midstream Operations
Gas midstream operations consists primarily of gas pipeline investments, with storage and fuels also aggregated into this segment. Gas pipeline investments include SNG, Horizon Pipeline, Atlantic Coast Pipeline, PennEast Pipeline,
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Dalton Pipeline, and Magnolia Enterprise Holdings, Inc. See Note (K) to the Condensed Financial Statements herein and Note 415 to the financial statements of Southern Company Gas in Item 8 of the Form 10-K under "Southern Company Gas" for additional information.
First Quarter 20182019 vs. First Quarter 20172018
In the first quarter 2018,2019, net income increased $8$48 million or 53.3%, compared to the corresponding period in 2017.2018. This increase primarily relates to a $7$64 million increasedecrease in operating expenses, partially offset by a $13 million decrease in adjusted operating margin primarily due to the Dalton Pipeline being placed in service, lower costs at the storage facilities, and a $3 million net increase in earnings from equity method investments in SNG, PennEast Pipeline,income tax expense.
Excluding a $25 million decrease attributable to the 2018 disposition of Pivotal Home Solutions, adjusted operating margin increased $12 million, which primarily reflects favorable margins and Horizon Pipeline.recovery of prior period hedge losses. Excluding a $61 million decrease attributable to the 2018 disposition of Pivotal Home Solutions that includes the related goodwill impairment charge, operating expense decreased $3 million.
All Other
All other includes Southern Company Gas' storage and fuels operations and its investment in Triton, 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.
First Quarter 20182019 vs. First Quarter 20172018
In the first quarter 2018,2019, net incomeloss decreased $18$11 million compared to the corresponding period in 2017.2018. This decrease primarily reflects aan $17 million increasedecrease in operating expenses, and a $4 million increase in interest expense, net of amounts capitalized, partially offset by a $4$3 million decrease in income taxes.adjusted operating margin. The increasedecrease in operating expenses primarily reflects a $12 million increaseone-time adjustment in compensation expense resulting from the adoption of the new paid time off policy. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Other Matters" of Southern Company Gas in Item 7 of the Form 10-K for additional information on the new paid time off policy. The increase in interest expense was primarily associated with new debt issuances and additional commercial paper borrowings. The decrease in income taxes is primarily due to a lower federal income tax rate.
Segment Reconciliations
Reconciliations of operating income to adjusted operating margin for the first quarter 2018 and 2017 are reflected in the following tables. See Note (L) to the Condensed Financial Statements herein for additional information.
|
| | | | | | | | | | | | | | | | | | | | | |
| First Quarter 2018 |
| Gas Distribution Operations | Gas Marketing Services | Wholesale Gas Services | Gas Midstream Operations | All Other | Intercompany Elimination | Consolidated |
| (in millions) |
| Operating Income (Loss) | $ | 234 |
| $ | 33 |
| $ | 141 |
| $ | 1 |
| $ | (21 | ) | $ | — |
| $ | 388 |
|
Other operating expenses(a) | 373 |
| 95 |
| 22 |
| 15 |
| 22 |
| (3 | ) | 524 |
|
Revenue tax expense(b) | (50 | ) | — |
| — |
| — |
| — |
| — |
| (50 | ) |
Adjusted Operating
Margin | $ | 557 |
| $ | 128 |
| $ | 163 |
| $ | 16 |
| $ | 1 |
| $ | (3 | ) | $ | 862 |
|
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
compensation expense in the first quarter 2018 for the adoption of a new paid time off policy and a decrease in depreciation and amortization. The decrease in adjusted operating margin primarily relates to a decrease in storage revenues.
Segment Reconciliations
Reconciliations of operating income to adjusted operating margin for the first quarter 2019 and 2018 are reflected in the following tables. See Note (M) to the Condensed Financial Statements herein for additional information.
| | | | First Quarter 2017 | First Quarter 2019 |
| | Gas Distribution Operations | Gas Marketing Services | Wholesale Gas Services | Gas Midstream Operations | All Other | Intercompany Elimination | Consolidated | Gas Distribution Operations | Gas Pipeline Investments | Wholesale Gas Services | Gas Marketing Services | All Other | Intercompany Elimination | Consolidated |
| | (in millions) | (in millions) |
| Operating Income (Loss) | $ | 227 |
| $ | 52 |
| $ | 116 |
| $ | (3 | ) | $ | (3 | ) | $ | — |
| $ | 389 |
| $ | 210 |
| $ | 5 |
| $ | 65 |
| $ | 84 |
| $ | (11 | ) | $ | — |
| $ | 353 |
|
Other operating expenses(a) | 362 |
| 53 |
| 15 |
| 12 |
| 5 |
| (2 | ) | 445 |
| 368 |
| 3 |
| 19 |
| 31 |
| 17 |
| (3 | ) | 435 |
|
Revenue tax expense(b) | (47 | ) | — |
| — |
| — |
| — |
| — |
| (47 | ) | (54 | ) | — |
| — |
| — |
| — |
| — |
| (54 | ) |
Adjusted Operating
Margin | $ | 542 |
| $ | 105 |
| $ | 131 |
| $ | 9 |
| $ | 2 |
| $ | (2 | ) | $ | 787 |
| $ | 524 |
| $ | 8 |
| $ | 84 |
| $ | 115 |
| $ | 6 |
| $ | (3 | ) | $ | 734 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| | First Quarter 2018 |
| | Gas Distribution Operations | Gas Pipeline Investments | Wholesale Gas Services | Gas Marketing Services | All Other | Intercompany Elimination | Consolidated |
| | (in millions) |
| Operating Income (Loss) | $ | 234 |
| $ | 5 |
| $ | 141 |
| $ | 33 |
| $ | (25 | ) | $ | — |
| $ | 388 |
|
Other operating expenses(a) | 373 |
| 3 |
| 22 |
| 95 |
| 34 |
| (3 | ) | 524 |
|
Revenue tax expense(b) | (50 | ) | — |
| — |
| — |
| — |
| — |
| (50 | ) |
| Adjusted Operating Margin | $ | 557 |
| $ | 8 |
| $ | 163 |
| $ | 128 |
| $ | 9 |
| $ | (3 | ) | $ | 862 |
|
| |
| (a) | Includes other operations and maintenance expenses, depreciation and amortization, taxes other than income taxes, and goodwill impairment. |
| |
| (b) | Nicor Gas' revenue tax expenses, which are passed through directly to customers. |
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Southern Company Gas' future earnings potential. The Southern Company Gas Dispositions are expected to materially decrease future earnings and cash flows to Southern Company Gas. In the first quarter 2018,net income attributable to these dispositions, excluding the related goodwill impairment, was $34 million.The level of Southern Company Gas' future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Southern Company Gas' primary business of natural gas distribution and its complementary businesses in the gas marketing services,pipeline investments, wholesale gas services, and gas midstream operationsmarketing services sectors. These factors include Southern Company Gas' ability to maintain a constructive regulatory environmentenvironments that allowsallow for the timely recovery of prudently-incurred costs, the completion and subsequent operation of ongoing infrastructure and other construction projects, creditworthiness of customers, Southern Company Gas'its ability to optimize its transportation and storage positions, and its ability to re-contract storage rates at favorable prices.
Future earnings will be driven by customer growth and are subject to a variety of other factors. These factors include weather, competition, new energy contracts with other utilities and other wholesale customers, energy conservation practiced by customers, the use of alternative energy sources by customers, the price of natural gas, the price elasticity of demand, and the rate of economic growth or decline in Southern Company Gas' service territories.
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Demand for natural gas is primarily driven by the pace of economic growth that may be affected by changes in regional and global economic conditions, which may impact future earnings.
Volatility of natural gas prices has a significant impact on Southern Company Gas' customer rates, its long-term competitive position against other energy sources, and the ability of its gas marketing services and wholesale gas services segments to capture value from locational and seasonal spreads. Additionally, changes in commodity prices subject a significant portion of Southern Company Gas' operations to earnings variability. Over the longer term, volatility is expected to be low to moderate and locational and/or transportation spreads are expected to decrease as new pipelines are built to reduce the existing supply constraints in the shale areas of the Northeast U.S. To the extent these pipelines are delayed or not built, volatility could increase. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "FERC Matters" of Southern Company Gas in Item 7 of the Form 10-K for additional information on permitting challenges experienced by the Atlantic Coast Pipeline. Additional economic factors may contribute to this environment, including a significant drop in oil and natural gas prices, which could lead to consolidation of natural gas producers or reduced levels of natural gas production. Further, if economic conditions continue to improve, including the new housing market, 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.
As part of its business strategy, Southern Company Gas regularly considers and evaluates joint development arrangements as well as acquisitions and dispositions of businesses and assets.
In October 2017, Southern Company Gas subsidiary, Pivotal Utility Holdings, entered into agreements for the sale of the assets of two of its natural gas distribution utilities, Elizabethtown Gas and Elkton Gas, to South Jersey Industries, Inc; the asset sales are expected to be completed by the end of the third quarter 2018. Net income attributable to Elizabethtown Gas and Elkton Gas for the three months ended March 31, 2018 was $30 million. However, dueDue to the seasonal nature of the natural gas business and other factors including, but not limited to, weather, regulation, competition, customer demand, and general economic conditions, the first quarter 2018 net income is2019 results are not necessarily indicative of the results to be expected for any other period.
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On April 11, 2018, Southern Company Gas and its subsidiary Pivotal Home Solutions entered into a stock purchase agreement with American Water Enterprises LLC for the sale of Pivotal Home Solutions; the stock purchase agreement is expected to be completed by the end of the second quarter 2018. Net income attributable to Pivotal Home Solutions for the three months ended March 31, 2018 was $4 million, exclusive of the goodwill impairment charge.
The ultimate outcome of these matters cannot be determined at this time.
See OVERVIEW and Note (J) to the Condensed Financial Statements under "Southern Company Gas" herein for additional information on these dispositions. See OVERVIEW – "Seasonality of Results" for additional information on seasonality.
Environmental Matters
New or revised environmental laws and regulations could affect many areas of Southern Company Gas' operations. The impact of any such changes cannot be determined at this time. Environmental compliance costs could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis. Further, increased costs that are recovered through regulated rates could contribute to reduced demand for natural gas, which could negatively affect results of operations, cash flows, andand/or financial condition. Additionally, many commercial and industrial customers may also be affected by existing and future environmental requirements, which for some may have the potential to ultimately affect their demand for natural gas. See Note (B) under "Environmental Matters –Environmental Remediation"(C) to the Condensed Financial Statements under "Environmental Remediation" herein and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" of Southern Company Gas in Item 7 and Note 3 to the financial statements of Southern Company Gas under "Environmental Matters"Remediation" in Item 8 of the Form 10-K for additional information.
Regulatory Matters
See Note 32 to the financial statements of Southernunder "Southern Company Gas under "Regulatory Matters"Gas" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Regulatory Matters – Southern Company Gas" herein for additional information regarding Southern Company Gas' regulatory matters.
RidersRate Proceedings
On April 19,Nicor Gas
In November 2018, the Illinois Commission approved Nicor Gas' variable income tax adjustment rider. This rider provides for refund or recovery of changes in income tax expense that result from income tax rates that differ from those used in Nicor Gas' last rate case. Customer refunds related to the 2018 impacts are expected to begin in July 2018.
Natural Gas Cost Recovery
Southern Company Gas has established natural gas cost recovery rates approved by the relevant state regulatory agencies in the states in which it serves. Natural gas cost recovery revenues are adjusted for differences in actual recoverable natural gas costs and amounts billed in current regulated rates. Changes in the billing factor will not have a significant effect on Southern Company Gas' revenues or net income, but will affect cash flows.
Base Rate Cases
Settled Base Rate Case
In October 2017, Florida City Gas filed a general base rate case with the Florida PSCIllinois Commission requesting an annual revenue increase of $19 million, which included an interim rate increase of $5 million annually that was approved and became effective January 12, 2018, subject to refund. On March 26, 2018, the Florida PSC approved a settlement that, after including the impact of the Tax Reform Legislation, provides for an $11.5$230 million increase in annual base rate revenues, effective June 1, 2018,revenues. The requested increase is based on a projected test year for the 12-month period ending September 30, 2020, a ROE of 10.19%. Under10.6%, and an increase in the termsequity ratio from 52% to 54% to address the negative cash flow and credit metric impacts of the settlement, Florida CityTax Reform Legislation.
On April 16, 2019, Nicor Gas agreed notentered into a stipulation agreement to file a new base rate caseresolve all related issues with an effective date prior to June 1, 2022 and will receive full recoverythe Staff of the costs related toIllinois Commission, including a ROE of 9.86% and an equity ratio of 54%. Also on April 16, 2019, Nicor Gas filed its LNG facility to be constructed through additional increases in annual base rate revenues ofrebuttal testimony with the Illinois Commission incorporating the stipulation agreement and addressing the
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$2.5 million on June 1, 2019 or the in-service date, whichever is later, and $1.3 million on December 1, 2019. If the facility is placed in service after December 1, 2019, the entire additional $3.8 million increase will take effect upon the in-service date of the LNG facility.
Pending Base Rate Cases
On February 15, 2018, Chattanooga Gas filed a general base rate caseremaining items outstanding with the Tennessee Public Utility Commission (PUC) requesting a $7 million increase in annual base rate revenues. The requested increase, which, in accordance with a Tennessee PUC order, incorporated the effects of the Tax Reform Legislation, was based on a projected test year ending June 30, 2019 and a ROE of 11.25%. The Tennessee PUC is expected to rule on the requested increase in the third quarter 2018.
In December 2017, Atlanta Gas Light filed its 2018 annual rate adjustment with the Georgia PSC, which, if approved, would have increased annual base rate revenues by $22 million, effective June 1, 2018. On February 23, 2018, Atlanta Gas Light revised its filing to reflect the impacts of the Tax Reform Legislation. The revised request replaced the $22 million rate increase with a $16 million rate reduction for customers in 2018. The revised request maintains the previously authorized earnings band based on a return on equity between 10.55% and 10.95% and proposes to increase the equity ratio by 3% to an equity ratio of 54% to address the negative cash flow and credit metric impacts of the Tax Reform Legislation. Atlanta Gas Light also notified the Georgia PSC that it intends to seek a further equity ratio increase of 2% to an equity ratio of 56% in its 2019 filing. The Georgia PSC is expected to rule on the revised request in the second quarter 2018.
In accordance with an Illinois Commission order and pursuant to its rehearing request, on April 13, 2018, Nicor Gas filed for revised base rates with the Illinois Commission, which would result in a decrease of approximately $44 million in annual base rate revenues effective in the second quarter 2018 to incorporate the reduction in the federal income tax rate asother two intervenors. As a result of the Tax Reform Legislation. Nicor Gas' previously-authorized capital structurestipulation agreement and ROE of 9.8% were not addressed inrebuttal testimony, the rehearing and remain unchanged. revised requested annual revenue increase is $180 million.
The Illinois Commission is expected to rule on the request on May 2, 2018.
requested increase within the statutory time limit of 11 months from the filing of the rate case, after which rate adjustments will be effective. The ultimate outcome of these mattersthis matter cannot be determined at this time.
OtherAtlanta Gas Light
The New Jersey BPU, Maryland PSC, and Virginia Commission each issued an orderAtlanta Gas Light is required to file a traditional base rate case no later than June 3, 2019 for rates effective January 1, 2020.
Virginia Natural Gas
In December 2018, that requires utilities in their respective statesthe Virginia Commission approved Virginia Natural Gas' annual information form filing, which reduced annual base rates by $14 million effective January 1, 2019 due to deferlower tax expense as a result of the Tax Reform Legislation. This approval also required Virginia Natural Gas to issue customer refunds, via bill credits, for $14 million related to 2018 tax benefits deferred as a regulatory liability, current, on the impactbalance sheet at December 31, 2018. These customer refunds were completed in the first quarter 2019.
Regulatory Infrastructure Programs
In addition to capital expenditures recovered through base rates by each of the Tax Reform Legislation, including the reductionnatural gas distribution utilities, Nicor Gas and Virginia Natural Gas have separate rate riders that provide for timely recovery of capital expenditures for specific infrastructure replacement programs. Infrastructure expenditures incurred under these programs in the corporate income tax rate to 21% and the impactfirst three months of excess deferred income taxes. On March 26, 2018, the New Jersey BPU approved an $11 million reduction in Elizabethtown Gas' annual base rate revenues effective April 1, 2018 on an interim basis, subject to refund, pending final approval. On March 28, 2018, the Maryland PSC approved a $0.1 million reduction in Elkton Gas' annual base rate revenues effective April 1, 2018. Credits will be issued to customers in New Jersey and Maryland later in 2018 for the impact of the Tax Reform Legislation on the January 2018 through March 2018 billing periods. 2019 were as follows:
|
| | | | |
| Utility | Program | First Quarter 2019 |
| | | (in millions) |
| Nicor Gas | Investing in Illinois | $ | 29 |
|
| Virginia Natural Gas | Steps to Advance Virginia's Energy (SAVE) | 9 |
|
| Total | | $ | 38 |
|
On April 25, 2018,8, 2019, Virginia Natural Gas filed an application with the Virginia Commission issued an order indicating that anyto amend and extend its SAVE program. The proposal beyond a proposed base rate reduction to reflect the cost savings from the Tax Reform Legislation must be made through a general base rate case.would allow Virginia Natural Gas expects to finalizecontinue replacing aging pipeline infrastructure and increase its strategyauthorized investment under the currently-approved plan. Virginia Natural Gas seeks to addressamend its currently-approved plan by increasing the impactsauthorized investment in 2019 from $35 million to $40 million and to extend the plan for an additional five years until 2024, with proposed annual investments of $50 million in 2020, $60 million in 2021, and $70 million in each year from 2022 through 2024, for a maximum total investment over the Tax Reform Legislationsix-year term (2019 through 2024) of $370 million. The proposed investment schedule would also allow for variances of up to $6 million in 2019, $8 million in 2020, $9 million in 2021, and $10 million in each year from 2022 through 2024, with a total potential net variance of up to $10 million allowed for the program. The Virginia Commission is expected to rule on or before July 1, 2018.
the request in the third quarter 2019. The ultimate outcome of these mattersthis matter cannot be determined at this time.
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Regulatory Infrastructure Programs
Southern Company Gas is engaged in various infrastructure programs that update or expand its gas distribution systems to improve reliability and ensure the safety of its utility infrastructure, and recovers in rates its investment and a return associated with these infrastructure programs. Expenditures incurred in the first three months of 2018 were as follows:
|
| | | | | | |
| Utility | | Program | | First Quarter 2018 |
| | | | | (in millions) |
| Nicor Gas | | Investing in Illinois | | $ | 31 |
|
| Atlanta Gas Light | | Georgia Rate Adjustment Mechanism (GRAM) infrastructure spending | | 62 |
|
| Virginia Natural Gas | | Steps to Advance Virginia's Energy | | 11 |
|
| Florida City Gas | | Safety, Access, and Facility Enhancement Program | | 2 |
|
| Total | | | | $ | 106 |
|
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Infrastructure Replacement Programs and Capital Projects" of Southern Company Gas in Item 7 and Note 32 to the financial statements of Southernunder "Southern Company Gas under "Regulatory Matters – Regulatory Infrastructure Programs"Replacement Programs and Capital Projects" in Item 8 of the Form 10-K for additional information.
Income Tax
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Affiliate Asset Management Agreements
On March 15, 2019, the Virginia Commission approved an extension of Virginia Natural Gas' asset management agreement with Sequent to March 31, 2021. Southern Company Gas does not expect the new agreement to have a material impact on its financial statements.
FERC Matters
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax "FERC Matters" of Southern Company Gas in Item 7 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk," Note (B)Notes 7 and 9 to the Condensed Financial Statementsfinancial statements under "Regulatory Matters"Southern Company Gas – Equity Method Investments" and "Guarantees," respectively, in Item 8 of the Form 10-K for additional information regarding Southern Company Gas," and Note (H) to the Condensed Financial Statements herein for information regarding the Tax Reform Legislation and related regulatory actions.Gas' gas pipeline construction projects.
Other Matters
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Other Matters" and "FERC Matters" of Southern Company Gas in Item 7 for additional information.
Southern Company Gas is involved in various other matters being litigated and regulatory matters that could affect future earnings.earnings, including matters being litigated, as well as other regulatory matters and matters that could result in asset impairments. In addition, Southern Company Gas is subject to certain claims and legal actions arising in the ordinary course of business. The ultimate outcome of such pending or potential litigation, or regulatory matters, or potential asset impairments cannot be predicted at this time; however, for current proceedings not specifically reported in NoteNotes (B) and (C) to the Condensed Financial Statements herein, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Southern Company Gas' financial statements. See NoteNotes (B) and (C) to the Condensed Financial Statements herein for a discussion of various other contingencies, and regulatory matters, and other matters being litigated which may affect future earnings potential.
Southern Company Gas owns a 50% interest in a planned LNG liquefaction and storage facility in Jacksonville, Florida. Once construction is complete and the facility is operational, it will be outfitted with a 2.0 million gallon storage tank with the capacity to produce in excess of 120,000 gallons of LNG per day. It is expected to be operational in the first half of 2018. The ultimate outcome of this matter cannot be determined at this time.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Southern Company Gas prepares its financial statements in accordance with GAAP. Significant accounting policies are described in NoteNotes 1, 5, and 6 to the financial statements of Southern Company Gas 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 Southern Company Gas' results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Southern Company Gas in Item 7 of the Form 10-K for a complete discussion of Southern Company Gas' critical accounting policies and estimates.
Recently Issued Accounting Standards
See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Recently Issued Accounting Standards" of Southern Company Gas in Item 7 of the Form 10-K for additional information regarding ASU No. 2016-02, Leases (Topic 842). See Note (A) to the Condensed Financial Statements herein for information regarding Southern Company Gas' recently adopted accounting standards.
FINANCIAL CONDITION AND LIQUIDITY
Overview
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Southern Company Gas in Item 7 of the Form 10-K for additional information. Southern Company Gas' financial condition remained stable at March 31, 2018.2019. Southern Company Gas intends to continue to monitor its access to short-term and long-term capital markets as well as bank credit agreements to meet future capital and liquidity needs. See "Capital Requirements and Contractual Obligations," "Sources of Capital," and "Financing Activities" herein for additional information.
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. The New Jersey BPU restricts the amount Elizabethtown Gas can dividend to its parent company to 70% of its quarterly net income. Additionally, as stipulated in the New Jersey BPU's order approving the Merger, Southern Company Gas is prohibited from paying dividends to its parent company, Southern Company, if Southern Company Gas' senior unsecured debt rating falls below investment grade. At March 31, 2018,2019, the amount of subsidiary retained earnings and net income restricted to dividend totaled $776$875 million. These restrictionsThis restriction did not have any impact on Southern Company Gas' ability to meet its cash obligations, nor does management expect such restrictions to materially impact Southern Company Gas' ability to meet its currently anticipated cash obligations.
Net cash provided from operating activities totaled $978$683 million for the first three months of 2018, an increase2019, a decrease of $222$295 million compared tofrom the first three months of 2017.corresponding period in 2018. The increase in net cash provided from operating activitiesdecrease was primarily due to increased volumesthe impacts of natural gas sold during the first three monthsSouthern Company Gas Dispositions and the timing of 2018.vendor payments. Net cash used for investing activities totaled $361$290 million for the first three months of 20182019 primarily due to gross property additions related to utility capital expenditures forand infrastructure investments recovered through replacement programs at gas distribution operations and capital contributed to equity method investments in pipelines.pipeline investments. Net cash used for financing activities totaled $595$402 million for the first three months of 20182019 primarily due to net repayments of commercial paper borrowings and a common stock dividend payment to Southern Company. Cash flows from financing activities vary from period to period based on capital needs and the maturity or redemption of securities.
Significant balance sheet changes at March 31, 2018for the first three months of 2019 include a decrease of $413$363 million in natural gas for sale, net of temporary LIFO liquidation, due to the use of stored natural gas and a $483$289 million decrease in notes payable primarily related to net repayments of commercial paper borrowings. Other significant balance sheet changes include decreases of $54 million in accounts payable as well as $159$272 million and $109$324 million in energy marketing receivables and payables, respectively, due to lower natural gas prices and volumes of natural gas sold, and an increase of $169$171 million in total property, plant, and equipment primarily due to utility capital expenditures and infrastructure investments recovered through replacement programs. Balance sheet changes for the first three months of 2019 also include recording $86 million in operating lease right-of use assets and $84 million in operating lease obligations related to the adoption of ASU No. 2016-02, Leases (Topic 842) (ASC 842). See Note (L) to the Condensed Financial Statements herein for additional information on the adoption of ASC 842.
Capital Requirements and Contractual Obligations
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Southern Company Gas in Item 7 of the Form 10-K for a description of Southern Company Gas' capital requirements and contractual obligations. Subsequent to March 31, 2018, Pivotal Utility Holdings caused $20 million aggregate principal amount of gas facility revenue bonds issued for its benefit to be redeemed. An additional $335Approximately $350 million will be required through March 31, 20192020 to fund
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
announced redemptions and maturities of long-term debt. See "Sources of Capital" herein for additional information.
The regulatory infrastructure programs and other construction programs are subject to periodic review and revision, and actual costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in FERC rules and regulations; state regulatory approvals; changes in legislation; the cost and efficiency of labor, equipment, and materials; project scope and design changes; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered. See Note 32 to the consolidated financial statements of Southernunder "Southern Company GasGas" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein for information regarding additional factors that may impact infrastructure investment expenditures.
Sources of Capital
Southern Company Gas plans to obtain the funds to meet its future capital needs throughfrom sources similar to those used in the past, which were primarily from operating cash flows, external securities issuances, borrowings from financial institutions, and equity contributions from Southern Company. In addition, Southern Company Gas plans to utilize the proceeds from the pending sales of Elizabethtown Gas, Elkton Gas, and Pivotal Home Solutions to pay the income taxes resulting from the sales, to retire existing debt, and for general corporate purposes. However, the amount, type, and timing of any future financings, if needed, depend upon prevailing market conditions, regulatory approval, and other factors. The issuance of securities by Nicor Gas is generally subject to the approval of the Illinois Commission. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" of Southern Company Gas in Item 7 of the Form 10-K for additional information.
At March 31, 2018, Southern Company Gas' current liabilities exceeded current assets by $972$495 million primarily as a result of $1.0 billion$361 million in notes payable.payable and $354 million in securities due within one year. Southern Company Gas' current
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
liabilities frequently exceed current assets because of commercial paper borrowings used to fund daily operations, scheduled maturities of long-term debt, and significant seasonal fluctuations in cash needs. Southern Company Gas intends to utilize operating cash flows, external securities issuances, borrowings from financial institutions, equity contributions from Southern Company, and the proceeds from the pending sales of Elizabethtown Gas, Elkton Gas, and Pivotal Home Solutions to fund its short-term capital needs. Southern Company Gas has substantial cash flow from operating activities and access to the capital markets and financial institutions to meet liquidity needs.
At March 31, 2018,2019, Southern Company Gas had $94$57 million of cash and cash equivalents. Committed credit arrangements with banks at March 31, 20182019 were as follows:
| | | Company | | Expires 2022 | | Unused | Expires 2022 | | Unused |
| | | (in millions) | (in millions) |
Southern Company Gas Capital(a) | | $ | 1,400 |
| | $ | 1,390 |
| $ | 1,400 |
| | $ | 1,395 |
|
| Nicor Gas | | 500 |
| | 500 |
| 500 |
| | 500 |
|
Total(b) | | $ | 1,900 |
| | $ | 1,890 |
| $ | 1,900 |
| | $ | 1,895 |
|
| |
| (a) | Southern Company Gas guarantees the obligations of Southern Company Gas Capital. |
| |
| (b) | Pursuant to the credit arrangement, the allocations between Southern Company Gas Capital and Nicor Gas may be adjusted. |
See Note 68 to the consolidated financial statements of Southern Company Gas under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.
The multi-year credit arrangement of Southern Company Gas Capital and Nicor Gas (Facility) contains a covenant that limits the ratio of debt to capitalization (as defined in the Facility) to a maximum of 70% for each of Southern Company Gas and Nicor Gaslevels and contains a cross-acceleration provision to other indebtedness (including guarantee obligations) of the applicable company. Such cross-acceleration provision to other indebtedness would trigger an event of default of the applicable company if Southern Company Gas or Nicor Gas defaulted on indebtedness, the payment of which was then accelerated. The term loan agreement for Pivotal Utility Holdings contains similar
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
provisions related to Southern Company Gas. At March 31, 2018,2019, both companies were in compliance with such covenant. The Facility does not contain a material adverse change clause at the time of borrowings.
Subject to applicable market conditions, the applicable company expects to renew or replace the Facility as needed, prior to expiration. In connection therewith, the applicable company may extend the maturity dates and/or increase or decrease the lending commitments thereunder. A portion of unused credit with banks provides liquidity support to Southern Company Gas.
Southern Company Gas has substantial cash flow from operating activities and access to capital markets, including the commercial paper programs, and financial institutions to meet liquidity needs. Southern Company Gas makes short-term borrowings primarily through commercial paper programs that have the liquidity support of the committed bank credit arrangements described above. Commercial paperShort-term borrowings are included in notes payable in the balance sheets.
Details of short-term borrowings were as follows:
| | | | Short-Term Debt at March 31, 2018 | | Short-Term Debt During the Period(*) | Short-Term Debt at March 31, 2019 | | Short-Term Debt During the Period(*) |
| | Amount
Outstanding | | Weighted Average Interest Rate | | Average Amount Outstanding | | Weighted Average Interest Rate | | Maximum Amount Outstanding | Amount
Outstanding | | Weighted Average Interest Rate | | Average Amount Outstanding | | Weighted Average Interest Rate | | Maximum Amount Outstanding |
| Commercial paper: | (in millions) | | | | (in millions) | | | | (in millions) | (in millions) | | | | (in millions) | | | | (in millions) |
| Southern Company Gas Capital | $ | 855 |
| | 2.4 | % | | $ | 960 |
| | 2.0 | % | | $ | 1,261 |
| $ | 326 |
| | 2.8 | % | | $ | 364 |
| | 2.9 | % | | $ | 472 |
|
| Nicor Gas | 180 |
| | 2.2 |
| | 189 |
| | 1.8 |
| | 275 |
| 35 |
| | 2.6 | % | | 106 |
| | 2.9 | % | | 247 |
|
| Short-term loans: | | | | | | | | | | |
| Southern Company Gas | — |
| | — | % | | 92 |
| | 2.8 | % | | 100 |
| |
| Total | $ | 1,035 |
| | 2.4 | % | | $ | 1,241 |
| | 2.0 | % | | | $ | 361 |
| | 2.8 | % | | $ | 470 |
| | 2.9 | % | | |
| |
| (*) | Average and maximum amounts are based upon daily balances during the three-month period ended March 31, 2018.2019. |
Southern Company Gas believes that the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, and operating cash flows.
Additionally, at March 31, 2018, Pivotal Utility Holdings was party to a series
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Credit Rating Risk
Southern Company Gas does 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 below BBB- and/or Baa3. These contracts are for physical gas purchases and sales and energy price risk management. The maximum potential collateral requirement under these contracts at March 31, 20182019 was $11approximately $12 million.
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 Southern Company Gas to access capital markets and would be likely to impact the cost at which it does so.
While it is unclear how the credit rating agencies and the relevant state regulatory bodies may respond toAs a result of the Tax Reform Legislation, certain financial metrics, such as the funds from operations to debt percentage, used by the credit rating agencies to assess Southern Company and its subsidiaries, including Southern Company Gas, may be negatively impacted. Absent actions by Southern Company and its subsidiaries, including Southern Company Gas
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
and its regulated subsidiaries have taken actions to mitigate the resulting impacts, which, among other alternatives, could include adjusting capital structure and/or monetizing regulatory assets,structure. Absent actions by Southern Company and its subsidiaries that fully mitigate the impacts, Southern Company Gas', Southern Company Gas Capital's, and Nicor Gas' credit ratings could be negatively affected. The Georgia PSC's May 15, 2018 approval of a stipulation for Atlanta Gas Light's annual rate adjustment maintained the previously authorized earnings band and increased the equity ratio to address the negative cash flow and credit metric impacts of the Tax Reform Legislation. See Note 32 to the financial statements of Southernunder "Southern Company Gas under "Regulatory Matters"Gas" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Regulatory Matters – "Southern Company Gas"Gas" herein for information on additional information.rate proceedings for Nicor Gas and Atlanta Gas Light expected to conclude in 2019.
Financing Activities
The long-term debt on Southern Company Gas' balance sheets includes both principal and non-principal components. As of March 31, 2018,2019, the non-principal components totaled $494$444 million, which consisted of the unamortized portions of the fair value adjustment recorded in purchase accounting, debt premiums, debt discounts, and debt issuance costs.
On January 4, 2018, Southern Company Gas issued a floating rate promissory note to Southern Company in an aggregate principal amount of $100 million bearing interest based on one-month LIBOR. On March 28, 2018, Southern Company Gas repaid this promissory note.
Subsequent todid not issue or redeem any securities during the three months ended March 31, 2018, Pivotal Utility Holdings caused $20 million aggregate principal amount of gas facility revenue bonds to be redeemed and provided notice of its intent to cause, on May 23, 2018, the remaining $180 million aggregate principal amount of gas facility revenue bonds issued for its benefit to be redeemed. Subsequent to March 31, 2018, Pivotal Utility Holdings, as borrower, and Southern Company Gas, as guarantor, entered into a $181 million short-term delayed draw floating rate bank term loan agreement. Pivotal Utility Holdings has the right to borrow up to $181 million on or before May 31, 2018, upon satisfaction of certain customary conditions. Pivotal Utility Holdings expects the proceeds to be used to repay the remaining $180 million of gas facility revenue bonds.2019.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Southern Company Gas plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.
Market Price Risk
Other than the items discussed below, there were no material changes to Southern Company Gas' disclosures about market price risk during the first quarter 2018.2019. For an in-depth discussion of Southern Company Gas' market price risks, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" of Southern Company Gas in Item 7 of the Form 10-K. Also see Notes (D)(I) and (I)(J) to the Condensed Financial Statements herein for information relating to derivative instruments.
Southern Company Gas is exposed to market risks, primarily commodity price risk, interest rate risk, and weather risk. Due to various cost recovery mechanisms, the natural gas distribution utilities of Southern Company Gas that sell natural gas directly to end-use customers have limited exposure to market volatility of natural gas prices. Certain natural gas distribution utilities of Southern Company Gas may manage fuel-hedging programs implemented per the guidelines of their respective state regulatory agencies to hedge the impact of market fluctuations in natural gas prices for customers. For the weather risk associated with Nicor Gas, Southern Company Gas has a corporate weather hedging program that utilizes weather derivatives to reduce the risk of lower operating margins potentially resulting from significantly warmer-than-normal weather. In addition, certain non-regulated operations routinely utilize various types of derivative instruments to economically hedge certain commodity price
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
and weather risks inherent in the natural gas industry. These instruments include a variety of exchange-traded and over-the-counter energy contracts, such as forward contracts, futures contracts, options contracts, and swap agreements. Some of these economic hedge activities may not qualify, or are not designated, for hedge accounting treatment. For the periods presented below, the changes in net fair value of Southern Company Gas' derivative contracts were as follows:
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| | | | First Quarter | | First Quarter | | | | | |
| | 2018 | | 2017 | First Quarter 2019 | First Quarter 2018 |
| | (in millions) | (in millions) |
| Contracts outstanding at beginning of period, assets (liabilities), net | $ | (106 | ) | | $ | 12 |
| $ | (167 | ) | $ | (106 | ) |
| Contracts realized or otherwise settled | 49 |
| | 4 |
| (5 | ) | 49 |
|
Current period changes(a) | (13 | ) | | 48 |
| 44 |
| (13 | ) |
| Contracts outstanding at the end of period, assets (liabilities), net | (70 | ) | | 64 |
| $ | (128 | ) | $ | (70 | ) |
| Netting of cash collateral | 223 |
| | 92 |
| 190 |
| 223 |
|
Cash collateral and net fair value of contracts outstanding at end of period(b) | $ | 153 |
| | $ | 156 |
| $ | 62 |
| $ | 153 |
|
| |
| (a) | Current period changes also include the fair value of new contracts entered into during the period, if any. |
| |
| (b) | Net fair value of derivative contracts outstanding excludes premium and the intrinsic value associated with weather derivatives of $11 million and $4 million at March 31, 2019 and 2018, and includes premium and the intrinsic value associated with weather derivatives of $19 million at March 31, 2017.respectively. |
The maturities of Southern Company Gas' energy-related derivative contracts at March 31, 20182019 were as follows:
| | | | | | Fair Value Measurements | | | Fair Value Measurements |
| | | | March 31, 2018 | | | March 31, 2019 |
| | Total
Fair Value | | Maturity | Total
Fair Value | | Maturity |
| | | Year 1 | | Years 2 & 3 | | Years 4 and thereafter | | Year 1 | | Years 2 & 3 | | Years 4 and thereafter |
| | (in millions) | (in millions) |
Level 1(a) | $ | (146 | ) | | $ | (51 | ) | | $ | (68 | ) | | $ | (27 | ) | $ | (144 | ) | | $ | (36 | ) | | $ | (76 | ) | | $ | (32 | ) |
Level 2(b) | 76 |
| | 22 |
| | 16 |
| | 38 |
| 35 |
| | 26 |
| | 10 |
| | (1 | ) |
Fair value of contracts outstanding at end of period(c) | $ | (70 | ) | | $ | (29 | ) | | $ | (52 | ) | | $ | 11 |
| |
Level 3(c) | | (19 | ) | | 2 |
| | (2 | ) | | (19 | ) |
Fair value of contracts outstanding at end of period(d) | | $ | (128 | ) | | $ | (8 | ) | | $ | (68 | ) | | $ | (52 | ) |
| |
| (a) | Valued using NYMEX futures prices. |
| |
| (b) | Valued using basis transactions that represent the cost to transport natural gas from a NYMEX delivery point to the contract delivery point. These transactions are based on quotes obtained either through electronic trading platforms or directly from brokers. |
| |
| (c) | Valued using a combination of observable and unobservable inputs. |
| |
| (d) | Excludes cash collateral of $223$190 million as well as premium and associated intrinsic value associated with weather derivatives of $4$11 million at March 31, 2018.2019. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
FOR
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
(UNAUDITED)
INDEX TO THE NOTES TO THE CONDENSED FINANCIAL STATEMENTS
|
| | |
| Note | | Page Number |
| A | | |
| B | | |
| C | | |
| D | | |
D | | |
| E | | |
| F | | |
| G | | |
| H | | |
H | | |
| I | | |
| J | | |
JK | | |
K | | |
| L | | |
| M | | |
INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS BY REGISTRANT
The following unaudited notes to the condensed financial statements are a combined presentation. The list below indicates the registrants to which each footnote applies.
|
| |
| Registrant | Applicable Notes |
| Southern Company | A, B, C, D, E, F, G, H, I, J, K, L, M |
| Alabama Power | A, B, C, D, F, G, H, I, J, L |
| Georgia Power | A, B, C, D, F, G, H, I, |
Gulf Power | A, B, C, D, F, G, H, I J, L |
| Mississippi Power | A, B, C, D, F, G, H, I, J, L |
| Southern Power | A, C, D, E, F, G, H, I, J, K, L |
| Southern Company Gas | A, B, C, D, E, F, G, H, I, J, |
Southern Company Gas | A, B, C, D, F, G, H, I, J, K, L, M |
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
NOTES TO THE CONDENSED FINANCIAL STATEMENTS:
(UNAUDITED)
(A) INTRODUCTION
The condensed quarterly financial statements of each registrant included herein have been prepared by such registrant, without audit, pursuant to the rules and regulations of the SEC. The Condensed Balance Sheets as of December 31, 20172018 have been derived from the audited financial statements of each registrant. In the opinion of each registrant's management, the information regarding such registrant furnished herein reflects all adjustments, which, except as otherwise disclosed, are of a normal recurring nature, necessary to present fairly the results of operations for the periods ended March 31, 20182019 and 2017.2018. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although each registrant believes that the disclosures regarding such registrant are adequate to make the information presented not misleading. Disclosures which would substantially duplicate the disclosures in the Form 10-K and details which have not changed significantly in amount or composition since the filing of the Form 10-K are generally omitted from this Quarterly Report on Form 10-Q unless specifically required by GAAP. Therefore, these Condensed Financial Statements should be read in conjunction with the financial statements and the notes thereto included in the Form 10-K. Due to the seasonal variations in the demand for energy, operating results for the periods presented are not necessarily indicative of the operating results to be expected for the full year.
Certain prior year data presented in the financial statements have been reclassified to conform to the current year presentation. These reclassifications had no impact on the results of operations, financial position, or cash flows of any registrant.
Recently Adopted Accounting Standards
See Note 1 to the financial statements of the registrants under "Recently Issued Accounting Standards" in Item 8 of the Form 10-K for additional information.
Revenue
In 2014,2016, the FASB issued ASC 606,ASU No. 2016-02, Revenue from Contracts with CustomersLeases (Topic 842) (ASC 606), replacing the existing accounting standard and industry-specific guidance for revenue recognition with a five-step model for recognizing and measuring revenue from contracts with customers. The underlying principle of the standard is(ASU 2016-02). ASU 2016-02 requires lessees to recognize revenueon the balance sheet a lease liability and a right-of-use asset for all leases. ASU 2016-02 also changes the recognition, measurement, and presentation of expense associated with leases and provides clarification regarding the identification of certain components of contracts that would represent a lease. The accounting required by lessors is relatively unchanged and there is no change to depict the transfer of goods or services to customers ataccounting for existing leveraged leases. The registrants adopted the amount expected to be collected. ASC 606 becamenew standard effective on January 1, 20182019. See Note (L) for additional information and the registrants adopted it using the modified retrospective method applied to open contracts and only to the versionrelated disclosures.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
ASC 606 provided additional clarity on financial statement presentation that resulted in reclassifications into other revenues and other operations and maintenance from other income/(expense), net at Alabama Power and Georgia Power related to certain unregulated sales of products and services. In addition, contract assets related to certain fixed retail revenues and pole attachment revenues at Georgia Power have been reclassified from unbilled revenue and other accounts and notes receivable, respectively, in accordance with the guidance in ASC 606. Neither of these changes resulted in an adjustment to the timing or amount of the recognition of revenues or cash flows. ASC 606 also provided additional guidance on over-time revenue recognition, resulting in a change in the timing of revenue recognized from guaranteed and fixed billing arrangements at Southern Company Gas. The increase in natural gas revenues recognized in the first quarter 2018 relates primarily to the seasonal nature of natural gas usage and is expected to be offset by decreases in natural gas revenue recognized in future periods during 2018.
The net impact of accounting for revenue under ASC 606 increased Southern Company's consolidated net income and net income per share by $10 million and $0.01 per basic share, respectively, for the three months ended March 31, 2018.
The specific impacts of applying ASC 606 to revenues from contracts with customers on the financial statements of Southern Company, Alabama Power, Georgia Power, and Southern Company Gas as of and for the three months ended March 31, 2018 compared to previously recognized guidance is shown below.
|
| | | | | | | | | |
| | As of and for the Three Months Ended March 31, 2018 |
| | As Reported | Balances Without Adoption of ASC 606 | Effect of Change |
| | (in millions) |
| Southern Company | | | |
| Condensed Consolidated Statements of Income | | | |
| Natural gas revenues | $ | 1,607 |
| $ | 1,593 |
| $ | 14 |
|
| Other revenues | 413 |
| 412 |
| 1 |
|
| Other operations and maintenance | 1,451 |
| 1,441 |
| 10 |
|
| Operating income | 1,376 |
| 1,371 |
| 5 |
|
| Other income (expense), net | 60 |
| 51 |
| 9 |
|
| Earnings before income taxes | 1,049 |
| 1,035 |
| 14 |
|
| Income taxes | 113 |
| 109 |
| 4 |
|
| Consolidated net income | 936 |
| 926 |
| 10 |
|
| Consolidated net income attributable to Southern Company | 938 |
| 928 |
| 10 |
|
| Basic earnings per share | $ | 0.93 |
| $ | 0.92 |
| $ | 0.01 |
|
| Diluted earnings per share | $ | 0.92 |
| $ | 0.91 |
| $ | 0.01 |
|
| | | | |
| Condensed Consolidated Statements of Cash Flow | | | |
| Consolidated net income | $ | 936 |
| $ | 926 |
| $ | 10 |
|
| Changes in certain current assets and liabilities: | | | |
| Receivables | 197 |
| 211 |
| (14 | ) |
| Other current assets | 7 |
| (7 | ) | 14 |
|
| Accrued taxes | (79 | ) | (75 | ) | (4 | ) |
| Other current liabilities | 81 |
| 67 |
| 14 |
|
| | | | |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
|
| | | | | | | | | |
| | As of and for the Three Months Ended March 31, 2018 |
| | As Reported | Balances Without Adoption of ASC 606 | Effect of Change |
| | (in millions) |
| Condensed Consolidated Balance Sheet | | | |
| Unbilled revenues | $ | 777 |
| $ | 822 |
| $ | (45 | ) |
| Other accounts and notes receivable | 703 |
| 709 |
| (6 | ) |
| Other current assets | 286 |
| 235 |
| 51 |
|
| Accrued taxes | 368 |
| 364 |
| 4 |
|
| Other current liabilities | 923 |
| 937 |
| (14 | ) |
| Retained earnings | 9,257 |
| 9,247 |
| 10 |
|
| | | | |
| Alabama Power | | | |
| Condensed Statements of Income | | | |
| Other revenues | $ | 63 |
| $ | 55 |
| $ | 8 |
|
| Other operations and maintenance | 387 |
| 377 |
| 10 |
|
| Operating income | 372 |
| 374 |
| (2 | ) |
| Other income (expense), net | 5 |
| 3 |
| 2 |
|
| | | | |
| Georgia Power | | | |
| Condensed Statements of Income | | | |
| Other revenues | $ | 109 |
| $ | 94 |
| $ | 15 |
|
| Other operations and maintenance | 408 |
| 394 |
| 14 |
|
| Operating income | 513 |
| 512 |
| 1 |
|
| Other income (expense), net | 38 |
| 39 |
| (1 | ) |
| | | | |
| Condensed Statements of Cash Flows | | | |
| Changes in certain current assets and liabilities: | | | |
| Receivables | $ | 135 |
| $ | 145 |
| $ | (10 | ) |
| Other current assets | 9 |
| (1 | ) | 10 |
|
| | | | |
| Condensed Balance Sheet | | | |
| Unbilled revenues | $ | 189 |
| $ | 202 |
| $ | (13 | ) |
| Other accounts and notes receivable | 77 |
| 83 |
| (6 | ) |
| Other current assets | 39 |
| 20 |
| 19 |
|
| | | | |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
|
| | | | | | | | | |
| | As of and for the Three Months Ended March 31, 2018 |
| | As Reported | Balances Without Adoption of ASC 606 | Effect of Change |
| | (in millions) |
| Southern Company Gas | | | |
| Condensed Statements of Income | | | |
| Natural gas revenues | $ | 1,631 |
| $ | 1,617 |
| $ | 14 |
|
| Operating income | 388 |
| 374 |
| 14 |
|
| Earnings before income taxes | 383 |
| 369 |
| 14 |
|
| Income taxes | 104 |
| 100 |
| 4 |
|
| Net income | 279 |
| 269 |
| 10 |
|
| | | | |
| Condensed Statements of Cash Flows | | | |
| Net income | $ | 279 |
| $ | 269 |
| $ | 10 |
|
| Changes in certain current assets and liabilities: | | | |
| Accrued taxes | 28 |
| 32 |
| (4 | ) |
| Other current liabilities | 48 |
| 34 |
| 14 |
|
| | | | |
| Condensed Consolidated Balance Sheet | | | |
| Accrued income taxes | $ | 77 |
| $ | 73 |
| $ | 4 |
|
| Other current liabilities | 143 |
| 157 |
| (14 | ) |
| Accumulated deficit | (55 | ) | (65 | ) | 10 |
|
Other
In 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18). ASU 2016-18 eliminates the need to reflect transfers between cash and restricted cash in operating, investing, and financing activities in the statements of cash flows. In addition, the net change in cash and cash equivalents during the period includes amounts generally described as restricted cash or restricted cash equivalents. The registrants adopted ASU 2016-18 effective January 1, 2018 with no material impact on their financial statements. Southern Company, Southern Power, and Southern Company Gas retrospectively applied ASU 2016-18 effective January 1, 2018 and have restated prior periods in the statements of cash flows by immaterial amounts. The change in restricted cash in the statements of cash flows was previously disclosed in operating activities for Southern Company and Southern Company Gas and in investing activities for Southern Company and Southern Power. See "Restricted Cash" herein for additional information.
In March 2017, the FASB issued ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07). ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs and requires the other components of net periodic pension and postretirement benefit costs to be separately presented in the statements of income outside of income from operations. Additionally, only the service cost component is eligible for capitalization, when applicable. The registrants adopted ASU 2017-07 effective January 1, 2018 with no material impact on their financial statements. ASU 2017-07 has been applied retrospectively for the presentation of the service cost component and the other components of net periodic benefit costs in the statements of income for Southern Company, the traditional electric operating companies, and Southern Company Gas. Since Southern Power did not participate in the qualified pension and postretirement benefit plans until December 2017, no retrospective presentation of Southern Power's net periodic benefits costs is required. The requirement to limit capitalization to the service cost component of net periodic benefit costs has been applied on a
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
prospective basis from the date of adoption for all registrants. The presentation changes resulted in a decrease in operating income and an increase in other income for the three months ended March 31, 2018 and 2017 for Southern Company, the traditional electric operating companies, and Southern Company Gas.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). ASU 2017-12 makes more financial and non-financial hedging strategies eligible for hedge accounting, amends the related presentation and disclosure requirements, and simplifies hedge effectiveness assessment requirements. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The registrants adopted ASU 2017-12 effective January 1, 2018 with no material impact on their financial statements. See Note (I) for disclosures required by ASU 2017-12.
On February 14, 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02) to address the application of ASC 740, Income Taxes (ASC 740) to certain provisions of the Tax Reform Legislation. ASU 2018-02 specifically addresses the ASC 740 requirement that the effect of a change in tax laws or rates on deferred tax assets and liabilities be included in income from continuing operations, even when the tax effects were initially recognized directly in OCI at the previous rate, which strands the income tax rate differential in accumulated OCI. The amendments in ASU 2018-02 allow a reclassification from accumulated OCI to retained earnings for stranded tax effects resulting from the Tax Reform Legislation. The registrants adopted ASU 2018-02 effective January 1, 2018 with no material impact on their financial statements.
Goodwill and Other Intangible Assets
AtGoodwill at March 31, 20182019 and December 31, 2017, goodwill2018 was as follows:
|
| | | | | | |
| | Goodwill |
| | At March 31, 2018 | At December 31, 2017 |
| | (in millions) |
| Southern Company | $ | 6,226 |
| $ | 6,268 |
|
| Southern Power | $ | 2 |
| $ | 2 |
|
| Southern Company Gas | | |
| Gas distribution operations | $ | 4,702 |
| $ | 4,702 |
|
| Gas marketing services | 1,223 |
| 1,265 |
|
| Southern Company Gas total | $ | 5,925 |
| $ | 5,967 |
|
On April 11, 2018, Southern Company Gas entered into a stock purchase agreement for the sale of Pivotal Home Solutions. In contemplation of the transaction, a goodwill impairment charge of $42 million was recorded as of March 31, 2018. See Note (J) under "Southern Company Gas" for additional information. |
| | | | | | |
| | At March 31, 2019 | At December 31, 2018 |
| | (in millions) |
| Southern Company | $ | 5,284 |
| $ | 5,315 |
|
| Southern Company Gas: | | |
| Gas distribution operations | $ | 4,034 |
| $ | 4,034 |
|
| Gas marketing services | 981 |
| 981 |
|
| Southern Company Gas total | $ | 5,015 |
| $ | 5,015 |
|
Goodwill is not amortized but is subject to an annual impairment test during the fourth quarter of each year or more frequently if impairment indicators arise.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Other intangible assets were as follows:
| | | | At March 31, 2018 | | At December 31, 2017 | At March 31, 2019 | | At December 31, 2018 |
| | Gross Carrying Amount | Accumulated Amortization | Other Intangible Assets, Net | | Gross Carrying Amount | Accumulated Amortization | Other
Intangible Assets, Net | Gross Carrying Amount | Accumulated Amortization | Other Intangible Assets, Net | | Gross Carrying Amount | Accumulated Amortization | Other
Intangible Assets, Net |
| | (in millions) | | (in millions) | (in millions) | | (in millions) |
| Southern Company | | | | | | |
| Other intangible assets subject to amortization: | | | | | | |
| Customer relationships | $ | 288 |
| $ | (93 | ) | $ | 195 |
| | $ | 288 |
| $ | (83 | ) | $ | 205 |
| $ | 211 |
| $ | (100 | ) | $ | 111 |
| | $ | 223 |
| $ | (94 | ) | $ | 129 |
|
| Trade names | 159 |
| (19 | ) | 140 |
| | 159 |
| (17 | ) | 142 |
| 70 |
| (22 | ) | 48 |
| | 70 |
| (21 | ) | 49 |
|
| Storage and transportation contracts | 64 |
| (40 | ) | 24 |
| | 64 |
| (34 | ) | 30 |
| 64 |
| (56 | ) | 8 |
| | 64 |
| (54 | ) | 10 |
|
| PPA fair value adjustments | 456 |
| (54 | ) | 402 |
| | 456 |
| (47 | ) | 409 |
| 405 |
| (67 | ) | 338 |
| | 405 |
| (61 | ) | 344 |
|
| Other | 18 |
| (6 | ) | 12 |
| | 17 |
| (5 | ) | 12 |
| 11 |
| (6 | ) | 5 |
| | 11 |
| (5 | ) | 6 |
|
| Total other intangible assets subject to amortization | $ | 985 |
| $ | (212 | ) | $ | 773 |
|
| $ | 984 |
| $ | (186 | ) | $ | 798 |
| $ | 761 |
| $ | (251 | ) | $ | 510 |
|
| $ | 773 |
| $ | (235 | ) | $ | 538 |
|
| Other intangible assets not subject to amortization: | | | | | | |
| Federal Communications Commission licenses | 75 |
| — |
| 75 |
| | 75 |
| — |
| 75 |
| 75 |
| — |
| 75 |
| | 75 |
| — |
| 75 |
|
| Total other intangible assets | $ | 1,060 |
| $ | (212 | ) | $ | 848 |
| | $ | 1,059 |
| $ | (186 | ) | $ | 873 |
| $ | 836 |
| $ | (251 | ) | $ | 585 |
| | $ | 848 |
| $ | (235 | ) | $ | 613 |
|
| | | | | | | |
| Southern Power | | | | | | |
| Other intangible assets subject to amortization: | | | | | | |
| PPA fair value adjustments | $ | 456 |
| $ | (54 | ) | $ | 402 |
| | $ | 456 |
| $ | (47 | ) | $ | 409 |
| $ | 405 |
| $ | (67 | ) | $ | 338 |
| | $ | 405 |
| $ | (61 | ) | $ | 344 |
|
| | | | | | | |
| Southern Company Gas | | | | | | |
| Other intangible assets subject to amortization: | | | | | | |
| Gas marketing services | | | | | | |
| Customer relationships | $ | 221 |
| $ | (86 | ) | $ | 135 |
| | $ | 221 |
| $ | (77 | ) | $ | 144 |
| $ | 156 |
| $ | (89 | ) | $ | 67 |
| | $ | 156 |
| $ | (84 | ) | $ | 72 |
|
| Trade names | 115 |
| (10 | ) | 105 |
| | 115 |
| (9 | ) | 106 |
| 26 |
| (8 | ) | 18 |
| | 26 |
| (7 | ) | 19 |
|
| Wholesale gas services | | | | | | |
| Storage and transportation contracts | 64 |
| (40 | ) | 24 |
| | 64 |
| (34 | ) | 30 |
| 64 |
| (56 | ) | 8 |
| | 64 |
| (54 | ) | 10 |
|
| Total other intangible assets subject to amortization | $ | 400 |
| $ | (136 | ) | $ | 264 |
| | $ | 400 |
| $ | (120 | ) | $ | 280 |
| $ | 246 |
| $ | (153 | ) | $ | 93 |
| | $ | 246 |
| $ | (145 | ) | $ | 101 |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Amortization associated with other intangible assets was as follows:
| | | | Three Months Ended | Three Months Ended |
| | March 31, 2018 | March 31, 2019 |
| | (in millions) | (in millions) |
| Southern Company | $ | 26 |
| $ | 17 |
|
Southern Power | $ | 7 |
| $ | 6 |
|
| Southern Company Gas | $ | 16 |
| |
Gas marketing services(b) | | $ | 6 |
|
Wholesale gas services(a) | | 2 |
|
| Southern Company Gas total | | $ | 8 |
|
| |
| (a) | Recorded as a reduction to operating revenues. |
| |
| (b) | Included in depreciation and amortization. |
Restricted Cash
The registrants adopted ASU 2016-18 as of January 1, 2018. See "Recently Adopted Accounting Standards – Other" herein for additional information.
At December 31, 2017, Southern2018, Georgia Power had restricted cash primarily related to certain acquisitions and construction projects.the redemption of pollution control revenue bonds, which were redeemed in January 2019. See Note (F) under "Financing Activities" for additional information. At both March 31, 20182019 and December 31, 2017,2018, Southern Company Gas had restricted cash held as collateral for worker's compensation, life insurance, and long-term disability insurance.
The following tables provide a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed balance sheets that total to the amounts shown in the condensed statements of cash flows for the registrants that had restricted cash at March 31, 20182019 and/or December 31, 2017:2018:
| | | | Southern Company | Southern Company Gas | Southern Company | | Southern Company Gas |
| | (in millions) | (in millions) |
| At March 31, 2018 | | |
| At March 31, 2019 | | | | |
| Cash and cash equivalents | $ | 2,284 |
| $ | 94 |
| $ | 1,361 |
| | $ | 57 |
|
| Restricted cash: | | | | |
| Other accounts and notes receivable | 6 |
| 6 |
| 4 |
| | 4 |
|
| Total cash, cash equivalents, and restricted cash | $ | 2,290 |
| $ | 100 |
| $ | 1,364 |
| (*) | $ | 61 |
|
| |
| (*) | Total does not add due to rounding. |
| | | | Southern Company | Southern Power | Southern Company Gas | Southern Company | Georgia Power | Southern Company Gas |
| | (in millions) | (in millions) |
| At December 31, 2017 | | |
| At December 31, 2018 | | |
| Cash and cash equivalents | $ | 2,130 |
| $ | 129 |
| $ | 73 |
| $ | 1,396 |
| $ | 4 |
| $ | 64 |
|
| Cash and cash equivalents held for sale | | 9 |
| — |
| — |
|
| Restricted cash: | | |
| Restricted cash | | — |
| 108 |
| — |
|
| Other accounts and notes receivable | 5 |
| — |
| 5 |
| 114 |
| — |
| 6 |
|
| Deferred charges and other assets | 12 |
| 11 |
| — |
| |
| Total cash, cash equivalents, and restricted cash | $ | 2,147 |
| $ | 140 |
| $ | 78 |
| $ | 1,519 |
| $ | 112 |
| $ | 70 |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Natural Gas for Sale
Southern Company Gas' natural gas distribution utilities,Gas, with the exception of Nicor Gas, carrycarries natural gas inventory on a WACOG basis. For any declines in market prices below the WACOG considered to be other than temporary, an adjustment is recorded to reduce the value of natural gas inventories to market value. Southern Company Gas had no material adjustment in any period presented.
Nicor Gas' natural gas inventory is carried at cost on a LIFO basis. Inventory decrements occurring during the year that are restored prior to year end are charged to cost of natural gas at the estimated annual replacement cost. Inventory decrements that are not restored prior to year end are charged to cost of natural gas at the actual LIFO cost of the inventory layers liquidated. Southern CompanyNicor Gas' inventory decrement at March 31, 20182019 is expected to be restored prior to year end.
(B) REGULATORY MATTERS
See Note 2 to the financial statements in Item 8 of the Form 10-K for additional information relating to regulatory matters.
The recovery balances for certain of Alabama Power's, Georgia Power's, and Mississippi Power's regulatory clauses at March 31, 2019 and December 31, 2018 were as follows:
|
| | | | | | | |
| Regulatory Clause | Balance Sheet Line Item | March 31,
2019 | December 31,
2018 |
| | | (in millions) |
| Alabama Power | | | |
| Rate CNP Compliance | Deferred under recovered regulatory clause revenues | $ | — |
| $ | 42 |
|
| | Customer accounts receivable | 25 |
| — |
|
| Rate CNP PPA | Deferred under recovered regulatory clause revenues | 21 |
| 25 |
|
Retail Energy Cost Recovery(*) | Deferred under recovered regulatory clause revenues | — |
| 109 |
|
| | Other regulatory liabilities, deferred | 2 |
| — |
|
| Natural Disaster Reserve | Other regulatory liabilities, deferred | 22 |
| 20 |
|
| Georgia Power | | | |
| Fuel Cost Recovery | Receivables – under recovered fuel clause revenues | $ | 73 |
| $ | 115 |
|
| Mississippi Power | | | |
| Fuel Cost Recovery | Over recovered retail fuel costs | $ | 10 |
| $ | 8 |
|
| |
| (*) | In accordance with an accounting order issued on February 5, 2019 by the Alabama PSC, Alabama Power utilized $75 million of the 2018 Rate RSE refund liability to reduce the Rate ECR under recovered balance. See Note 2 to the financial statements under "Alabama Power – Rate ECR" in Item 8 of the Form 10-K for additional information. |
Alabama Power
Environmental Accounting Order
In connection with management's decision to retire Plant Gorgas, in February 2019, Alabama Power reclassified approximately $1.3 billion for Plant Gorgas Unit 10 from plant in service, net of depreciation to other utility plant, net and continued to depreciate the asset according to the original depreciation rates. On April 15, 2019, Alabama Power retired Plant Gorgas Units 8, 9, and 10 and reclassified approximately $740 million of the remaining net investment costs of the units to a regulatory asset to be recovered over the units' remaining useful lives as established prior to the decision to retire. Additionally, approximately $700 million of net capitalized asset
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
retirement costs will be reclassified to a regulatory asset and recovered in accordance with accounting guidance provided by the Alabama PSC. See Note 2 to the financial statements under "Alabama Power – Environmental Accounting Order" and Note 6 in Item 8 of the Form 10-K for additional information.
Georgia Power
Nuclear Construction
See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding Georgia Power's construction of Plant Vogtle Units 3 and 4, the joint ownership agreements and related funding agreement, VCM reports, and the NCCR tariff.
In 2009, the Georgia PSC certified construction of Plant Vogtle Units 3 and 4. Georgia Power holds a 45.7% ownership interest in Plant Vogtle Units 3 and 4. In 2012, the NRC issued the related combined construction and operating licenses, which allowed full construction of the two AP1000 nuclear units (with electric generating capacity of approximately 1,100 MWs each) and related facilities to begin. Until March 2017, construction on Plant Vogtle Units 3 and 4 continued under the Vogtle 3 and 4 Agreement, which was a substantially fixed price agreement. In March 2017, the EPC Contractor filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. In connection with the EPC Contractor's bankruptcy filing, Georgia Power, acting for itself and as agent for the other Vogtle Owners, entered into several transitional arrangements to allow construction to continue. In July 2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners, entered into the Vogtle Services Agreement, whereby Westinghouse provides facility design and engineering services, procurement and technical support, and staff augmentation on a time and materials cost basis. The Vogtle Services Agreement provides that it will continue until the start-up and testing of Plant Vogtle Units 3 and 4 are complete and electricity is generated and sold from both units. The Vogtle Services Agreement is terminable by the Vogtle Owners upon 30 days' written notice.
In October 2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners, executed the Bechtel Agreement, a cost reimbursable plus fee arrangement, whereby Bechtel is reimbursed for actual costs plus a base fee and an at-risk fee, which is subject to adjustment based on Bechtel's performance against cost and schedule targets. Each Vogtle Owner is severally (not jointly) liable for its proportionate share, based on its ownership interest, of all amounts owed to Bechtel under the Bechtel Agreement. The Vogtle Owners may terminate the Bechtel Agreement at any time for their convenience, provided that the Vogtle Owners will be restoredrequired to pay amounts related to work performed prior to year end. The costthe termination (including the applicable portion of natural gas, including inventory costs, is recovered from customers under a purchased gas recovery mechanism adjusted for differences between actualthe base fee), certain termination-related costs, and, amounts billed; therefore, LIFO liquidations have no impact on Southern Company's or Southern Company Gas' net income.at certain stages of the work, the applicable portion of the at-risk fee. Bechtel may terminate the Bechtel Agreement under certain circumstances, including certain Vogtle Owner suspensions of work, certain breaches of the Bechtel Agreement by the Vogtle Owners, Vogtle Owner insolvency, and certain other events.
Natural gas inventories for Southern Company Gas' non-utility businesses are carried at the lower
Hypothetical Liquidation at Book Value
Southern Power has consolidated renewable generation projects that are partially financed by a third-party tax equity investor. The related contractual provisions represent profit-sharing arrangements because the allocations of cash distributionsNOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Cost and tax benefits are not based on fixed ownership percentages. Therefore, the noncontrolling interest is accounted for under a balance sheet approach utilizing the hypothetical liquidation at book value (HLBV) method. The HLBV method calculates each partner'sSchedule
Georgia Power's approximate proportionate share of income based on the change in net equityremaining estimated capital cost to complete Plant Vogtle Units 3 and 4 by the partner can legally claim in a hypothetical liquidation at the endexpected in-service dates of the period compared to the beginning of the period.November 2021 and November 2022, respectively, is as follows:
|
| | | |
| | (in billions) |
Base project capital cost forecast(a)(b) | $ | 8.0 |
|
| Construction contingency estimate | 0.4 |
|
Total project capital cost forecast(a)(b) | 8.4 |
|
Net investment as of March 31, 2019(b) | (4.9 | ) |
Remaining estimate to complete(a) | $ | 3.5 |
|
| |
(B)(a) | CONTINGENCIES AND REGULATORY MATTERSExcludes financing costs expected to be capitalized through AFUDC of approximately $325 million. |
| |
| (b) | Net of $1.7 billion received from Toshiba under the Guarantee Settlement Agreement and approximately $188 million in related Customer Refunds. |
Georgia Power estimates that its financing costs for construction of Plant Vogtle Units 3 and 4 will total approximately $3.1 billion, of which $1.9 billion had been incurred through March 31, 2019.
In April 2019, Southern Nuclear completed a cost and schedule validation process to verify and update quantities of commodities remaining to install, labor hours to install remaining quantities and related productivity, testing and system turnover requirements, and forecasted staffing needs and related costs. This process confirmed the total estimated project capital cost forecast for Plant Vogtle Units 3 and 4. The expected in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4, as previously approved by the Georgia PSC, remain unchanged.
As construction continues, challenges with management of contractors, subcontractors, and vendors; supervision of craft labor and related craft labor productivity, ability to attract and retain craft labor, and/or related cost escalation; procurement, fabrication, delivery, assembly, and/or installation and the initial testing and start-up, including any required engineering changes, of plant systems, structures, or components (some of which are based on new technology that only recently began initial operation in the global nuclear industry at this scale), any of which may require additional labor and/or materials; or other issues could arise and change the projected schedule and estimated cost. Monthly construction production targets established as part of a strategy to maintain and build margin to the approved in-service dates will continue to increase significantly throughout 2019. To meet these increasing monthly targets, existing craft construction productivity must improve and additional craft laborers must be retained and deployed.
There have been technical and procedural challenges to the construction and licensing of Plant Vogtle Units 3 and 4 at the federal and state level and additional challenges may arise. Processes are in place that are designed to assure compliance with the requirements specified in the Westinghouse Design Control Document and the combined construction and operating licenses, including inspections by Southern Nuclear and the NRC that occur throughout construction. As a result of such compliance processes, certain license amendment requests have been filed and approved or are pending before the NRC. Various design and other licensing-based compliance matters, including the timely resolution of ITAAC and the related approvals by the NRC, may arise, which may result in additional license amendments or require other resolution. If any license amendment requests or other licensing-based compliance issues are not resolved in a timely manner, there may be delays in the project schedule that could result in increased costs.
The ultimate outcome of these matters cannot be determined at this time. However, any extension of the regulatory-approved project schedule is currently estimated to result in additional base capital costs of approximately $50 million per month, based on Georgia Power's ownership interests, and AFUDC of approximately $12 million per month. While Georgia Power is not precluded from seeking recovery of any future capital cost forecast increase, management will ultimately determine whether or not to seek recovery. Any further changes to the capital cost forecast that are not expected to be recoverable through regulated rates will be required to be charged to income and such charges could be material.
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Joint Owner Contracts
In November 2017, the Vogtle Owners entered into an amendment to their joint ownership agreements for Plant Vogtle Units 3 and 4 to provide for, among other conditions, additional Vogtle Owner approval requirements. Effective in August 2018, the Vogtle Owners further amended the joint ownership agreements to clarify and provide procedures for certain provisions of the joint ownership agreements related to adverse events that require the vote of the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 to continue construction (as amended, and together with the November 2017 amendment, the Vogtle Joint Ownership Agreements). The Vogtle Joint Ownership Agreements also confirm that the Vogtle Owners' sole recourse against Georgia Power or Southern Nuclear for any action or inaction in connection with their performance as agent for the Vogtle Owners is limited to removal of Georgia Power and/or Southern Nuclear as agent, except in cases of willful misconduct.
As a result of the increase in the total project capital cost forecast and Georgia Power's decision not to seek rate recovery of the increase in the base capital costs in conjunction with the nineteenth VCM report, the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 were required to vote to continue construction. In September 2018, the Vogtle Owners unanimously voted to continue construction of Plant Vogtle Units 3 and 4.
Amendments to the Vogtle Joint Ownership Agreements
In connection with the vote to continue construction, Georgia Power entered into (i) a binding term sheet (Vogtle Owner Term Sheet) with the other Vogtle Owners and MEAG's wholly-owned subsidiaries MEAG Power SPVJ, LLC (MEAG SPVJ), MEAG Power SPVM, LLC (MEAG SPVM), and MEAG Power SPVP, LLC (MEAG SPVP) to take certain actions which partially mitigate potential financial exposure for the other Vogtle Owners, including additional amendments to the Vogtle Joint Ownership Agreements and the purchase of PTCs from the other Vogtle Owners at pre-established prices, and (ii) a term sheet (MEAG Term Sheet) with MEAG and MEAG SPVJ to provide funding with respect to MEAG SPVJ's ownership interest in Plant Vogtle Units 3 and 4 under certain circumstances. On January 14, 2019, Georgia Power, MEAG, and MEAG SPVJ entered into an agreement to implement the provisions of the MEAG Term Sheet. On February 18, 2019, Georgia Power, the other Vogtle Owners, and MEAG's wholly-owned subsidiaries MEAG SPVJ, MEAG SPVM, and MEAG SPVP entered into certain amendments to the Vogtle Joint Ownership Agreements to implement the provisions of the Vogtle Owner Term Sheet.
The ultimate outcome of these matters cannot be determined at this time.
Regulatory Matters
In 2009, the Georgia PSC voted to certify construction of Plant Vogtle Units 3 and 4 with a certified capital cost of $4.418 billion. In addition, in 2009 the Georgia PSC approved inclusion of the Plant Vogtle Units 3 and 4 related CWIP accounts in rate base, and the State of Georgia enacted the Georgia Nuclear Energy Financing Act, which allows Georgia Power to recover financing costs for Plant Vogtle Units 3 and 4. Financing costs are recovered on all applicable certified costs through annual adjustments to the NCCR tariff up to the certified capital cost of $4.418 billion. At March 31, 2019, Georgia Power had recovered approximately $1.9 billion of financing costs. Financing costs related to capital costs above $4.418 billion will be recovered through AFUDC; however, Georgia Power will not record AFUDC related to any capital costs in excess of the total deemed reasonable by the Georgia PSC (currently $7.3 billion) and not requested for rate recovery. In December 2018, the Georgia PSC approved Georgia Power's request to increase the NCCR tariff by $88 million annually, effective January 1, 2019.
Georgia Power is required to file semi-annual VCM reports with the Georgia PSC by February 28 and August 31 of each year. In 2013, in connection with the eighth VCM report, the Georgia PSC approved a stipulation between Georgia Power and the staff of the Georgia PSC to waive the requirement to amend the Plant Vogtle Units 3 and 4 certificate in accordance with the 2009 certification order until the completion of Plant Vogtle Unit 3, or earlier if deemed appropriate by the Georgia PSC and Georgia Power.
In 2016, the Georgia PSC voted to approve a settlement agreement (Vogtle Cost Settlement Agreement) resolving certain prudency matters in connection with the fifteenth VCM report. In December 2017, the Georgia PSC voted to
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approve (and issued its related order on January 11, 2018) Georgia Power's seventeenth VCM report and modified the Vogtle Cost Settlement Agreement. The Vogtle Cost Settlement Agreement, as modified by the January 11, 2018 order, resolved the following regulatory matters related to Plant Vogtle Units 3 and 4: (i) none of the $3.3 billion of costs incurred through December 31, 2015 and reflected in the fourteenth VCM report should be disallowed from rate base on the basis of imprudence; (ii) the Contractor Settlement Agreement was reasonable and prudent and none of the amounts paid pursuant to the Contractor Settlement Agreement should be disallowed from rate base on the basis of imprudence; (iii) (a) capital costs incurred up to $5.68 billion would be presumed to be reasonable and prudent with the burden of proof on any party challenging such costs, (b) Georgia Power would have the burden to show that any capital costs above $5.68 billion were prudent, and (c) a revised capital cost forecast of $7.3 billion (after reflecting the impact of payments received under the Guarantee Settlement Agreement and related Customer Refunds) was found reasonable; (iv) construction of Plant Vogtle Units 3 and 4 should be completed, with Southern Nuclear serving as project manager and Bechtel as primary contractor; (v) approved and deemed reasonable Georgia Power's revised schedule placing Plant Vogtle Units 3 and 4 in service in November 2021 and November 2022, respectively; (vi) confirmed that the revised cost forecast does not represent a cost cap and that prudence decisions on cost recovery will be made at a later date, consistent with applicable Georgia law; (vii) reduced the ROE used to calculate the NCCR tariff (a) from 10.95% (the ROE rate setting point authorized by the Georgia PSC in the 2013 ARP) to 10.00% effective January 1, 2016, (b) from 10.00% to 8.30%, effective January 1, 2020, and (c) from 8.30% to 5.30%, effective January 1, 2021 (provided that the ROE in no case will be less than Georgia Power's average cost of long-term debt); (viii) reduced the ROE used for AFUDC equity for Plant Vogtle Units 3 and 4 from 10.00% to Georgia Power's average cost of long-term debt, effective January 1, 2018; and (ix) agreed that upon Unit 3 reaching commercial operation, retail base rates would be adjusted to include carrying costs on those capital costs deemed prudent in the Vogtle Cost Settlement Agreement. The January 11, 2018 order also stated that if Plant Vogtle Units 3 and 4 are not commercially operational by June 1, 2021 and June 1, 2022, respectively, the ROE used to calculate the NCCR tariff will be further reduced by 10 basis points each month (but not lower than Georgia Power's average cost of long-term debt) until the respective Unit is commercially operational. The ROE reductions negatively impacted earnings by approximately $100 million in 2018 and are estimated to have negative earnings impacts of approximately $75 million in 2019 and an aggregate of approximately $635 million from 2020 to 2022.
In its January 11, 2018 order, the Georgia PSC also stated if other conditions change and assumptions upon which Georgia Power's seventeenth VCM report are based do not materialize, the Georgia PSC reserved the right to reconsider the decision to continue construction.
In February 2018, Georgia Interfaith Power & Light, Inc. (GIPL) and Partnership for Southern Equity, Inc. (PSE) filed a petition appealing the Georgia PSC's January 11, 2018 order with the Fulton County Superior Court. In March 2018, Georgia Watch filed a similar appeal to the Fulton County Superior Court for judicial review of the Georgia PSC's decision and denial of Georgia Watch's motion for reconsideration. In December 2018, the Fulton County Superior Court granted Georgia Power's motion to dismiss the two appeals. On January 9, 2019, GIPL, PSE, and Georgia Watch filed an appeal of this decision with the Georgia Court of Appeals. Georgia Power believes the appeal has no merit; however, an adverse outcome in the appeal combined with subsequent adverse action by the Georgia PSC could have a material impact on Southern Company's and Georgia Power's results of operations, financial condition, and liquidity.
In August 2018, Georgia Power filed its nineteenth VCM report with the Georgia PSC, which requested approval of $578 million of construction capital costs incurred from January 1, 2018 through June 30, 2018. On February 19, 2019, the Georgia PSC approved the nineteenth VCM, but deferred approval of $51.6 million of expenditures related to Georgia Power's portion of an administrative claim filed in the Westinghouse bankruptcy proceedings. Through the nineteenth VCM, the Georgia PSC has approved total construction capital costs incurred through June 30, 2018 of $5.4 billion (before $1.7 billion of payments received under the Guarantee Settlement Agreement and approximately $188 million in related Customer Refunds). In addition, the staff of the Georgia PSC requested, and Georgia Power agreed, to report the results of the cost and schedule validation process to the Georgia PSC (which is expected to occur by May 1, 2019) and to file its twentieth VCM report concurrently with the twenty-first VCM report by August 31, 2019.
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The ultimate outcome of these matters cannot be determined at this time.
DOE Financing
At March 31, 2019, Georgia Power had borrowed $3.46 billion related to Plant Vogtle Units 3 and 4 costs as provided through the Amended and Restated Loan Guarantee Agreement and related multi-advance credit facilities among Georgia Power, the DOE, and the FFB, which provide for borrowings of up to approximately $5.130 billion, subject to the satisfaction of certain conditions. See Note 8 to the financial statements under "Long-term Debt – DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K and Note (F) under "DOE Loan Guarantee Borrowings" for additional information, including applicable covenants, events of default, mandatory prepayment events, and conditions to borrowing.
The ultimate outcome of these matters cannot be determined at this time.
Mississippi Power
Municipal and Rural Association Tariff
On March 28, 2019, Mississippi Power filed a request with the FERC for a decrease in wholesale base revenues under the MRA tariff as agreed upon in a settlement agreement reached with its wholesale customers resolving all matters related to the Kemper County energy facility similar to the retail rate settlement agreement approved by the Mississippi PSC in February 2018 and reflecting the impacts of the Tax Reform Legislation. The MRA settlement agreement provides that base rates will decrease $3.7 million annually, effective January 1, 2019. Mississippi Power expects the matter to be resolved in the second quarter 2019. The ultimate outcome of this matter cannot be determined at this time.
Kemper County Energy Facility
As the mining permit holder, Liberty Fuels Company, LLC has a legal obligation to perform mine reclamation, and Mississippi Power has a contractual obligation to fund all reclamation activities. As a result of the abandonment of the Kemper IGCC, final mine reclamation began in 2018 and is expected to be substantially completed in 2020, with monitoring expected to continue through 2027. See Note 6 to the financial statements in Item 8 of the Form 10-K for additional information.
During the first quarter 2019, Mississippi Power recorded pre-tax charges to income of $2 million ($1 million after tax), primarily resulting from the abandonment and related closure activities and ongoing period costs, net of sales proceeds, for the mine and gasifier-related assets at the Kemper County energy facility. Additional closure costs for the mine and gasifier-related assets, currently estimated at up to $10 million pre-tax (excluding salvage, net of dismantlement costs), may be incurred through the first half of 2020. In addition, period costs, including, but not limited to, costs for compliance and safety, ARO accretion, and property taxes for the mine and gasifier-related assets, are estimated at $11 million for the remainder of 2019 and $2 million to $6 million annually in 2020 through 2023.
In addition, Mississippi Power constructed the CO2 pipeline for the planned transport of captured CO2 for use in enhanced oil recovery and is currently evaluating its options regarding the final disposition of the CO2 pipeline, including removal of the pipeline. This evaluation is expected to be complete later in 2019. If Mississippi Power ultimately decides to remove the CO2 pipeline, the cost of removal would have a material impact on Mississippi Power's financial statements and could have a material impact on Southern Company's financial statements.
In December 2018, Mississippi Power filed with the DOE its request for property closeout certification under the contract related to the $387 million of grants received. Mississippi Power and the DOE are currently in discussions regarding the requested closeout and property disposition, which may require payment to the DOE for a portion of certain property that is to be retained by Mississippi Power. In connection with the DOE closeout discussions, on April 29, 2019, the Civil Division of the Department of Justice informed Southern Company and Mississippi Power of an investigation related to the Kemper County energy facility. The ultimate outcome of these matters cannot be
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determined at this time; however, they could have a material impact on Mississippi Power's and Southern Company's financial statements.
Southern Company Gas
Rate Proceedings
Nicor Gas
In November 2018, Nicor Gas filed a general base rate case with the Illinois Commission requesting a $230 million increase in annual base rate revenues. The requested increase is based on a projected test year for the 12-month period ending September 30, 2020, a ROE of 10.6%, and an increase in the equity ratio from 52% to 54% to address the negative cash flow and credit metric impacts of the Tax Reform Legislation.
On April 16, 2019, Nicor Gas entered into a stipulation agreement to resolve all related issues with the Staff of the Illinois Commission, including a ROE of 9.86% and an equity ratio of 54%. Also on April 16, 2019, Nicor Gas filed its rebuttal testimony with the Illinois Commission incorporating the stipulation agreement and addressing the remaining items outstanding with the other two intervenors. As a result of the stipulation agreement and rebuttal testimony, the revised requested annual revenue increase is $180 million.
The Illinois Commission is expected to rule on the requested increase within the statutory time limit of 11 months from the filing of the rate case, after which rate adjustments will be effective. The ultimate outcome of this matter cannot be determined at this time.
Virginia Natural Gas
In December 2018, the Virginia Commission approved Virginia Natural Gas' annual information form filing, which reduced annual base rates by $14 million effective January 1, 2019 due to lower tax expense as a result of the Tax Reform Legislation. This approval also required Virginia Natural Gas to issue customer refunds, via bill credits, for $14 million related to 2018 tax benefits deferred as a regulatory liability, current, on the balance sheet at December 31, 2018. These customer refunds were completed in the first quarter 2019.
Regulatory Infrastructure Programs
Southern Company Gas is engaged in various infrastructure programs that update or expand its gas distribution systems to improve reliability and help ensure the safety of its utility infrastructure, and recovers in rates its investment and a return associated with these infrastructure programs. In addition to capital expenditures recovered through base rates by each of the natural gas distribution utilities, Nicor Gas and Virginia Natural Gas have separate rate riders that provide for timely recovery of capital expenditures for specific infrastructure replacement programs.
Virginia Natural Gas
On April 8, 2019, Virginia Natural Gas filed an application with the Virginia Commission to amend and extend its Steps to Advance Virginia's Energy program. The proposal would allow Virginia Natural Gas to continue replacing aging pipeline infrastructure and increase its authorized investment under the currently-approved plan. Virginia Natural Gas seeks to amend its currently-approved plan by increasing the authorized investment in 2019 from $35 million to $40 million and to extend the plan for an additional five years until 2024, with proposed annual investments of $50 million in 2020, $60 million in 2021, and $70 million in each year from 2022 through 2024, for a maximum total investment over the six-year term (2019 through 2024) of $370 million. The proposed investment schedule would also allow for variances of up to $6 million in 2019, $8 million in 2020, $9 million in 2021, and $10 million in each year from 2022 through 2024, with a total potential net variance of up to $10 million allowed for the program. The Virginia Commission is expected to rule on the request in the third quarter 2019. The ultimate outcome of this matter cannot be determined at this time.
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Affiliate Asset Management Agreements
On March 15, 2019, the Virginia Commission approved an extension of Virginia Natural Gas' asset management agreement with Sequent to March 31, 2021.
FERC Matters
See Note 2 to the financial statements under "FERC Matters – Open Access Transmission Tariff" in Item 8 of the Form 10-K for additional information.
On March 25, 2019, the Alabama Municipal Electric Authority and Cooperative Energy and SCS and the traditional electric operating companies filed a formal settlement agreement with the FERC agreeing to a rate reduction based on a 10.6% ROE, with a retroactive effective date of May 10, 2018, and a five-year moratorium on these parties seeking changes to the OATT formula rate. The ultimate outcome of this matter cannot be determined at this time; however, if approved by the FERC as filed, the OATT settlement would not have a material impact on the financial statements of any of the traditional electric operating companies or Southern Company.
(C) CONTINGENCIES
See Note 3 to the financial statements of the registrants in Item 8 of the Form 10-K for information relating to various lawsuits and other contingencies, and regulatory matters.contingencies.
General Litigation Matters
Each registrant is subject to certain claims and legal actions arising in the ordinary course of business. In addition, the business activities of Southern Company's subsidiaries are subject to extensive governmental regulation related to public health and the environment, such as regulationlaws and regulations governing air, water, land, and protection of air emissions and water discharges.natural resources. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as air qualitylaws and water standards,regulations, has occurred throughout the U.S. This litigation has included claims for damages alleged to have been caused by CO2 and other emissions, CCR, and alleged exposure to hazardous materials, and/or requests for injunctive relief in connection with such matters.
The ultimate outcome of such pending or potential litigation against each registrant and any subsidiaries cannot be predicted at this time; however, for current proceedings not specifically reported herein, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on such registrant's financial statements.
On March 2, 2018, the Alabama Department of Environmental Management (ADEM) issued proposed administrative orders assessing a penalty of $1.25 million to Alabama Power for unpermitted discharge of fluids and/or pollutants to groundwater at five electric generating plants. The proposed orders also require the submission to the ADEM of a plan with a schedule for implementation of a comprehensive groundwater investigation, including an assessment of corrective measures, a report evaluating any deficiencies at the facilities that may have led to the unpermitted discharges, and quarterly progress reports. Alabama Power is awaiting finalization of the orders. The ultimate outcome of this matter cannot be determined at this time.
Southern Company
In January 2017, a purportedputative securities class action complaint was filed against Southern Company, certain of its officers, and certain former Mississippi Power officers in the U.S. District Court for the Northern District of Georgia Atlanta Division, by Monroe County Employees' Retirement System on behalf of all persons who purchased shares of Southern Company's common stock between April 25, 2012 and October 29, 2013. The complaint alleges that Southern Company, certain of its officers, and certain former Mississippi Power officers
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made materially false and misleading statements regarding the Kemper County energy facility in violation of certain provisions under the Securities Exchange Act of 1934, as amended. The complaint seeks, among other things, compensatory damages and litigation costs and attorneys' fees. In June 2017, the plaintiffs filed an amended complaint that provided additional detail about their claims, increased the purported class period by one day, and added certain other former Mississippi Power officers as defendants. In JulyAlso in 2017, the defendants filed a motion to dismiss the plaintiffs' amended complaint with prejudice, to which the plaintiffs filed an opposition in September 2017. Onopposition. In March 29, 2018, the U.S. District Court for the Northern District of Georgia, Atlanta Division,court issued an order granting, in part, the defendants' motion to dismiss. The court dismissed certain claims against certain officers of Southern Company and Mississippi Power and dismissed the allegations related to a number of the statements that plaintiffs challenged as being false or misleading. OnIn April 26, 2018, the defendants filed a motion for reconsideration of the court's order, seeking the dismissal of the remaining claims in the lawsuit. In August 2018, the court denied the motion for reconsideration and denied a motion to certify the issue for interlocutory appeal.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
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In February 2017, Jean Vineyard and Judy Mesirov each filed a shareholder derivative lawsuit and, in May 2017, Judy Mesirov filed a shareholder derivative lawsuit, each in the U.S. District Court for the Northern District of Georgia. Each of these lawsuits names as defendants Southern Company, certain of its directors, certain of its officers, and certain former Mississippi Power officers. In August 2017, these two shareholder derivative lawsuits were consolidated in the U.S. District Court for the Northern District of Georgia and the court has deferred the consolidated case until after certain further action in the purported securities class action complaint discussed above.Georgia. The complaints allege that the defendants caused Southern Company to make false or misleading statements regarding the Kemper County energy facility cost and schedule. Further, the complaints allege that the defendants were unjustly enriched and caused the waste of corporate assets and also allege that the individual defendants violated their fiduciary duties. Each plaintiff seeks to recover, on behalf of Southern Company, unspecified actual damages and, on each plaintiff's own behalf, attorneys' fees and costs in bringing the lawsuit. Each plaintiff also seeks certain changes to Southern Company's corporate governance and internal processes. In April 2018, the court entered an order staying this lawsuit until 30 days after the resolution of any dispositive motions or any settlement, whichever is earlier, in the putative securities class action.
In May 2017, Helen E. Piper Survivor's Trust filed a shareholder derivative lawsuit in the Superior Court of Gwinnett County, State of Georgia that names as defendants Southern Company, certain of its directors, certain of its officers, and certain former Mississippi Power officers. The complaint alleges that the individual defendants, among other things, breached their fiduciary duties in connection with schedule delays and cost overruns associated with the construction of the Kemper County energy facility. The complaint further alleges that the individual defendants authorized or failed to correct false and misleading statements regarding the Kemper County energy facility schedule and cost and failed to implement necessary internal controls to prevent harm to Southern Company. The plaintiff seeks to recover, on behalf of Southern Company, unspecified actual damages and disgorgement of profits and, on its behalf, attorneys' fees and costs in bringing the lawsuit. The plaintiff also seeks certain unspecified changes to Southern Company's corporate governance and internal processes. TheIn May 2018, the court has deferred theentered an order staying this lawsuit until 30 days after certain further actionthe resolution of any dispositive motions or any settlement, whichever is earlier, in the purportedputative securities class action complaint discussed above.action.
Southern Company believes these legal challenges have no merit; however, an adverse outcome in any of these proceedings could have an impact on Southern Company's results of operations, financial condition, and liquidity. Southern Company will vigorously defend itself in these matters, theThe ultimate outcome of whichthese matters cannot be determined at this time.
Georgia Power
In 2011, plaintiffs filed a putative class action against Georgia Power in the Superior Court of Fulton County, Georgia alleging that Georgia Power's collection in rates of amounts for municipal franchise fees (all of which(which fees are remittedpaid to municipalities) exceeded the amounts allowed in orders of the Georgia PSC and alleging certain state tort law claims. In 2016, the Georgia Court of Appeals reversed the trial court's previous dismissal of the case and remanded the case to the trial court for further proceedings.court. Georgia Power filed a petition for writ of certiorari with the Georgia Supreme Court, which was granted in August 2017. A decision fromIn June 2018, the Georgia Supreme Court is expectedaffirmed the judgment of the Georgia Court of Appeals and remanded the case to the trial court for further proceedings. Following a motion by Georgia Power, on February 13, 2019, the Superior Court of Fulton County ordered the parties to submit petitions to the Georgia PSC for a declaratory ruling to address certain terms the court previously held were ambiguous as used in late 2018.the Georgia PSC's orders. The order entered by the Superior Court of Fulton County also conditionally certified the proposed class. In March 2019, Georgia Power and the plaintiffs filed petitions with the Georgia PSC seeking confirmation of the proper application of the municipal franchise fee schedule pursuant to the Georgia PSC's orders. Georgia Power and the plaintiffs also have filed notices of appeal with the Georgia Court of Appeals regarding the Superior Court of Fulton County's February 2019 order. Georgia Power believes the plaintiffs' claims have no meritmerit. The amount of any possible losses cannot be calculated at this time because, among other factors, it is unknown whether conditional class certification will be upheld and intendsthe ultimate composition of any class and whether any losses would be subject to vigorously defend itself in this matter.recovery from any municipalities. The ultimate outcome of this matter cannot be determined at this time.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
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Mississippi Power
In 2016, a complaint againstMay 2018, Southern Company and Mississippi Power wasreceived a notice of dispute and arbitration demand filed by Martin Product Sales, LLC (Martin) based on two agreements, both related to Kemper IGCC byproducts for which Mississippi Power provided termination notices in Harrison County Circuit Court (Circuit Court) by Biloxi Freezing & Processing Inc., Gulfside Casino Partnership,2017. Martin alleges breach of contract, breach of good faith and John Carlton Dean, which was amendedfair dealing, fraud and refiled to include, among other things, Southern Companymisrepresentation, and civil conspiracy and makes a claim for damages in the amount of approximately $143 million, as a defendant. The individual plaintiff alleges thatwell as additional unspecified damages, attorney's fees, costs, and interest. In the first quarter 2019, Mississippi Power and Southern Company violated the Mississippi Unfair Trade Practices Act. All plaintiffs have alleged that Mississippi Power and Southern Company concealed, falsely represented, and failedfiled motions to fully disclose important facts concerning the cost and schedule of the Kemper County energy facility and that these alleged breaches have unjustly enriched Mississippi Power and Southern Company. The plaintiffs seek unspecified actual damages and punitive damages; ask the Circuit Court to appoint a receiver to oversee, operate, manage, and otherwise control all affairs relating to the Kemper County energy facility; ask the Circuit Court to revoke any licenses or certificates authorizing Mississippi Power or Southern Company to engage in any business related to the Kemper County energy facility in Mississippi; and seek attorney's fees, costs, and interest. The plaintiffs also seek an injunction to prevent any Kemper County energy facility costs from being charged to customers through electric rates. In June 2017, the Circuit Court ruled in favor of motions by Southern Company and Mississippi Power and dismissed the case. In July 2017, the plaintiffs filed notice of an appeal.
dismiss. Southern Company and Mississippi Power believe this legal challenge has no merit; however, an adverse outcome in this proceeding could have a material impact on Southern Company's and Mississippi Power's results of operations, financial condition, and liquidity. Southern Company and Mississippi Power will vigorously defend itself in this matter, theThe ultimate outcome of whichthis matter cannot be determined at this time.
In November 2018, Ray C. Turnage and 10 other individual plaintiffs filed a putative class action complaint against Mississippi Power and the three current members of the Mississippi PSC in the U.S. District Court for the Southern District of Mississippi. Mississippi Power received Mississippi PSC approval in 2013 to charge a mirror CWIP rate premised upon including in its rate base pre-construction and construction costs for the Kemper IGCC prior to placing the Kemper IGCC into service. The Mississippi Supreme Court reversed that approval and ordered Mississippi Power to refund the amounts paid by customers under the previously-approved mirror CWIP rate. The plaintiffs allege that the initial approval process, and the amount approved, were improper. They also allege that Mississippi Power underpaid customers in the refund process by applying an incorrect interest rate. The plaintiffs seek to recover, on behalf of themselves and their putative class, actual damages, punitive damages, pre-judgment interest, post-judgment interest, attorney's fees, and costs. In response to Mississippi Power and the Mississippi PSC each filing a motion to dismiss, the plaintiffs filed an amended complaint on March 14, 2019. The amended complaint included four additional plaintiffs and additional claims for gross negligence, reckless conduct, and intentional wrongdoing. Mississippi Power and the Mississippi PSC have each filed a motion to dismiss the amended complaint. Mississippi Power believes this legal challenge has no merit; however, an adverse outcome in this proceeding could have a material impact on Mississippi Power's results of operations, financial condition, and liquidity. The ultimate outcome of this matter cannot be determined at this time.
Southern Power
During 2015, Southern Power indirectly acquiredowns a 51% membership interest in RE Roserock LLC (Roserock), the owner of the Roserock facility in Pecos County, Texas, which was under construction by Recurrent Energy, LLC and was subsequentlyTexas. Prior to the facility being placed in service in November 2016. Prior to placing the facility in service,2016, certain solar panels were damaged during installation. Whileinstallation by the facility currently is generating energy consistent with operational expectationsconstruction contractor, McCarthy Building Companies, Inc. (McCarthy), and PPA obligations, Southern Power is pursuing remedies under its insurance policies and other contracts to repair or replace thesecertain solar panels.panels were damaged by a hail event that also occurred during construction. In connection therewith, Southern Power is withholding paymentswithheld payment of approximately $26 million fromto the construction contractor, who haswhich placed a lien on the Roserock facility for the same amount. The amounts withheld are included in other accounts and notes payable and other current liabilities on Southern Company's consolidated balance sheets and other accounts payable and other current liabilities on Southern Power's consolidated balance sheets. In May 2017, Roserock filed a lawsuit in the state district court in Pecos County, Texas against XL Insurance America, Inc. (XL) and North American Elite Insurance Company (North American Elite) seeking recovery from an insurance policy for damages resulting from athe hail stormevent and certainMcCarthy's installation practices bypractices. In June 2018, the construction contractor, McCarthy Building Companies, Inc. (McCarthy). Alsocourt granted Roserock's motion for partial summary judgment, finding that the insurers were in May 2017, Roserock filed a separate lawsuit against McCarthy in the state district court in Travis County, Texas alleging breach of contract and breachin violation of warrantythe Texas Insurance Code for failing to pay any monies owed for the damages sustained at thehail claim. Separate lawsuits were filed between Roserock facility, which has since been moved toand McCarthy, as well as other parties, and that litigation was consolidated in the U.S. District Court for the Western District of Texas. AdditionallyOn April 18, 2019, Roserock and the parties to the state and federal lawsuits executed a settlement agreement and mutual release that resolves both lawsuits. Under the agreement, the lawsuits will be dismissed and McCarthy will release its lien following payments of all amounts (which are expected to occur in May 2017,2019). Roserock will pay $26 million to McCarthy filed a counter lawsuit against Roserock, Array Technologies, Inc., Canadian Solar (USA), Inc., XL,that was withheld and North American Eliteincluded in the U.S. District Court fororiginal construction costs and will receive funds that will cover all related legal costs and the Western Districtreplacement costs of Texas alleging, among other things, breachcertain solar panels. In addition, during the first quarter 2019, Roserock received a partial payment of contract, and requesting foreclosureapproximately $5 million in insurance proceeds toward the hail event. Any additional funds received in excess of mechanic's liens against Roserock. In July 2017, the U.S. District Court forinitial replacement costs are expected to be recognized as a gain when received by Roserock in the Western Districtsecond quarter 2019, but are not expected to have a material impact on Southern Power's net income.
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Environmental Matters
Environmental Remediation
The Southern Company system must comply with environmental laws and regulations governing the handling and disposal of waste and releases of hazardous substances. Under these various laws and regulations, the Southern Company system could incur substantial costs to clean up affected sites. The traditional electric operating companies and the natural gas distribution utilities in Illinois New Jersey,and Georgia and Florida have alleach received authority from their respective state PSCs or other applicable state regulatory agencies to recover approved environmental compliance costs through regulatory mechanisms. These regulatory mechanisms are adjusted annually or as necessary within limits approved by the state PSCs or other applicable state regulatory agencies.
Georgia Power's environmental remediation liability was $22$18 million and $23 million as of both March 31, 20182019 and December 31, 2017.2018, respectively. Georgia Power has been designated or identified as a potentially responsible party at sites governed by the Georgia Hazardous Site Response Act and/or by the federal Comprehensive Environmental Response, Compensation, and Liability Act, and assessment and potential cleanup of such sites is expected.
Gulf Power's environmental remediation liability includes estimated costs of environmental remediation projects of approximately $49 million and $52 million as of March 31, 2018 and December 31, 2017, respectively. These estimated costs primarily relate to site closure criteria by the Florida Department of Environmental Protection (FDEP) for potential impacts to soil and groundwater from herbicide applications at Gulf Power's substations. The schedule for completion of the remediation projects is subject to FDEP approval.
Southern Company Gas' environmental remediation liability was $369$289 million and $388$294 million as of March 31, 20182019 and December 31, 2017,2018, respectively, based on the estimated cost of environmental investigation and remediation associated with known current and former manufactured gas plant operating sites. These environmental remediation expenditures are recoverable from customers through rate mechanisms approved by the applicable state regulatory agencies of the natural gas distribution utilities, with the exception of one site representing $2 million of the total accrued remediation costs.
The ultimate outcome of these matters cannot be determined at this time; however, as a result of the regulatory treatment for environmental remediation expenses described above, the final disposition of these matters is not expected to have a material impact on the financial statements of Southern Company, Georgia Power, Gulf Power, or Southern Company Gas.
Other Matters
Market-Based Rate AuthorityMississippi Power
The traditional electric operating companiesIn conjunction with Southern Company's sale of Gulf Power, Mississippi Power and SouthernGulf Power have authority fromcommitted to seek a restructuring of their 50% undivided ownership interests in Plant Daniel such that each of them would, after the FERCrestructuring, own 100% of a generating unit. On January 15, 2019, Gulf Power provided notice to sell electricity at market-based rates. Since 2008,Mississippi Power that authority,Gulf Power will retire its share of the generating capacity of Plant Daniel on January 15, 2024. Mississippi Power has the option to purchase Gulf Power's ownership interest for certain balancing authority areas, has been conditioned$1 on compliance withJanuary 15, 2024, provided that Mississippi Power exercises the requirements of an energy auction, which the FERC foundoption no later than 120 days prior to be tailored mitigation that addresses potential market power concerns. In accordance with FERC regulations governing such authority, the traditional electric operating companies and Southerndate. Mississippi Power filed a triennial market power analysis in 2014, which included continued reliance on the energy auction as tailored mitigation. In 2015, the FERC issued an order finding that the traditional electric operating companies' and Southern Power's existing tailored mitigation may not effectively mitigateis assessing the potential to exert market power in certain areas served by the traditional electric operating companiesoperational and in some adjacent areas. The FERC directed the traditional electric operating companies and Southern Power to show why market-based rate authority should not be revoked in these areas or to provide a mitigation plan to further address market power concerns. The traditional electric operating companies and Southern Power filed a request for rehearing and filed their response with the FERC in 2015.
In 2016, the traditional electric operating companies and Southern Power filed an amendment to their market-based rate tariff that proposed certain changes to the energy auction, as well as several non-tariff changes. In February 2017, the FERC issued an order accepting all such changes subject to an additional conditioneconomic effects of cost-based price caps for certain sales outside of the energy auction, finding that all of these changes would provide adequate
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
alternative mitigation for the traditional electric operating companies' and SouthernGulf Power's potential to exert market power in certain areas served by the traditional electric operating companies and in some adjacent areas. In May 2017, the FERC accepted the traditional electric operating companies' and Southern Power's compliance filing accepting the terms of the order. While the FERC's February 2017 order references the market power proceeding discussed above, it remains a separate, ongoing matter.
In October 2017, the FERC issued an order in response to the traditional electric operating companies' and Southern Power's June 29, 2017 triennial updated market power analysis. The FERC directed the traditional electric operating companies and Southern Power to show cause within 60 days why market-based rate authority should not be revoked in certain areas adjacent to the area presently under mitigation in accordance with the February 2017 order or to provide a mitigation plan to further address market power concerns. In November 2017, the traditional electric operating companies and Southern Power responded to the FERC and proposed to resolve matters by applying the alternative mitigation authorized by the February 2017 order to the adjacent areas made the subject of the October 2017 order.
notice. The ultimate outcome of these matters cannot be determined at this time.
Cooperative Energy Power Supply Agreement
See Note 3remains subject to the financial statementscompletion of Mississippi Power under "FERC Matters – Cooperative Energy Power Supply Agreement" in Item 8 of the Form 10-K for additional information regarding Cooperative Energy's network integration transmission service agreement (NITSA) with SCS.
On March 23, 2018,Power's evaluations and applicable regulatory approvals, including by the FERC acceptedand the amendment to the NITSA between Cooperative EnergyMississippi PSC, and SCS, effective April 1, 2018.
Regulatory Matters
Alabama Power
See Note 3 to the financial statements of Southern Company and Alabama Power under "Regulatory Matters – Alabama Power" and "Retail Regulatory Matters," respectively, in Item 8 of the Form 10-K for additional information regarding Alabama Power's recovery of retail costs through various regulatory clauses and accounting orders. The balance of each regulatory clause recovery on the balance sheet follows:
|
| | | | | | | |
| Regulatory Clause | Balance Sheet Line Item | March 31,
2018 | December 31,
2017 |
| | | (in millions) |
| Rate CNP Compliance | Deferred under recovered regulatory clause revenues | $ | 15 |
| $ | 17 |
|
| Rate CNP PPA | Deferred under recovered regulatory clause revenues | 8 |
| 12 |
|
| Retail Energy Cost Recovery | Deferred under recovered regulatory clause revenues | 78 |
| 25 |
|
| Natural Disaster Reserve | Other regulatory liabilities, deferred | 38 |
| 38 |
|
On May 1, 2018, the Alabama PSC approved modifications to Rate RSE and other commitments designed to position Alabama Power to address the growing pressure on its credit quality resulting from the Tax Reform Legislation, without increasing retail rates under Rate RSE in the near term. Alabama Power plans to reduce growth in total debt by increasing equity, with corresponding reductions in debt issuances, thereby de-leveraging its capital structure. Alabama Power's goal is to achieve an equity ratio of approximately 55% by the end of 2025.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Rate RSE
The approved modifications to Rate RSE are effective June 2018 and applicable for January 2019 billings and thereafter. The modifications include reducing the top of the allowed weighted common equity return (WCER) range from 6.21% to 6.15% and modifications to the refund mechanism applicable to prior year actual results. The modifications to the refund mechanism allow Alabama Power to retain a portion of the revenue that causes the actual WCER for a given year to exceed the allowed range.
Generally, if Alabama Power's actual WCER range is between 6.15% and 7.65%, customers will receive 25% of the amount between 6.15% and 6.65%, 40% of the amount between 6.65% and 7.15%, and 75% of the amount between 7.15% and 7.65%. Customers will receive all amounts in excess of an actual WCER of 7.65%.
In conjunction with these modifications to Rate RSE, Alabama Power committed to a moratorium on any upward adjustments under Rate RSE for 2019 and 2020. Additionally, Alabama Power will return $50 million to customers through bill credits in 2019. Alabama Power typically has three to five business days to indicate its acceptance of the Alabama PSC's actions following issuance of the related Alabama PSC order. The ultimate outcome of this matter cannot be determined at this time.
In accordance with an established retail tariff that provides for an interim adjustment to customer billings to recognize the impact of a change in the statutory income tax rate, Alabama Power will also return approximately $257 million to retail customers through bill credits in the second half of 2018 as a result of the change in the federal income tax rate under the Tax Reform Legislation.
Rate ECR
On May 1, 2018, the Alabama PSC approved an increase to Rate ECR from 2.015 cents per KWH to 2.353 cents per KWH effective July 2018 which is expected to result in additional collections of approximately $100 million through December 31, 2018. The approved increase in the Rate ECR factor will have no significant effect on Alabama Power's net income, but will increase operating cash flows related to fuel cost recovery in 2018. The rate will return to 5.910 cents per KWH in 2019, absent a further order from the Alabama PSC. Alabama Power typically has three to five business days to indicate its acceptance of the Alabama PSC's actions following issuance of the related Alabama PSC order. The ultimate outcome of this matter cannot be determined at this time.
Accounting Order
On May 1, 2018, the Alabama PSC approved an accounting order that authorizes Alabama Power to defer the benefits of federal excess deferred income taxes associated with the Tax Reform Legislation for the year ending December 31, 2018 as a regulatory liability. Up to $30 million of such deferrals may be used to offset under-recovered amounts under Rate ECR, with any remaining amounts to be used for the benefit of customers as determined by the Alabama PSC. Alabama Power expects the benefits deferred to total approximately $30 million to $50 million. The ultimate outcome of this matter cannot be determined at this time. See Note 5 to(K) under "Southern Company" for information regarding the financial statementssale of Southern Company and Alabama Power under "Federal Tax Reform Legislation" and of Alabama Power under "Current and Deferred Income Taxes" in Item 8 of the Form 10-K for additional information.Gulf Power.
Georgia Power(D) REVENUE FROM CONTRACTS WITH CUSTOMERS
Georgia Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Georgia PSC. Georgia Power currently recovers its costs from the regulated retail business through the 2013 ARP, which includes traditional base tariff rates, Demand-Side Management tariffs, Environmental Compliance Cost Recovery tariffs, and Municipal Franchise Fee tariffs. In addition, financing costs related to certified construction costs of Plant Vogtle Units 3 and 4 are being collected through the NCCR tariff and fuel costs are collected through a separate fuel cost recovery tariff. See "Nuclear Construction" herein and Note 3 to the financial statements of Southern Company under "Nuclear Construction" and Georgia Power under "Retail Regulatory Matters – Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding the NCCR tariff. Also see "Fuel Cost Recovery" herein and Note 3 to the financial statements of Southern Company
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
under "Regulatory Matters – Georgia Power – Fuel Cost Recovery" and Georgia Power under "Retail Regulatory Matters – Fuel Cost Recovery" in Item 8 of the Form 10-K for additional information regarding fuel cost recovery.
Rate Plans
See Note 3 to the financial statements of Southern Company and Georgia Power under "Regulatory Matters – Georgia Power – Rate Plans" and "Retail Regulatory Matters – Rate Plans," respectively, in Item 8 of the Form 10-K for additional information regarding Georgia Power's 2013 ARP and the Georgia PSC's 2018 order related to the Tax Reform Legislation.
On April 3, 2018, the Georgia PSC approved a settlement agreement between Georgia Power and the staff of the Georgia PSC regarding the retail rate impact of the Tax Reform Legislation (Georgia Power Tax Reform Settlement Agreement). Pursuant to the Georgia Power Tax Reform Settlement Agreement, to reflect the federal income tax rate reduction impact of the Tax Reform Legislation, Georgia Power will refund to customers a total of $330 million through bill credits of $131 million in October 2018, $96 million in June 2019, and $103 million in February 2020. In addition, Georgia Power is deferring as a regulatory liability (i) the revenue equivalent of the tax expense reduction resulting from legislation lowering the Georgia state income tax rate from 6.00% to 5.75% in 2019 and (ii) the entire benefit of approximately $700 million in federal and state excess accumulated deferred income taxes. The amortization of these regulatory liabilities is expected to be addressed in Georgia Power's next base rate case, which is scheduled to be filed by July 1, 2019. If there is not a base rate case in 2019, customers will receive $185 million in annual bill credits beginning in 2020, with any additional federal and state income tax savings deferred as a regulatory liability, until Georgia Power's next base rate case.
To address the negative cash flow and credit metric impacts of the Tax Reform Legislation, the Georgia PSC also approved an increase in Georgia Power's retail equity ratio to the lower of (i) Georgia Power's actual common equity weight in its capital structure or (ii) 55%, until Georgia Power's next base rate case. Benefits from reduced federal income tax rates in excess of the amounts refunded to customers will be retained by Georgia Power to cover the carrying costs of the incremental equity in 2018 and 2019.
Fuel Cost Recovery
As of March 31, 2018 and December 31, 2017, Georgia Power's under recovered fuel balance totaled $156 million and $165 million, respectively, and is included in current assets on Southern Company's and Georgia Power's condensed balance sheets. The Georgia PSC will review Georgia Power's cumulative over or under recovered fuel balance no later than September 1, 2018 and evaluate the need to file a fuel case. Georgia Power continues to be allowed to adjust its fuel cost recovery rates under an interim fuel rider prior to the next fuel case if the under or over recovered fuel balance exceeds $200 million.
Fuel cost recovery revenues are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes in the billing factor will not have a significant effect on Southern Company's or Georgia Power's revenues or net income, but will affect cash flow.
Gulf Power
See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters" in Item 8 of the Form 10-K for additional information regarding Gulf Power's rates and charges for service to retail customers.
Retail Base Rate Case
See Note 3 to the financial statements of Southern Company and Gulf Power under "Regulatory Matters – Gulf Power – Retail Base Rate Cases" and "Retail Regulatory Matters – Retail Base Rate Cases," respectively, in Item 8 of the Form 10-K for additional information.
As a continuation of a settlement agreement approved by the Florida PSC in April 2017 (2017 Gulf Power Rate Case Settlement Agreement), on March 26, 2018, the Florida PSC approved a stipulation and settlement agreement
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
among Gulf Power and three intervenors addressing the retail revenue requirement effects of the Tax Reform Legislation (Gulf Power Tax Reform Settlement Agreement).
The Gulf Power Tax Reform Settlement Agreement results in annual reductions to Gulf Power's revenues of $18.2 million from base rates and $15.6 million from environmental cost recovery rates, implemented April 1, 2018, and also provides for a one-time refund of $69.4 million for the retail portion of unprotected (not subject to normalization) deferred tax liabilities through Gulf Power's fuel cost recovery rate over the remainder of 2018. As a result of the Gulf Power Tax Reform Settlement Agreement, the Florida PSC also approved an increase in Gulf Power's maximum equity ratio from 52.5% to 53.5% for all retail regulatory purposes.
As part of the Gulf Power Tax Reform Settlement Agreement, a limited scope proceeding to address protected deferred tax liabilities consistent with IRS normalization principles was initiated on April 30, 2018. Pending resolution of this proceeding, Gulf Power is deferring the related amounts for 2018 as a regulatory liability. Unless otherwise agreed to by the parties to the Gulf Power Tax Reform Settlement Agreement, amounts recorded in this regulatory liability will be refunded to retail customers in 2019 through Gulf Power's fuel cost recovery rates. The ultimate outcome of this matter cannot be determined at this time.
Cost Recovery Clauses
See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters – Cost Recovery Clauses" in Item 8 of the Form 10-K for additional information regarding Gulf Power's recovery of retail costs through various regulatory clauses and accounting orders, as approved by the Florida PSC. Regulatory clause recovery balances included in the balance sheets are as follows:
|
| | | | | | | |
| Regulatory Clause | Balance Sheet Line Item | March 31,
2018 | December 31,
2017 |
| | | (in millions) |
| Fuel Cost Recovery | Under recovered regulatory clause revenues | $ | 4 |
| $ | 22 |
|
| Purchased Power Capacity Recovery | Under recovered regulatory clause revenues | 4 |
| 2 |
|
Environmental Cost Recovery(*) | Under recovered regulatory clause revenues | 2 |
| 2 |
|
| |
(*) | At March 31, 2018 and December 31, 2017, the under recovered balance included in the balance sheets represents the current portion of the regulatory assets associated with projected environmental expenditures of approximately $12 million and $13 million, respectively, partially offset by the over recovered environmental cost recovery balance of approximately $10 million and $11 million, respectively. |
Mississippi Power
See Note 3 to the financial statements of Mississippi Power under "Retail Regulatory Matters" in Item 8 of the Form 10-K for additional information.
On April 10, 2018, the Mississippi PSC stated its intent to begin an operations review process for investor-owned utilities in Mississippi and instructed its legal staff and the Mississippi Public Utilities Staff to prepare an order and request for proposals for a review of Mississippi Power. Mississippi Power expects that the review will include its cost recovery framework and an analysis of potential participation in a regional transmission organization. The ultimate outcome of this matter cannot be determined at this time.
Performance Evaluation Plan
In 2014, 2015, 2016, and 2017, Mississippi Power submitted its annual PEP lookback filings for the prior years, which for 2013 and 2014 each indicated no surcharge or refund and for each of 2015 and 2016 indicated a $5 million surcharge. Additionally, in July 2016, in November 2016, and on November 15, 2017, Mississippi Power submitted its annual projected PEP filings for 2016, 2017, and 2018, respectively, which for 2016 and 2017
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
indicated no change in rates and for 2018 indicated a rate increase of 4%, or $38 million in annual revenues. The Mississippi PSC suspended each of these filings to allow more time for review.
On February 7, 2018, Mississippi Power revised its annual projected PEP filing for 2018 to reflect the impacts of the Tax Reform Legislation. The revised filing requests an increase of $26 million in annual revenues, based on a performance adjusted ROE of 9.33% and an increased equity ratio of 55%. The Mississippi PSC is expected to rule on this request in mid-2018.
On March 22, 2018, Mississippi Power submitted its annual PEP lookback filing for 2017, which reflected no surcharge or refund.
The ultimate outcome of these matters cannot be determined at this time.
Environmental Compliance Overview Plan
On February 14, 2018, Mississippi Power submitted its ECO Plan filing for 2018, including the effects of the Tax Reform Legislation, which requested the maximum 2% annual increase in revenues, or approximately $17 million, primarily related to the carryforward from the prior year. Approximately $13 million of related revenue requirements in excess of the 2% maximum, along with related carrying costs, remains deferred for inclusion in the 2019 filing. The Mississippi PSC is expected to rule on this request in mid-2018. The ultimate outcome of this matter cannot be determined at this time.
Fuel Cost Recovery
At March 31, 2018, the amount of over-recovered retail fuel costs included in other regulatory liabilities, current on the condensed balance sheet was approximately $3 million compared to an approximately $6 million under-recovered balance in other accounts and notes receivable at December 31, 2017.
Ad Valorem Tax Adjustment
On March 23, 2018, Mississippi Power submitted its annual ad valorem tax adjustment factor filing for 2018, which included an annual rate increase of 0.8%, or $7 million in annual retail revenues, primarily due to increased assessments. The ultimate outcome of this matter cannot be determined at this time.
Southern Company Gas
See Note 3 to the financial statements of Southern Company and Southern Company Gas under "Regulatory Matters – Southern Company Gas" and "Regulatory Matters," respectively, in Item 8 of the Form 10-K for additional information regarding Southern Company Gas' regulatory matters.
Riders
On April 19, 2018, the Illinois Commission approved Nicor Gas' variable income tax adjustment rider. This rider provides for refund or recovery of changes in income tax expense that result from income tax rates that differ from those used in Nicor Gas' last rate case. Customer refunds related to the 2018 impacts are expected to begin in July 2018.
Natural Gas Cost Recovery
Southern Company Gas has established natural gas cost recovery rates approved by the relevant state regulatory agencies in the states in which it serves. Natural gas cost recovery revenues are adjusted for differences in actual recoverable natural gas costs and amounts billed in current regulated rates. Changes in the billing factor will not have a significant effect on Southern Company's or Southern Company Gas' revenues or net income, but will affect cash flows.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Base Rate Cases
Settled Base Rate Case
In October 2017, Florida City Gas filed a general base rate case with the Florida PSC requesting an annual revenue increase of $19 million, which included an interim rate increase of $5 million annually that was approved and became effective January 12, 2018, subject to refund. On March 26, 2018, the Florida PSC approved a settlement that, after including the impact of the Tax Reform Legislation, provides for an $11.5 million increase in annual base rate revenues, effective June 1, 2018, based on a ROE of 10.19%. Under the terms of the settlement, Florida City Gas agreed not to file a new base rate case with an effective date prior to June 1, 2022 and will receive full recovery of the costs related to its LNG facility to be constructed through additional increases in annual base rate revenues of $2.5 million on June 1, 2019 or the in-service date, whichever is later, and $1.3 million on December 1, 2019. If the facility is placed in service after December 1, 2019, the entire additional $3.8 million increase will take effect upon the in-service date of the LNG facility.
Pending Base Rate Cases
On February 15, 2018, Chattanooga Gas filed a general base rate case with the Tennessee Public Utility Commission (PUC) requesting a $7 million increase in annual base rate revenues. The requested increase, which, in accordance with a Tennessee PUC order, incorporated the effects of the Tax Reform Legislation, was based on a projected test year ending June 30, 2019 and a ROE of 11.25%. The Tennessee PUC is expected to rule on the requested increase in the third quarter 2018.
In December 2017, Atlanta Gas Light filed its 2018 annual rate adjustment with the Georgia PSC, which, if approved, would have increased annual base rate revenues by $22 million, effective June 1, 2018. On February 23, 2018, Atlanta Gas Light revised its filing to reflect the impacts of the Tax Reform Legislation. The revised request replaced the $22 million rate increase with a $16 million rate reduction for customers in 2018. The revised request maintains the previously authorized earnings band based on a return on equity between 10.55% and 10.95% and proposes to increase the equity ratio by 3% to an equity ratio of 54% to address the negative cash flow and credit metric impacts of the Tax Reform Legislation. Atlanta Gas Light also notified the Georgia PSC that it intends to seek a further equity ratio increase of 2% to an equity ratio of 56% in its 2019 filing. The Georgia PSC is expected to rule on the revised request in the second quarter 2018.
In accordance with an Illinois Commission order and pursuant to its rehearing request, on April 13, 2018, Nicor Gas filed for revised base rates with the Illinois Commission, which would result in a decrease of approximately $44 million in annual base rate revenues effective in the second quarter 2018 to incorporate the reduction in the federal income tax rate as a result of the Tax Reform Legislation. Nicor Gas' previously-authorized capital structure and ROE of 9.8% were not addressed in the rehearing and remain unchanged. The Illinois Commission is expected to rule on the request on May 2, 2018.
The ultimate outcome of these matters cannot be determined at this time.
Other
The New Jersey BPU, Maryland PSC, and Virginia Commission each issued an order effective January 1, 2018 that requires utilities in their respective states to defer as a regulatory liability the impact of the Tax Reform Legislation, including the reduction in the corporate income tax rate to 21% and the impact of excess deferred income taxes. On March 26, 2018, the New Jersey BPU approved an $11 million reduction in Elizabethtown Gas' annual base rate revenues effective April 1, 2018 on an interim basis, subject to refund, pending final approval. On March 28, 2018, the Maryland PSC approved a $0.1 million reduction in Elkton Gas' annual base rate revenues effective April 1, 2018. Credits will be issued to customers in New Jersey and Maryland later in 2018 for the impact of the Tax Reform Legislation on the January 2018 through March 2018 billing periods. On April 25, 2018, the Virginia Commission issued an order indicating that any proposal beyond a proposed base rate reduction to reflect the cost savings from the Tax Reform Legislation must be made through a general base rate case. Virginia Natural Gas expects to finalize its strategy to address the impacts of the Tax Reform Legislation on or before July 1, 2018.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
The ultimate outcome of these matters cannot be determined at this time.
Regulatory Infrastructure Programs
Southern Company Gas is engaged in various infrastructure programs that update or expand its gas distribution systems to improve reliability and ensure the safety of its utility infrastructure, and recovers in rates its investment and a return associated with these infrastructure programs. See Note 3 to the financial statements of Southern Company and Southern Company Gas under "Regulatory Matters – Southern Company Gas – Regulatory Infrastructure Programs" and "Regulatory Matters – Regulatory Infrastructure Programs," respectively, in Item 8 of the Form 10-K for additional information.
Nuclear Construction
See Note 3 to the financial statements of Southern Company and Georgia Power under "Nuclear Construction" and "Retail Regulatory Matters – Nuclear Construction," respectively, in Item 8 of the Form 10-K for additional information regarding Georgia Power's construction of Plant Vogtle Units 3 and 4, VCM reports, and the NCCR tariff.
Project Status
In 2009, the Georgia PSC certified construction of Plant Vogtle Units 3 and 4. In 2012, the NRC issued the related combined construction and operating licenses, which allowed full construction of the two AP1000 nuclear units (with electric generating capacity of approximately 1,100 MWs each) and related facilities to begin. Until March 2017, construction on Plant Vogtle Units 3 and 4 continued under the Vogtle 3 and 4 Agreement, which was a substantially fixed price agreement. In March 2017, the EPC Contractor filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code.
In connection with the EPC Contractor's bankruptcy filing, Georgia Power, acting for itself and as agent for the Vogtle Owners, entered into the Interim Assessment Agreement with the EPC Contractor to allow construction to continue. The Interim Assessment Agreement expired in July 2017 when the Vogtle Services Agreement became effective. In August 2017, following completion of comprehensive cost to complete and cancellation cost assessments, Georgia Power filed its seventeenth VCM report with the Georgia PSC, which included a recommendation to continue construction of Plant Vogtle Units 3 and 4, with Southern Nuclear serving as project manager and Bechtel serving as the primary construction contractor. In December 2017, the Georgia PSC approved Georgia Power's recommendation to continue construction.
Georgia Power expects Plant Vogtle Units 3 and 4 to be placed in service by November 2021 and November 2022, respectively. Georgia Power's capital cost forecast for its 45.7% proportionate share of Plant Vogtle Units 3 and 4 is $8.8 billion ($7.3 billion after reflecting $1.7 billion received from Toshiba in 2017 under the Guarantee Settlement Agreement and $188 million in Customer Refunds recognized as a regulatory liability in 2017). Georgia Power's CWIP balance for Plant Vogtle Units 3 and 4 was $3.6 billion at March 31, 2018, which is net of the Guarantee Settlement Agreement payments less the Customer Refunds. Georgia Power estimates that its financing costs for construction of Plant Vogtle Units 3 and 4 will total approximately $3.1 billion, of which $1.6 billion had been incurred through March 31, 2018.
Vogtle 3 and 4 Contracts
Effective in July 2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners, and the EPC Contractor entered into the Vogtle Services Agreement, whereby Westinghouse will provide facility design and engineering services, procurement and technical support, and staff augmentation on a time and materials cost basis. The Vogtle Services Agreement will continue until the start-up and testing of Plant Vogtle Units 3 and 4 are complete and electricity is generated and sold from both units. The Vogtle Services Agreement is terminable by the Vogtle Owners upon 30 days' written notice.
In October 2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners, entered into a construction completion agreement with Bechtel, whereby Bechtel will serve as the primary contractor for the
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
remaining construction activities for Plant Vogtle Units 3 and 4 (Bechtel Agreement). The Bechtel Agreement is a cost reimbursable plus fee arrangement, whereby Bechtel is reimbursed for actual costs plus a base fee and an at-risk fee, which is subject to adjustment based on Bechtel's performance against cost and schedule targets. Each Vogtle Owner is severally (not jointly) liable for its proportionate share, based on its ownership interest, of all amounts owed to Bechtel under the Bechtel Agreement. The Vogtle Owners may terminate the Bechtel Agreement at any time for their convenience, provided that the Vogtle Owners will be required to pay amounts related to work performed prior to the termination (including the applicable portion of the base fee), certain termination-related costs, and, at certain stages of the work, the applicable portion of the at-risk fee. Bechtel may terminate the Bechtel Agreement under certain circumstances, including certain Vogtle Owner suspensions of work, certain breaches of the Bechtel Agreement by the Vogtle Owners, Vogtle Owner insolvency, and certain other events. Pursuant to the Loan Guarantee Agreement between Georgia Power and the DOE, Georgia Power is required to obtain the DOE's approval of the Bechtel Agreement prior to obtaining any further advances under the Loan Guarantee Agreement.
In November 2017, the Vogtle Owners entered into an amendment to their joint ownership agreements for Plant Vogtle Units 3 and 4 (as amended, Vogtle Joint Ownership Agreements) to provide for, among other conditions, additional Vogtle Owner approval requirements. Pursuant to the Vogtle Joint Ownership Agreements, the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 must vote to continue construction if certain adverse events occur, including (i) the bankruptcy of Toshiba; (ii) termination or rejection in bankruptcy of certain agreements, including the Vogtle Services Agreement or the Bechtel Agreement; (iii) the Georgia PSC or Georgia Power determines that any of Georgia Power's costs relating to the construction of Plant Vogtle Units 3 and 4 will not be recovered in retail rates because such costs are deemed unreasonable or imprudent; or (iv) an increase in the construction budget contained in the seventeenth VCM report of more than $1 billion or extension of the project schedule contained in the seventeenth VCM report of more than one year. In addition, pursuant to the Vogtle Joint Ownership Agreements, the required approval of holders of ownership interests in Plant Vogtle Units 3 and 4 is at least (i) 90% for a change of the primary construction contractor and (ii) 67% for material amendments to the Vogtle Services Agreement or agreements with Southern Nuclear or the primary construction contractor, including the Bechtel Agreement. The Vogtle Joint Ownership Agreements also confirm that the Vogtle Owners' sole recourse against Georgia Power or Southern Nuclear for any action or inaction in connection with their performance as agent for the Vogtle Owners is limited to removal of Georgia Power and/or Southern Nuclear as agent, except in cases of willful misconduct.
Regulatory Matters
In 2009, the Georgia PSC voted to certify construction of Plant Vogtle Units 3 and 4 with a certified capital cost of $4.418 billion. In addition, in 2009 the Georgia PSC approved inclusion of the Plant Vogtle Units 3 and 4 related CWIP accounts in rate base, and the State of Georgia enacted the Georgia Nuclear Energy Financing Act, which allows Georgia Power to recover financing costs for Plant Vogtle Units 3 and 4. Financing costs are recovered on all applicable certified costs through annual adjustments to the NCCR tariff up to the certified capital cost of $4.418 billion. As of March 31, 2018, Georgia Power had recovered approximately $1.6 billion of financing costs. On March 20, 2018, the Georgia PSC approved a decrease to the NCCR tariff of approximately $50 million, effective April 1, 2018.
Georgia Power is required to file semi-annual VCM reports with the Georgia PSC by February 28 and August 31 each year. In 2013, in connection with the eighth VCM report, the Georgia PSC approved a stipulation between Georgia Power and the staff of the Georgia PSC to waive the requirement to amend the Plant Vogtle Units 3 and 4 certificate in accordance with the 2009 certification order until the completion of Plant Vogtle Unit 3, or earlier if deemed appropriate by the Georgia PSC and Georgia Power.
In 2016, the Georgia PSC voted to approve a settlement agreement (Vogtle Cost Settlement Agreement) resolving certain prudency matters in connection with the fifteenth VCM report. In December 2017, the Georgia PSC voted to approve (and issued its related order on January 11, 2018) certain recommendations made by Georgia Power in the seventeenth VCM report and modifying the Vogtle Cost Settlement Agreement. The Vogtle Cost Settlement Agreement, as modified by the January 11, 2018 order, resolved the following regulatory matters related to Plant
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Vogtle Units 3 and 4: (i) none of the $3.3 billion of costs incurred through December 31, 2015 and reflected in the fourteenth VCM report should be disallowed from rate base on the basis of imprudence; (ii) the Contractor Settlement Agreement was reasonable and prudent and none of the amounts paid pursuant to the Contractor Settlement Agreement should be disallowed from rate base on the basis of imprudence; (iii) (a) capital costs incurred up to $5.68 billion would be presumed to be reasonable and prudent with the burden of proof on any party challenging such costs, (b) Georgia Power would have the burden to show that any capital costs above $5.68 billion were prudent, and (c) a revised capital cost forecast of $7.3 billion (after reflecting the impact of payments received under the Guarantee Settlement Agreement and Customer Refunds) was found reasonable; (iv) construction of Plant Vogtle Units 3 and 4 should be completed, with Southern Nuclear serving as project manager and Bechtel as primary contractor; (v) approved and deemed reasonable Georgia Power's revised schedule placing Plant Vogtle Units 3 and 4 in service in November 2021 and November 2022, respectively; (vi) confirmed that the revised cost forecast does not represent a cost cap and that prudence decisions on cost recovery will be made at a later date, consistent with applicable Georgia law; (vii) reduced the ROE used to calculate the NCCR tariff (a) from 10.95% (the ROE rate setting point authorized by the Georgia PSC in the 2013 ARP) to 10.00% effective January 1, 2016, (b) from 10.00% to 8.30%, effective January 1, 2020, and (c) from 8.30% to 5.30%, effective January 1, 2021 (provided that the ROE in no case will be less than Georgia Power's average cost of long-term debt); (viii) reduced the ROE used for AFUDC equity for Plant Vogtle Units 3 and 4 from 10.00% to Georgia Power's average cost of long-term debt, effective January 1, 2018; and (ix) agreed that upon Unit 3 reaching commercial operation, retail base rates would be adjusted to include carrying costs on those capital costs deemed prudent in the Vogtle Cost Settlement Agreement. The January 11, 2018 order also stated that if Plant Vogtle Units 3 and 4 are not commercially operational by June 1, 2021 and June 1, 2022, respectively, the ROE used to calculate the NCCR tariff will be further reduced by 10 basis points each month (but not lower than Georgia Power's average cost of long-term debt) until the respective unit is commercially operational. The ROE reductions negatively impacted earnings by approximately $25 million in 2017 and are estimated to have negative earnings impacts of approximately $100 million in 2018 and an aggregate of $585 million from 2019 to 2022. In its January 11, 2018 order, the Georgia PSC stated if other certain conditions and assumptions upon which Georgia Power's seventeenth VCM report are based do not materialize, both Georgia Power and the Georgia PSC reserve the right to reconsider the decision to continue construction.
On February 12, 2018, Georgia Interfaith Power & Light, Inc. and Partnership for Southern Equity, Inc. filed a petition appealing the Georgia PSC's January 11, 2018 order with the Fulton County Superior Court. On March 8, 2018, Georgia Watch filed a similar appeal to the Fulton County Superior Court for judicial review of the Georgia PSC's final decision and denial of Georgia Watch's motion for reconsideration. Georgia Power believes the two appeals have no merit; however, an adverse outcome in either appeal could have a material impact on Southern Company's and Georgia Power's results of operations, financial condition, and liquidity.
The IRS has allocated PTCs to each of Plant Vogtle Units 3 and 4. The nominal value of Georgia Power's portion of the PTCs is approximately $500 million per unit.
The Georgia PSC has approved seventeen VCM reports covering the periods through June 30, 2017, including total construction capital costs incurred through that date of $4.4 billion. Georgia Power filed its eighteenth VCM report on February 28, 2018 requesting approval of $448 million of construction capital costs (excluding the $1.7 billion received from Toshiba under the Guarantee Settlement Agreement and the $188 million in Customer Refunds recognized as a regulatory liability) incurred from July 1, 2017 through December 31, 2017.
The ultimate outcome of these matters cannot be determined at this time.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Cost and Schedule
Georgia Power's approximate proportionate share of the remaining estimated capital cost to complete Plant Vogtle Units 3 and 4 with in-service dates of November 2021 and November 2022, respectively, is as follows:
|
| | | |
| | (in billions) |
| Project capital cost forecast | $ | 7.3 |
|
| Net investment as of March 31, 2018 | (3.7 | ) |
| Remaining estimate to complete | $ | 3.6 |
|
Note: Excludes financing costs capitalized through AFUDC and is net of $1.7 billion received from Toshiba in 2017 under the Guarantee Settlement Agreement and $188 million in Customer Refunds recognized as a regulatory liability in 2017.
Georgia Power estimates that its financing costs for construction of Plant Vogtle Units 3 and 4 will total approximately $3.1 billion, of which $1.6 billion had been incurred through March 31, 2018.
Subsequent to the EPC Contractor bankruptcy filing, a number of subcontractors to the EPC Contractor alleged non-payment by the EPC Contractor for amounts owed for work performed on Plant Vogtle Units 3 and 4. Georgia Power, acting for itself and as agent for the Vogtle Owners, has taken actions to remove liens filed by these subcontractors through the posting of surety bonds. Related to such liens, certain subcontractors have filed, and additional subcontractors may file, lawsuits against the EPC Contractor and the Vogtle Owners to preserve their payment rights with respect to such claims. All amounts associated with the removal of subcontractor liens and other EPC Contractor pre-petition accounts payable have been paid or accrued as of March 31, 2018.
As construction continues, challenges with management of contractors, subcontractors, and vendors, labor productivity and availability, fabrication, delivery, assembly, and installation of plant systems, structures, and components (some of which are based on new technology and have not yet operated in the global nuclear industry at this scale), or other issues could arise and change the projected schedule and estimated cost.
There have been technical and procedural challenges to the construction and licensing of Plant Vogtle Units 3 and 4 at the federal and state level and additional challenges may arise. Processes are in place that are designed to assure compliance with the requirements specified in the Westinghouse Design Control Document and the combined construction and operating licenses, including inspections by Southern Nuclear and the NRC that occur throughout construction. As a result of such compliance processes, certain license amendment requests have been filed and approved or are pending before the NRC. Various design and other licensing-based compliance matters, including the timely resolution of Inspections, Tests, Analyses, and Acceptance Criteria and the related approvals by the NRC, may arise, which may result in additional license amendments or require other resolution. If any license amendment requests or other licensing-based compliance issues are not resolved in a timely manner, there may be delays in the project schedule that could result in increased costs.
The ultimate outcome of these matters cannot be determined at this time.
DOE Financing
As of March 31, 2018, Georgia Power had borrowed $2.6 billion related to Plant Vogtle Units 3 and 4 costs through the Loan Guarantee Agreement and a multi-advance credit facility among Georgia Power, the DOE, and the FFB, which provides for borrowings of up to $3.46 billion, subject to the satisfaction of certain conditions. In September 2017, the DOE issued a conditional commitment to Georgia Power for up to approximately $1.67 billion in additional guaranteed loans under the Loan Guarantee Agreement. This conditional commitment expires on June 30, 2018, subject to any further extension approved by the DOE. Final approval and issuance of these additional loan guarantees by the DOE cannot be assured and are subject to the negotiation of definitive agreements, completion of due diligence by the DOE, receipt of any necessary regulatory approvals, and satisfaction of other conditions. See Note 6 to the financial statements of Southern Company and Georgia Power under "DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K for additional information, including applicable covenants, events of default, mandatory prepayment events, and conditions to borrowing.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
The ultimate outcome of these matters cannot be determined at this time.
Kemper County Energy Facility
For additional information on the Kemper County energy facility, see Note 3 to the financial statements of Southern Company and Mississippi Power under "Kemper County Energy Facility" in Item 8 of the Form 10-K.
As the mining permit holder for the Kemper County energy facility, Liberty Fuels Company, LLC has a legal obligation to perform mine reclamation, and Mississippi Power has a contractual obligation to fund all reclamation activities. Mine reclamation began in the first quarter 2018. See Note 1 to the financial statements of Southern Company and Mississippi Power under "Asset Retirement Obligations and Other Costs of Removal" and of Mississippi Power under "Variable Interest Entities" in Item 8 of the Form 10-K for additional information.
During the first quarter 2018, Mississippi Power recorded charges to income of $44 million ($33 million after tax), primarily resulting from the abandonment and related closure activities for the mine and gasifier-related assets at the Kemper County energy facility. Additional closure costs for the mine and gasifier-related assets, including ash disposal, currently estimated to cost up to $50 million pre-tax (excluding salvage), are expected to be incurred during the remainder of 2018 and 2019. In addition, period costs, including, but not limited to, costs for compliance and safety, ARO accretion, and property taxes for the mine and gasifier-related assets, are estimated at $4 million for the remainder of 2018, $4 million in 2019, and $1 million annually beginning in 2020. The ultimate outcome of this matter cannot be determined at this time.
Other Matters
Investments in Leveraged Leases
See Note 1 to the financial statements of Southern Company under "Leveraged Leases" in Item 8 of the Form 10-K for additional information regarding a Southern Company Holdings Inc. (Southern Holdings) subsidiary's leveraged lease agreements and concerns about the financial and operational performance of one of the lessees and the associated generation assets.
The ability of the lessees to make required payments to the Southern Holdings subsidiary is dependent on the operational performance of the assets. As a result of operational improvements in the first quarter 2018, the June 2018 lease payment is currently expected to be paid in full. However, operational issues and resulting cash liquidity challenges persist and significant concerns continue regarding the lessee's ability to make the remaining semi-annual lease payments, including the lease payment due in December 2018. These operational challenges may also impact the expected residual value of the assets at the end of the lease term in 2047. If any future lease payment is not paid in full, the Southern Holdings subsidiary may be unable to make its corresponding payment to the holders of the underlying non-recourse debt related to the generation assets. Failure to make the required payment to the debtholders would represent an event of default that would give the debtholders the right to foreclose on, and take ownership of, the generation assets from the Southern Holdings subsidiary, in effect terminating the lease and resulting in the write-off of the related lease receivable which had a balance of approximately $86 million as of March 31, 2018. Southern Company has evaluated the recoverability of the lease receivable and the expected residual value of the generation assets at the end of the lease under various scenarios and has concluded that its investment in the leveraged lease is not impaired as of March 31, 2018. Southern Company will continue to monitor the operational performance of the underlying assets and evaluate the ability of the lessee to continue to make the required lease payments. The ultimate outcome of this matter cannot be determined at this time.
Natural Gas Storage
A wholly-owned subsidiary of Southern Company Gas owns and operates a natural gas storage facility consisting of two salt dome caverns in Louisiana. Periodic integrity tests are required in accordance with rules of the Louisiana Department of Natural Resources (DNR). In August 2017, in connection with an ongoing integrity project, updated seismic mapping indicated the proximity of one of the caverns to the edge of the salt dome may be less than the required minimum and could result in Southern Company Gas retiring the cavern early. At March 31, 2018, the
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
facility's property, plant, and equipment had a net book value of $111 million, of which the cavern itself represents approximately 20%. A potential early retirement of this cavern is dependent upon several factors including compliance with an order from the Louisiana DNR detailing the requirements to place the cavern back in service, which includes, among other things, obtaining core samples to determine the composition of the sheath surrounding the edge of the salt dome.
The cavern continues to maintain its pressures and overall structural integrity. Southern Company Gas intends to monitor the cavern and comply with the Louisiana DNR order through 2020 and place the cavern back in service in 2021. These events were considered in connection with Southern Company Gas' 2017 long-lived asset impairment analysis, which determined there was no impairment. Any future changes in results of monitoring activities, rates at which expiring capacity contracts are re-contracted, timing of placing the cavern back in service, or Louisiana DNR requirements could trigger impairment. Further, early retirement of the cavern could trigger impairment of other long-lived assets associated with the natural gas storage facility. The ultimate outcome of this matter cannot be determined at this time, but could have a significant impact on Southern Company's financial statements and a material impact on Southern Company Gas' financial statements.
| |
(C) | REVENUE FROM CONTRACTS WITH CUSTOMERS |
The registrants generate revenues from a variety of sources, some of which are excluded from the scope of ASC 606, Revenue from Contracts with Customers (ASC 606), such as leases, derivatives, and certain cost recovery mechanisms. See Note (A)1 to the financial statements under "Recently Adopted Accounting Standards – Revenue" in Item 8 of the Form 10-K for additional information on the adoption of ASC 606 for revenue from contracts with customers.
The majoritycustomers and Note 1 to the financial statements under "Revenues" and "Other Taxes" in Item 8 of the revenuesForm 10-K for additional information on the revenue policies of the traditional electric operating companiesregistrants. For additional information on revenues accounted for under other accounting guidance, see Notes (J) and (L) for energy-related derivative contracts and lessor revenues, respectively, Note 1 to the financial statements under "Revenues – Southern Company Gas are generated from contracts with retail electric andGas" in Item 8 of the Form 10-K for alternative revenue programs at the natural gas distribution customers. Revenues from this integrated service to deliver electricity or gas whenutilities, and if called upon by the customer is recognized as a single performance obligation satisfied over time and is recognized at a tariff rate as electricity or gas is deliveredNote 2 to the customer during the month. The traditional electric operating companies and Southern Company Gas exclude taxes imposed on the customer and collected on behalf of governmental agencies to be remitted to these agencies from the transaction pricefinancial statements in determining the revenue related to contracts with a customer.
The traditional electric operating companies and Southern Power also have contracts with multiple performance obligations, such as capacity and energy in a wholesale PPA, where the contract's total transaction price is allocated to each performance obligation based on the standalone selling price. The standalone selling price is primarily determined by the price charged to customers for the specific goods or services transferred with the performance obligations. Generally, the registrants recognize revenue as the performance obligations are satisfied over time as electricity or natural gas is delivered to the customer or as generation capacity is available to the customer. At Southern Company Gas, the performance obligations related to wholesale gas services are satisfied, and revenue is recognized, at a point in time when natural gas is delivered to the customer.
The registrants generally have a right to consideration in an amount that corresponds directly with the value to the customerItem 8 of the entity's performance completed to date and may recognize revenue in the amount to which the entity has a right to invoice and has elected to recognize revenueForm 10-K for its salescost recovery mechanisms.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
The following tables disaggregate revenue sources for the three months ended March 31, 2019 and 2018:
| | | | For the Three Months Ended March 31, 2018 | For the Three Months Ended March 31, 2019 | For the Three Months Ended March 31, 2018 |
| | (in millions) | (in millions) |
| Southern Company | | |
| Operating revenues | | |
Retail electric revenues(a) | | |
| Residential | $ | 1,539 |
| $ | 1,288 |
| $ | 1,539 |
|
| Commercial | 1,243 |
| 1,093 |
| 1,243 |
|
| Industrial | 756 |
| 677 |
| 756 |
|
| Other | 30 |
| 26 |
| 30 |
|
| Natural gas distribution revenues | 1,224 |
| 1,163 |
| 1,224 |
|
Alternative revenue programs(b) | (24 | ) | (2 | ) | (24 | ) |
| Total retail electric and gas distribution revenues | $ | 4,768 |
| $ | 4,245 |
| $ | 4,768 |
|
Wholesale energy revenues(c)(d) | 468 |
| 367 |
| 472 |
|
Wholesale capacity revenues(d) | 151 |
| 132 |
| 151 |
|
Other natural gas revenues(e)(f) | 407 |
| 313 |
| 407 |
|
Other revenues(f)(g) | 578 |
| 355 |
| 574 |
|
| Total operating revenues | $ | 6,372 |
| $ | 5,412 |
| $ | 6,372 |
|
| |
| (a) | Retail electric revenues include $8 million and $18 million of revenues accounted for as leases for the three months ended March 31, 2019 and 2018, respectively, and a (net reduction) or net increase of $(103) million and $117 million for the three months ended March 31, 2019 and 2018, respectively, from certain cost recovery mechanisms that are not accounted for as revenue under ASC 606. See Note 3 to the financial statements of Southern Company under "Regulatory Matters" in Item 8 of the Form 10-K for additional information on cost recovery mechanisms. |
| |
| (b) | See Note 1 to the financial statements of Southern Company under "Revenues" in Item 8 of the Form 10-K for additional information on alternative revenue programs at the natural gas distribution utilities. Alternative revenue program revenues are presented net of any previously recognized program amounts billed to customers during the same accounting period. |
| |
| (c) | Wholesale energy revenues include $53 million and $93 million for the three months ended March 31, 2019 and 2018, respectively, of revenues accounted for as derivatives, primarily related to revenues from short-term sales related to physical energy sales from uncovered capacity in the wholesale electricity market. See Note (I) for additional information on energy-related derivative contracts. |
| |
| (d) | Wholesale energy and wholesale capacity revenues include $66 million and $25 million, respectively, for the three months ended March 31, 2019 and $69 million and $30 million, respectively, of PPA contractsfor the three months ended March 31, 2018 related to PPAs accounted for as leases. |
| |
| (e) | Other natural gas revenues related to Southern Company Gas' energy and risk management activities are presented net of the related costs of those activities and include gross third-party revenues of $1.9 billion for each of the three months ended March 31, 2019 and 2018, of which $1.2 billion and $1.1 billion, respectively, relates to contracts that are accounted for as derivatives. See Note (L)(M) under "Southern"Southern Company Gas"Gas" for additional information on the components of wholesale gas services operating revenues. |
| |
| (f) | Other natural gas revenues for the three months ended March 31, 2019 include $9 million of revenues accounted for as leases. |
| |
| (g) | Other revenues include $96 million and $90 million for the three months ended March 31, 2019 and 2018, respectively, of revenues not accounted for under ASC 606.606, including $31 million and $33 million in 2019 and 2018, respectively, accounted for as leases. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
| | | | For the Three Months Ended March 31, 2018 | Alabama Power | Georgia Power | Mississippi Power |
| | Alabama Power | Georgia Power | Gulf Power | Mississippi Power | (in millions) |
| | (in millions) | |
| For the Three Months Ended March 31, 2019 | | |
| Operating revenues | | |
Retail revenues(a)(b) | | |
| Residential | $ | 570 |
| $ | 744 |
| $ | 165 |
| $ | 60 |
| $ | 540 |
| $ | 688 |
| $ | 60 |
|
| Commercial | 371 |
| 717 |
| 92 |
| 62 |
| 354 |
| 674 |
| 65 |
|
| Industrial | 338 |
| 316 |
| 32 |
| 70 |
| 313 |
| 289 |
| 74 |
|
| Other | 6 |
| 21 |
| 1 |
| 2 |
| 6 |
| 17 |
| 4 |
|
| Total retail electric revenues | $ | 1,285 |
| $ | 1,798 |
| $ | 290 |
| $ | 194 |
| $ | 1,213 |
| $ | 1,668 |
| $ | 203 |
|
Wholesale energy revenues(c) | 101 |
| 40 |
| 35 |
| 93 |
| 94 |
| 18 |
| 78 |
|
| Wholesale capacity revenues | 24 |
| 14 |
| 6 |
| 4 |
| 27 |
| 14 |
| 1 |
|
Other revenues(b)(d) | 63 |
| 109 |
| 17 |
| 11 |
| 74 |
| 133 |
| 5 |
|
| Total operating revenues | $ | 1,473 |
| $ | 1,961 |
| $ | 348 |
| $ | 302 |
| $ | 1,408 |
| $ | 1,833 |
| $ | 287 |
|
| | | |
| For the Three Months Ended March 31, 2018 | | |
| Operating revenues | | |
Retail revenues(a)(b) | | |
| Residential | | $ | 570 |
| $ | 744 |
| $ | 60 |
|
| Commercial | | 371 |
| 717 |
| 62 |
|
| Industrial | | 338 |
| 316 |
| 70 |
|
| Other | | 6 |
| 21 |
| 2 |
|
| Total retail electric revenues | | $ | 1,285 |
| $ | 1,798 |
| $ | 194 |
|
Wholesale energy revenues(c) | | 101 |
| 40 |
| 98 |
|
| Wholesale capacity revenues | | 24 |
| 14 |
| 4 |
|
Other revenues(b)(d) | | 63 |
| 109 |
| 6 |
|
| Total operating revenues | | $ | 1,473 |
| $ | 1,961 |
| $ | 302 |
|
| |
| (a) | Retail revenues at Alabama Power, Georgia Power, Gulf Power, and Mississippi Power include a net increase or (net reduction) of $(57) million, $(47) million, and $1 million, respectively, for the three months ended March 31, 2019 and $47 million, $10 million, $(16) million, and $76 million, respectively, for the three months ended March 31, 2018 related to certain cost recovery mechanisms that are not accounted for as revenue under ASC 606. See Note 3 to the financial statements of Alabama Power, Georgia Power, Gulf Power, and Mississippi Power under "Retail Regulatory Matters" in Item 8 of the Form 10-K for additional information on cost recovery mechanisms. |
| |
| (b) | Retail revenues and other revenues at Georgia Power include $8 million and $11 million, respectively, for the three months ended March 31, 2019 and $18 million and $33 million, respectively, for the three months ended March 31, 2018 of revenues accounted for as leases. |
| |
| (c) | Wholesale energy revenues at Alabama Power, Georgia Power, Gulf Power, and Mississippi Power include $5$3 million, $7 million, $1$4 million, and $1 million, respectively, for the three months ended March 31, 2019 and $5 million, $7 million, and $1 million, respectively, for the three months ended March 31, 2018 accounted for as derivatives primarily related to physical energy sales in the forward and spot markets. See Note (I) for additional information on energy-related derivative contracts.wholesale electricity market. |
| |
| (d) | Other revenues at Alabama Power and Georgia Power include $28 million and Gulf Power include$31 million, respectively, for the three months ended March 31, 2019 and $25 million and $26 million, and $2 million, respectively, for the three months ended March 31, 2018 of revenues not accounted for under ASC 606. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
| | | | For the Three Months Ended March 31, 2018 | For the Three Months Ended March 31, 2019 | For the Three
Months Ended March 31, 2018 |
| | (in millions) | (in millions) |
| Southern Power | | |
PPA capacity revenues(a) | $ | 138 |
| $ | 127 |
| $ | 138 |
|
PPA energy revenues(a) | 254 |
| 227 |
| 254 |
|
Non-PPA revenues(b) | 115 |
| 85 |
| 115 |
|
| Other revenues | 2 |
| 4 |
| 2 |
|
| Total operating revenues | $ | 509 |
| $ | 443 |
| $ | 509 |
|
| |
| (a) | PPA capacity revenues and PPA energy revenues include $41 million and $72 million, respectively, for the three months ended March 31, 2019 and $47 million and $76 million, respectively, for the three months ended March 31, 2018 related to PPAs accounted for as leases. See Note 1 to the financial statements of Southern Power under "Revenues" in Item 8 of the Form 10-K for additional information on capacity revenues accounted for as leases. |
| |
| (b) | Non-PPA revenues include $45 million and $79 million for the three months ended March 31, 2019 and 2018, respectively, of revenues from short-term sales related to physical energy sales from uncovered capacity in the wholesale electricity market. See Note 1 to the financial statements of Southern Power under "Revenues" in Item 8 of the Form 10-K and Note (I) for additional information on energy-related derivative contracts. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
| | | | For the Three Months Ended March 31, 2018 | For the Three Months Ended March 31, 2019 | For the Three
Months Ended March 31, 2018 |
| | (in millions) | (in millions) |
| Southern Company Gas | | |
| Operating revenues | | |
| Natural gas distribution revenues | | |
| Residential | $ | 660 |
| $ | 601 |
| $ | 660 |
|
| Commercial | 192 |
| 170 |
| 192 |
|
| Transportation | 277 |
| 256 |
| 277 |
|
| Industrial | 17 |
| 17 |
| 17 |
|
| Other | 78 |
| 119 |
| 78 |
|
Alternative revenue programs(a) | (24 | ) | (2 | ) | (24 | ) |
| Total natural gas distribution revenues | $ | 1,200 |
| $ | 1,161 |
| $ | 1,200 |
|
Gas marketing services(b) | 271 |
| |
Gas pipeline investments(b) | | 8 |
| 8 |
|
Wholesale gas services(c) | 146 |
| 66 |
| 146 |
|
| Gas midstream operations | 22 |
| |
Gas marketing services(d) | | 229 |
| 271 |
|
| Other revenues | | 10 |
| 14 |
|
| Total operating revenues | $ | 1,639 |
| $ | 1,474 |
| $ | 1,639 |
|
| |
| (a) | See Note 1 to the financial statements of Southern Company Gas under "Revenues" in Item 8 of the Form 10-K for additional information on alternative revenue programs at the natural gas distribution utilities. Alternative revenue program revenues are presented net of any previously recognized program amounts billed to customers during the same accounting period. |
| |
| (b) | Gas marketing services includes $3Revenues from gas pipeline investments include $8 million and $1 million of revenuesfor the three months ended March 31, 2019 accounted for as derivatives and leases, respectively. See Note (I) for additional information on energy-related derivative contracts.leases. |
| |
| (c) | Wholesale gas services revenues are presented net of the related costs associated with its energy trading and risk management activities. Operating revenues, as presented, include gross third-party revenues of $1.9 billion for each of the three months ended March 31, 2019 and 2018, of which $1.2 billion and $1.1 billion, respectively, relates to contracts that are accounted for as derivatives. See Note (L)(M) under "Southern"Southern Company Gas"Gas" for additional information on the components of wholesale gas services operating revenues and Note (I) for additional information on energy-related derivative contracts.revenues. |
| |
| (d) | Gas marketing services includes $6 million and $4 million for the three months ended March 31, 2019 and 2018, respectively, of revenues not accounted for under ASC 606. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Contract Balances
The following table reflects the closing balances of receivables, contract assets, and contract liabilities related to revenues from contracts with customers as of March 31, 2019 and December 31, 2018:
| | | | Receivables | | Contract Assets | | Contract Liabilities | Receivables | | Contract Assets | | Contract Liabilities |
| | (in millions) | March 31, 2019 | December 31, 2018 | | March 31, 2019 | December 31, 2018 | | March 31, 2019 | December 31, 2018 |
| Southern Company | $ | 2,607 |
| | $ | 60 |
| | $ | 52 |
| |
| | | (in millions) |
Southern Company(*) | | $ | 2,522 |
| $ | 2,630 |
| | $ | 84 |
| $ | 102 |
| | $ | 62 |
| $ | 32 |
|
| Alabama Power | 507 |
| | — |
| | 11 |
| 514 |
| 520 |
| | 1 |
| — |
| | 10 |
| 12 |
|
| Georgia Power | 600 |
| | 29 |
| | 5 |
| 668 |
| 721 |
| | 41 |
| 58 |
| | 25 |
| 7 |
|
| Gulf Power | 129 |
| | — |
| | 1 |
| |
| Mississippi Power | 64 |
| | — |
| | — |
| 85 |
| 100 |
| | — |
| — |
| | — |
| — |
|
| Southern Power | 78 |
| | — |
| | 4 |
| 99 |
| 118 |
| | — |
| — |
| | 4 |
| 11 |
|
| Southern Company Gas | 948 |
| | — |
| | 15 |
| 948 |
| 952 |
| | — |
| — |
| | 1 |
| 2 |
|
| |
| (*) | Includes amounts related to held for sale investments. |
As of March 31, 2019 and December 31, 2018, Alabama Power had contract liabilities for outstanding performance obligations primarily related to extended service agreements. Georgia Power had contract assets primarily related to unregulated service agreements where payment is contingent on project completion and fixed retail customer bill programs where the payment is contingent upon Georgia Power's continued performance and the customer's continued participation in the program over the one-year contract term, as well asterm. Alabama Power had contract liabilities for outstanding performance obligations primarily related to extended service agreements. Contract liabilities for Georgia Power and Southern Power relate to cash collections recognized in advance of revenue for certain unregulated service agreements where payment is contingent on project completion.and certain levelized PPAs, respectively. Southern Company's unregulated distributed generation business had $34 million and $39 million of contract assets and $25 million and $11 million of contract liabilities at March 31, 2019 and December 31, 2018, respectively, remaining for outstanding performance obligations.
The following table reflects revenue from contracts with customers recognized in the three-month period ended March 31, 2019 included in the contract liability at December 31, 2018:
|
| | | |
| | Three Months Ended March 31, 2019 |
| | (in millions) |
| Southern Company | $ | 17 |
|
| Southern Power | 10 |
|
Revenues recognized in the three-month period ended March 31, 2019, which were included in contract liabilities at December 31, 2018, were immaterial for Alabama Power, Georgia Power, and Southern Company Gas' contract liability relates to collections from customers received in advanceGas.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
distributed generation business had $31 million and $20 million of contract assets and contract liabilities, respectively, remaining for outstanding performance obligations.
Remaining Performance Obligations
The traditional electric operating companies and Southern Power have long-term contracts with customers in which revenues are recognized aswhen the performance obligations are satisfied overduring the contract term. These contracts primarily relate to PPAs whereby the traditional electric operating companies and Southern Power provide electricity and generation capacity to a customer. The revenue recognized for the delivery of electricity is variable; however, certain PPAs include a fixed payment for fixed generation capacity over the term of the contract. Southern Company's unregulated distributed generation business also has partially satisfied performance obligations related to certain fixed price contracts. RevenuesRegistrants with revenues from contracts with customers related to these performance obligations remaining at March 31, 2018 are expected2019 expect the revenues to be recognized as follows:
| | | | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 and Thereafter | 2019 (remaining) | 2020 | 2021 | 2022 | 2023 | Thereafter |
| | (in millions) | (in millions) |
| Southern Company | $ | 458 |
| $ | 403 |
| $ | 369 |
| $ | 358 |
| $ | 345 |
| $ | 2,161 |
| |
Southern Company(*) | | $ | 451 |
| $ | 349 |
| $ | 315 |
| $ | 310 |
| $ | 301 |
| $ | 2,219 |
|
| Alabama Power | 16 |
| 21 |
| 22 |
| 26 |
| 22 |
| 161 |
| 16 |
| 22 |
| 27 |
| 23 |
| 22 |
| 140 |
|
| Georgia Power | 31 |
| 41 |
| 38 |
| 40 |
| 30 |
| 113 |
| 30 |
| 38 |
| 40 |
| 30 |
| 31 |
| 82 |
|
| Gulf Power | 16 |
| 22 |
| — |
| — |
| — |
| — |
| |
| Mississippi Power | 2 |
| 3 |
| 3 |
| 1 |
| — |
| — |
| 2 |
| 3 |
| 1 |
| — |
| — |
| — |
|
| Southern Power | 384 |
| 350 |
| 330 |
| 313 |
| 312 |
| 2,010 |
| 248 |
| 295 |
| 270 |
| 276 |
| 269 |
| 2,143 |
|
| |
| (*) | Includes amounts related to held for sale investments. |
(E) CONSOLIDATED ENTITIES AND EQUITY METHOD INVESTMENTS
Southern Power
Variable Interest Entities
See Note 7 to the financial statements in Item 8 of the Form 10-K for additional information on Southern Power's VIEs.
Southern Power has certain wholly-owned subsidiaries that are determined to be VIEs. Southern Power is considered the primary beneficiary of these VIEs because it controls the most significant activities of the VIEs, including operating and maintaining the respective assets, and has the obligation to absorb expected losses of these VIEs to the extent of its equity interests. Southern Power previously consolidated SP Solar and SP Wind. Southern Power continues to consolidate them following the 2018 sales of noncontrolling interests in each entity, as the primary beneficiary of each VIE, since it controls the most significant activities of each entity, including operating and maintaining their assets. Transfers and sales of the assets in the VIEs are subject to limited partner consent and the liabilities are non-recourse to the general credit of Southern Power. Liabilities consist of customary working capital items and do not include any long-term debt.
SP Solar
At March 31, 2019, SP Solar had total assets of $6.5 billion, total liabilities of $373 million, and noncontrolling interests of $1.2 billion. Cash distributions from SP Solar are allocated 67% to Southern Power and 33% to Global Atlantic in accordance with their partnership interest percentage. Under the terms of the limited partnership agreement, distributions without limited partner consent are limited to available cash and SP Solar is obligated to distribute all such available cash to its partners each quarter. Available cash includes all cash generated in the quarter subject to the maintenance of appropriate operating reserves.
SP Wind
At March 31, 2019, SP Wind had total assets of $2.6 billion, total liabilities of $141 million, and noncontrolling interests of $46 million. Under the terms of the limited liability agreement, distributions without Class A member consent are limited to available cash and SP Wind is obligated to distribute all such available cash to its members
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
each quarter. Available cash includes all cash generated in the quarter subject to the maintenance of appropriate operating reserves. Cash distributions from SP Wind are generally allocated 60% to Southern Power and 40% to the three financial investors in accordance with the limited liability agreement.
Southern Company Gas
See Note 7 to the financial statements in Item 8 of the Form 10-K for additional information on Southern Company Gas' equity method investments.
Equity Method Investments
The carrying amounts of Southern Company Gas' equity method investments as of March 31, 2019 and December 31, 2018 and related income from those investments for the three-month periods ended March 31, 2019 and 2018 were as follows:
|
| | | | | | |
| Investment Balance | March 31, 2019 | December 31, 2018 |
| | (in millions) |
| SNG | $ | 1,262 |
| $ | 1,261 |
|
| Atlantic Coast Pipeline | 96 |
| 83 |
|
| PennEast Pipeline | 75 |
| 71 |
|
| Other | 124 |
| 123 |
|
| Total | $ | 1,557 |
| $ | 1,538 |
|
|
| | | | | | |
| Earnings from Equity Method Investments | Three Months Ended
March 31, 2019 | Three Months
Ended
March 31, 2018 |
| | (in millions) |
| SNG | $ | 42 |
| $ | 39 |
|
| Atlantic Coast Pipeline | 3 |
| 1 |
|
| PennEast Pipeline | 2 |
| 1 |
|
| Other | 1 |
| 1 |
|
| Total | $ | 48 |
| $ | 42 |
|
SNG
Selected financial information of SNG for the three months ended March 31, 2019 and 2018 is as follows:
|
| | | | | | |
| Income Statement Information | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 |
| | (in millions) |
| Revenues | $ | 166 |
| $ | 160 |
|
| Operating income | 106 |
| 99 |
|
| Net income | 84 |
| 78 |
|
(F) FINANCING
Bank Credit Arrangements
Bank credit arrangements provide liquidity support to the registrants' commercial paper borrowings and the traditional electric operating companies' revenue bonds. The amount of variable rate revenue bonds of the traditional electric operating companies outstanding requiring liquidity support as of March 31, 2019 was approximately $1.4 billion (comprised of approximately $854 million at Alabama Power, $550 million at Georgia
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Power, and $40 million at Mississippi Power). In addition, at March 31, 2019, the traditional electric operating companies had approximately $432 million (comprised of approximately $87 million at Alabama Power and $345 million at Georgia Power) of revenue bonds outstanding that were required to be remarketed within the next 12 months. Subsequent to March 31, 2019, Georgia Power purchased and held approximately $115 million of outstanding pollution control revenue bonds required to be remarketed. See Note 8 to the financial statements under "Bank Credit Arrangements" in Item 8 of the Form 10-K and "Financing Activities" herein for additional information.
The following table outlines the committed credit arrangements by company as of March 31, 2019:
|
| | | | | | | | | | | | | | | | | |
| | Expires | | |
| Company | 2019 | 2020 | 2022 | | Total | | Unused(d) |
| | (in millions) |
Southern Company(a) | $ | — |
| $ | — |
| $ | 2,000 |
| | $ | 2,000 |
| | $ | 1,999 |
|
| Alabama Power | 33 |
| 500 |
| 800 |
| | 1,333 |
| | 1,333 |
|
| Georgia Power | — |
| — |
| 1,750 |
| | 1,750 |
| | 1,736 |
|
| Mississippi Power | 100 |
| — |
| — |
| | 100 |
| | 100 |
|
Southern Power(b) | — |
| — |
| 750 |
| | 750 |
| | 741 |
|
Southern Company Gas(c) | — |
| — |
| 1,900 |
| | 1,900 |
| | 1,895 |
|
| Other | 30 |
| — |
| — |
| | 30 |
| | 30 |
|
| Southern Company Consolidated | $ | 163 |
| $ | 500 |
| $ | 7,200 |
| | $ | 7,863 |
| | $ | 7,834 |
|
| |
(D)(a) | FAIR VALUE MEASUREMENTSRepresents the Southern Company parent entity. |
| |
| (b) | Does not include Southern Power Company's $120 million continuing letter of credit facility for standby letters of credit expiring in 2021, of which $24 million was unused at March 31, 2019. Southern Power's subsidiaries are not parties to its bank credit arrangement. |
| |
| (c) | Southern Company Gas, as the parent entity, guarantees the obligations of Southern Company Gas Capital, which is the borrower of $1.4 billion of this arrangement. Southern Company Gas' committed credit arrangement also includes $500 million for which Nicor Gas is the borrower and which is restricted for working capital needs of Nicor Gas. Pursuant to this multi-year credit arrangement, the allocations between Southern Company Gas Capital and Nicor Gas may be adjusted. |
| |
| (d) | Amounts used are for letters of credit. |
Subject to applicable market conditions, Southern Company and its subsidiaries expect to renew or replace their bank credit arrangements as needed, prior to expiration. In connection therewith, Southern Company and its subsidiaries may extend the maturity dates and/or increase or decrease the lending commitments thereunder.
DOE Loan Guarantee 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 regarding Georgia Power's 2014 loan guarantee agreement.
Pursuant to the loan guarantee program established under Title XVII of the Energy Policy Act of 2005 (Title XVII Loan Guarantee Program), Georgia Power and the DOE entered into a loan guarantee agreement in 2014 and the Amended and Restated Loan Guarantee Agreement in March 2019. Under the Amended and Restated Loan Guarantee Agreement, the DOE has agreed to guarantee the obligations of Georgia Power under note purchase agreements among the DOE, Georgia Power, and the FFB and related promissory notes which provide for two multi-advance term loan facilities (FFB Credit Facilities). Under the FFB Credit Facilities, Georgia Power may make term loan borrowings through the FFB in an amount up to approximately $5.130 billion, provided that total aggregate borrowings under the FFB Credit Facilities may not exceed 70% of (i) Eligible Project Costs minus (ii) approximately $1.492 billion (reflecting the amounts received by Georgia Power under the Guarantee Settlement Agreement less the Customer Refunds).
In March 2019, Georgia Power made borrowings under the FFB Credit Facilities in an aggregate principal amount of $835 million at an interest rate of 3.213% through the final maturity date of February 20, 2044. At March 31, 2019, Georgia Power had a total of $3.46 billion of borrowings outstanding under the FFB Credit Facilities.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
All borrowings under the FFB Credit Facilities are full recourse to Georgia Power, and Georgia Power is obligated to reimburse the DOE for any payments the DOE is required to make to the FFB under its guarantee. Georgia Power's reimbursement obligations to the DOE are full recourse and secured by a first priority lien on (i) Georgia Power's 45.7% undivided ownership interest in Plant Vogtle Units 3 and 4 (primarily the units under construction, the related real property, and any nuclear fuel loaded in the reactor core) and (ii) Georgia Power's rights and obligations under the principal contracts relating to Plant Vogtle Units 3 and 4. There are no restrictions on Georgia Power's ability to grant liens on other property.
In addition to the conditions described above, future advances are subject to satisfaction of customary conditions, as well as certification of compliance with the requirements of the Title XVII Loan Guarantee Program, including accuracy of project-related representations and warranties, delivery of updated project-related information, and evidence of compliance with the prevailing wage requirements of the Davis-Bacon Act of 1931, as amended, and certification from the DOE's consulting engineer that proceeds of the advances are used to reimburse Eligible Project Costs.
Upon satisfaction of all conditions described above, advances may be requested on a quarterly basis through 2023. The final maturity date for each advance under the FFB Credit Facilities is February 20, 2044. Interest is payable quarterly and principal payments will begin on February 20, 2020. Borrowings under the FFB Credit Facilities will bear interest at the applicable U.S. Treasury rate plus a spread equal to 0.375%.
Under the Amended and Restated Loan Guarantee Agreement, Georgia Power is subject to customary borrower affirmative and negative covenants and events of default. In addition, Georgia Power is subject to project-related reporting requirements and other project-specific covenants and events of default.
In the event certain mandatory prepayment events occur, the FFB's commitment to make further advances under the FFB Credit Facilities will terminate and Georgia Power will be required to prepay the outstanding principal amount of all borrowings under the FFB Credit Facilities over a period of five years (with level principal amortization). Among other things, these mandatory prepayment events include (i) the termination of the Vogtle Services Agreement or rejection of the Vogtle Services Agreement in any Westinghouse bankruptcy if Georgia Power does not maintain access to intellectual property rights under the related intellectual property licenses; (ii) termination of the Bechtel Agreement, unless the Vogtle Owners enter into a replacement agreement; (iii) cancellation of Plant Vogtle Units 3 and 4 by the Georgia PSC or by Georgia Power; (iv) failure of the holders of 90% of the ownership interests in Plant Vogtle Units 3 and 4 to vote to continue construction following certain schedule extensions; (v) cost disallowances by the Georgia PSC that could have a material adverse effect on completion of Plant Vogtle Units 3 and 4 or Georgia Power's ability to repay the outstanding borrowings under the FFB Credit Facilities; or (vi) loss of or failure to receive necessary regulatory approvals. Under certain circumstances, insurance proceeds and any proceeds from an event of taking must be applied to immediately prepay outstanding borrowings under the FFB Credit Facilities. In addition, if Georgia Power discontinues construction of Plant Vogtle Units 3 and 4, Georgia Power would be obligated to immediately repay a portion of the outstanding borrowings under the FFB Credit Facilities to the extent such outstanding borrowings exceed 70% of Eligible Project Costs, net of the proceeds received by Georgia Power under the Guarantee Settlement Agreement less the Customer Refunds. Georgia Power also may voluntarily prepay outstanding borrowings under the FFB Credit Facilities. Under the FFB Credit Facilities, any prepayment (whether mandatory or optional) will be made with a make-whole premium or discount, as applicable.
In connection with any cancellation of Plant Vogtle Units 3 and 4, the DOE may elect to continue construction of Plant Vogtle Units 3 and 4. In such an event, the DOE will have the right to assume Georgia Power's rights and obligations under the principal agreements relating to Plant Vogtle Units 3 and 4 and to acquire all or a portion of Georgia Power's ownership interest in Plant Vogtle Units 3 and 4.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Financing Activities
The following table outlines the long-term debt financing activities for Southern Company and its subsidiaries for the first three months of 2019:
|
| | | | | | | | | | | | | | | | | | | |
| Company | Senior Note Maturities, Redemptions, and Repurchases | | Revenue Bond Issuances and Reofferings of Purchased Bonds | | Revenue Bond
Maturities, Redemptions, and
Repurchases | | Other Long-Term Debt Issuances | | Other Long-Term Debt Redemptions and Maturities(a) |
| | (in millions) |
Southern Company(b) | $ | 2,100 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Alabama Power | 200 |
| | — |
| | — |
| | — |
| | — |
|
| Georgia Power | — |
| | 343 |
| | 108 |
| | 835 |
| | 2 |
|
| Mississippi Power | — |
| | 43 |
| | — |
| | — |
| | — |
|
| Other | — |
| | — |
| | — |
| | — |
| | 19 |
|
| Southern Company Consolidated | $ | 2,300 |
| | $ | 386 |
| | $ | 108 |
| | $ | 835 |
| | $ | 21 |
|
| |
| (a) | Includes reductions in finance lease obligations resulting from cash payments under finance leases. |
| |
| (b) | Represents the Southern Company parent entity. |
Except as otherwise described herein, Southern Company and its subsidiaries 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 subsidiaries also used the proceeds for their construction programs.
Southern Company
In January 2019, Southern Company repaid a $250 million short-term uncommitted bank credit arrangement and a $1.5 billion short-term floating rate bank loan.
Also in January 2019, through cash tender offers, Southern Company repurchased and retired approximately $522 million of the $1.0 billion aggregate principal amount outstanding of its 1.85% Senior Notes due July 1, 2019 (1.85% Notes), approximately $180 million of the $350 million aggregate principal amount outstanding of its Series 2014B 2.15% Senior Notes due September 1, 2019 (Series 2014B Notes), and approximately $504 million of the $750 million aggregate principal amount outstanding of its Series 2018A Floating Rate Notes due February 14, 2020 (Series 2018A Notes), for an aggregate purchase price, excluding accrued and unpaid interest, of approximately $1.2 billion. In addition, following the completion of the cash tender offers, in February 2019, Southern Company completed the redemption of all of the Series 2018A Notes, 1.85% Notes, and Series 2014B Notes remaining outstanding.
Georgia Power
In January 2019, Georgia Power redeemed approximately $13 million, $20 million, and $75 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), First Series 1992, Eighth Series 1994, and Second Series 1995, respectively.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
In March 2019, Georgia Power reoffered to the public the following pollution control revenue bonds that previously had been purchased and held by Georgia Power:
$173 million aggregate principal amount of Development Authority of Bartow County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Bowen Project), First Series 2009;
approximately $105 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), First Series 2013; and
$65 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Second Series 2008.
Subsequent to March 31, 2019, Georgia Power purchased and held the following pollution control revenue bonds, which may be reoffered to the public at a later date:
$55 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Fourth Series 1994;
$30 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Fourth Series 1995;
$20 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Ninth Series 1994; and
$10 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Second Series 1994.
Mississippi Power
In March 2019, Mississippi Power reoffered to the public $43 million of Mississippi Business Finance Corporation Pollution Control Revenue Refunding Bonds, Series 2002, that previously had been purchased and held by Mississippi Power.
Earnings per Share
For Southern Company, the only difference in computing basic and diluted earnings per share is attributable to awards outstanding under stock-based compensation plans. See Note 12 to the financial statements in Item 8 of the Form 10-K for information on stock-based compensation plans. The effect of stock-based compensation plans was determined using the treasury stock method. Shares used to compute diluted earnings per share were as follows:
|
| | | | |
| | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 |
| | (in millions) |
| As reported shares | 1,038 |
| 1,011 |
|
| Effect of stock-based compensation | 7 |
| 5 |
|
| Diluted shares | 1,045 |
| 1,016 |
|
There were no stock-based compensation awards that were not included in the diluted earnings per share calculation because they were anti-dilutive for the three months ended March 31, 2019 and an immaterial amount of such awards was not included for the three months ended March 31, 2018.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
(G) INCOME TAXES
See Note 10 to the financial statements in Item 8 of the Form 10-K for additional tax information.
Effective Tax Rate
Details of significant changes in the effective tax rate for the applicable registrants are provided herein.
Southern Company
Southern Company's effective tax rate is typically lower than the statutory rate due to employee stock plans' dividend deduction, non-taxable AFUDC equity and flowback of excess deferred income taxes at the regulated utilities, and federal income tax benefits from ITCs and PTCs, primarily at Southern Power.
Southern Company's effective tax rate was 39.8% for the three months ended March 31, 2019 compared to 10.8% for the corresponding period in 2018. The effective tax rate increase was primarily due to the tax impact from the sale of Gulf Power. See Note (K) for additional information.
Alabama Power
Alabama Power's effective tax rate was 21.9% for the three months ended March 31, 2019 compared to 26.3% for the corresponding period in 2018. The effective tax rate decrease was primarily due to the application in 2018 of the accounting order approved by the Alabama PSC in May 2018 related to the Tax Reform Legislation. See Note 2 to the financial statements under "Alabama Power – Tax Reform Accounting Order" in Item 8 of the Form 10-K for additional information.
Mississippi Power
Mississippi Power's effective tax rate was 15.5% for the three months ended March 31, 2019 compared to a benefit rate of (34.7)% for the corresponding period in 2018. The effective tax rate increase was primarily due to lower estimated losses on the Kemper IGCC in 2019, partially offset by an increase in the flowback of excess deferred income taxes as a result of a settlement agreement reached with wholesale customers under the MRA tariff. See Note (B) under "Mississippi Power" for additional information.
Southern Power
Southern Power's effective tax benefit rate was (49.8)% for the three months ended March 31, 2019 compared to (647.0)% for the corresponding period in 2018. The effective tax benefit rate decrease was primarily due to changes in state apportionment rates following the reorganization of Southern Power's legal entities that own and operate certain solar facilities and a reduction of tax benefits from wind PTCs primarily as a result of the sale of a noncontrolling tax equity interest in SP Wind.
Southern Company Gas
Southern Company Gas' effective tax rate was 22.3% for the three months ended March 31, 2019 compared to 27.2% for the corresponding period in 2018. This decrease was primarily related to tax impacts of the goodwill impairment charge recorded in the first quarter 2018 and an increase in the flowback of excess deferred income taxes in 2019 primarily at Atlanta Gas Light as previously authorized by the Georgia PSC. See Note 2 to the financial statements under "Southern Company Gas – Rate Proceedings" in Item 8 of the Form 10-K for additional information.
(H) RETIREMENT BENEFITS
The Southern Company system has a qualified defined benefit, trusteed, pension plan covering substantially all employees, with the exception of employees at PowerSecure. The qualified pension plan is funded in accordance with requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA). No mandatory contributions to the qualified pension plan are anticipated for the year ending December 31, 2019. The Southern
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Company system also provides certain non-qualified defined benefits for a select group of management and highly compensated employees, which are funded on a cash basis. In addition, the Southern Company system provides certain medical care and life insurance benefits for retired employees through other postretirement benefit plans. The traditional electric operating companies fund other postretirement trusts to the extent required by their respective regulatory commissions. Southern Company Gas has a separate unfunded supplemental retirement health care plan that provides medical care and life insurance benefits to employees of discontinued businesses.
See Note 11 to the financial statements in Item 8 of the Form 10-K for additional information.
Components of the net periodic benefit costs for the three months ended March 31, 2019 and 2018 are presented in the following tables.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2019 | Southern Company | | Alabama Power | | Georgia Power | | Mississippi Power | | Southern Power | | Southern Company Gas |
| | (in millions) |
| Pension Plans |
| Service cost | $ | 73 |
| | $ | 17 |
| | $ | 19 |
| | $ | 3 |
| | $ | 2 |
| | $ | 6 |
|
| Interest cost | 123 |
| | 28 |
| | 39 |
| | 6 |
| | 1 |
| | 9 |
|
| Expected return on plan assets | (221 | ) | | (51 | ) | | (73 | ) | | (10 | ) | | (2 | ) | | (15 | ) |
| Amortization: | | | | | | | | | | | |
| Prior service costs | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) |
| Regulatory asset | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
|
| Net (gain)/loss | 30 |
| | 9 |
| | 11 |
| | 1 |
| | — |
| | 1 |
|
| Net periodic pension cost (income) | $ | 5 |
| | $ | 3 |
| | $ | (4 | ) | | $ | — |
| | $ | 1 |
| | $ | 3 |
|
| Postretirement Benefits |
| Service cost | $ | 5 |
| | $ | 1 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| Interest cost | 17 |
| | 4 |
| | 7 |
| | 1 |
| | — |
| | 2 |
|
| Expected return on plan assets | (16 | ) | | (6 | ) | | (6 | ) | | — |
| | — |
| | (2 | ) |
| Amortization: | | | | | | | | | | | |
| Prior service costs | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
| Regulatory asset | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
|
| Net (gain)/loss | (1 | ) | | — |
| | — |
| | — |
| | — |
| | (1 | ) |
| Net periodic postretirement benefit cost | $ | 6 |
| | $ | — |
| | $ | 2 |
| | $ | 1 |
| | $ | — |
| | $ | 2 |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2018 | Southern Company | | Alabama Power | | Georgia Power | | Mississippi Power | | Southern Power | | Southern Company Gas |
| | (in millions) |
| Pension Plans |
| Service cost | $ | 90 |
|
| $ | 19 |
|
| $ | 22 |
|
| $ | 4 |
|
| $ | 2 |
|
| $ | 8 |
|
| Interest cost | 116 |
|
| 25 |
|
| 35 |
|
| 5 |
|
| 1 |
|
| 10 |
|
| Expected return on plan assets | (236 | ) |
| (51 | ) |
| (74 | ) |
| (10 | ) |
| (3 | ) |
| (18 | ) |
| Amortization: | | | | | | | | | | | |
| Prior service costs | 1 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1 | ) |
| Regulatory asset | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
|
| Net (gain)/loss | 53 |
|
| 14 |
|
| 17 |
|
| 3 |
|
| 1 |
|
| 3 |
|
| Net periodic pension cost (income) | $ | 24 |
|
| $ | 7 |
|
| $ | — |
|
| $ | 2 |
|
| $ | 1 |
|
| $ | 5 |
|
| Postretirement Benefits |
| Service cost | $ | 6 |
| | $ | 1 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| Interest cost | 19 |
| | 4 |
| | 7 |
| | 1 |
| | — |
| | 2 |
|
| Expected return on plan assets | (17 | ) | | (6 | ) | | (6 | ) | | — |
| | — |
| | (2 | ) |
| Amortization: | | | | | | | | | | | |
| Prior service costs | 2 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
| Regulatory asset | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
| Net (gain)/loss | 3 |
| | — |
| | 2 |
| | — |
| | — |
| | — |
|
| Net periodic postretirement benefit cost | $ | 13 |
| | $ | — |
| | $ | 5 |
| | $ | 1 |
| | $ | — |
| | $ | 2 |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
(I) FAIR VALUE MEASUREMENTS
As of March 31, 2018,2019, assets and liabilities measured at fair value on a recurring basis during the period, together with their associated level of the fair value hierarchy, were as follows:
| | | | Fair Value Measurements Using: | | | Fair Value Measurements Using: | | |
| As of March 31, 2018: | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Net Asset Value as a Practical Expedient (NAV) | | Total | |
| As of March 31, 2019: | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Net Asset Value as a Practical Expedient (NAV) | | Total |
| | (in millions) | (in millions) |
| Southern Company | | | | | | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | | | |
Energy-related derivatives(a)(b) | $ | 360 |
| | $ | 172 |
| | $ | — |
| | $ | — |
| | $ | 532 |
| $ | 322 |
| | $ | 128 |
| | $ | 4 |
| | $ | — |
| | $ | 454 |
|
| Foreign currency derivatives | — |
| | 182 |
| | — |
| | — |
| | 182 |
| — |
| | 38 |
| | — |
| | — |
| | 38 |
|
Nuclear decommissioning trusts(c) | 776 |
| | 1,019 |
| | — |
| | 32 |
| | 1,827 |
| |
Investments in trusts:(c)(d) | | | | | | | | | | |
| Domestic equity | | 682 |
| | 120 |
| | — |
| | — |
| | 802 |
|
| Foreign equity | | 60 |
| | 195 |
| | — |
| | — |
| | 255 |
|
| U.S. Treasury and government agency securities | | — |
| | 283 |
| | — |
| | — |
| | 283 |
|
| Municipal bonds | | — |
| | 73 |
| | — |
| | — |
| | 73 |
|
| Pooled funds – fixed income | | — |
| | 14 |
| | — |
| | — |
| | 14 |
|
| Corporate bonds | | 24 |
| | 298 |
| | — |
| | — |
| | 322 |
|
| Mortgage and asset backed securities | | — |
| | 72 |
| | — |
| | — |
| | 72 |
|
| Private equity | | — |
| | — |
| | — |
| | 48 |
| | 48 |
|
| Cash and cash equivalents | | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
| Other | | 28 |
| | 4 |
| | — |
| | — |
| | 32 |
|
| Cash equivalents | 1,664 |
| | — |
| | — |
| | — |
| | 1,664 |
| 907 |
| | 3 |
| | — |
| | — |
| | 910 |
|
| Other investments | 9 |
| | — |
| | 1 |
| | — |
| | 10 |
| 9 |
| | 14 |
| | — |
| | — |
| | 23 |
|
| Total | $ | 2,809 |
| | $ | 1,373 |
| | $ | 1 |
| | $ | 32 |
| | $ | 4,215 |
| $ | 2,033 |
| | $ | 1,242 |
| | $ | 4 |
| | $ | 48 |
| | $ | 3,327 |
|
| Liabilities: | | | | | | | | | | | | | | | | | | |
Energy-related derivatives(a)(b) | $ | 506 |
| | $ | 136 |
| | $ | — |
| | $ | — |
| | $ | 642 |
| $ | 466 |
| | $ | 106 |
| | $ | 23 |
| | $ | — |
| | $ | 595 |
|
| Interest rate derivatives | — |
| | 61 |
| | — |
| | — |
| | 61 |
| — |
| | 35 |
| | — |
| | — |
| | 35 |
|
| Foreign currency derivatives | — |
| | 22 |
| | — |
| | — |
| | 22 |
| — |
| | 24 |
| | — |
| | — |
| | 24 |
|
| Contingent consideration | — |
| | — |
| | 22 |
| | — |
| | 22 |
| — |
| | — |
| | 21 |
| | — |
| | 21 |
|
| Total | $ | 506 |
| | $ | 219 |
| | $ | 22 |
| | $ | — |
| | $ | 747 |
| $ | 466 |
| | $ | 165 |
| | $ | 44 |
| | $ | — |
| | $ | 675 |
|
| | | | | | | | | | | | | | | | | | | |
| Alabama Power | | | | | | | | | | |
| Assets: | | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 3 |
| |
Nuclear decommissioning trusts:(d) | | | | | | | | |
|
| |
| Domestic equity | 437 |
| | 83 |
| | — |
| | — |
| | 520 |
| |
| Foreign equity | 63 |
| | 58 |
| | — |
| | — |
| | 121 |
| |
| U.S. Treasury and government agency securities | — |
| | 19 |
| | — |
| | — |
| | 19 |
| |
| Corporate bonds | 21 |
| | 162 |
| | — |
| | — |
| | 183 |
| |
| Mortgage and asset backed securities | — |
| | 17 |
| | — |
| | — |
| | 17 |
| |
| Private Equity | — |
| | — |
| | — |
| | 32 |
| | 32 |
| |
| Other | 6 |
| | — |
| | — |
| | — |
| | 6 |
| |
| Cash equivalents | 459 |
| | — |
| | — |
| | — |
| | 459 |
| |
| Total | $ | 986 |
| | $ | 342 |
| | $ | — |
| | $ | 32 |
| | $ | 1,360 |
| |
| Liabilities: | | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 8 |
| | $ | — |
| | $ | — |
| | $ | 8 |
| |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
| | | | Fair Value Measurements Using: | | | Fair Value Measurements Using: | | |
| As of March 31, 2018: | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Net Asset Value as a Practical Expedient (NAV) | | Total | |
| As of March 31, 2019: | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Net Asset Value as a Practical Expedient (NAV) | | Total |
| | | (in millions) |
| Alabama Power | | | | | | | | | | |
| Assets: | | | | | | | | | | |
| Energy-related derivatives | | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | 6 |
|
Nuclear decommissioning trusts:(c) | | | | | | | | | |
|
|
| Domestic equity | | 446 |
| | 108 |
| | — |
| | — |
| | 554 |
|
| Foreign equity | | 60 |
| | 57 |
| | — |
| | — |
| | 117 |
|
| U.S. Treasury and government agency securities | | — |
| | 18 |
| | — |
| | — |
| | 18 |
|
| Municipal bonds | | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
| Corporate bonds | | 24 |
| | 139 |
| | — |
| | — |
| | 163 |
|
| Mortgage and asset backed securities | | — |
| | 24 |
| | — |
| | — |
| | 24 |
|
| Private equity | | — |
| | — |
| | — |
| | 48 |
| | 48 |
|
| Other | | 5 |
| | — |
| | — |
| | — |
| | 5 |
|
| Cash equivalents | | 569 |
| | 3 |
| | — |
| | — |
| | 572 |
|
| Other investments | | — |
| | 14 |
| | — |
| | — |
| | 14 |
|
| Total | | $ | 1,104 |
| | $ | 370 |
| | $ | — |
| | $ | 48 |
| | $ | 1,522 |
|
| Liabilities: | | | | | | | | | | |
| Energy-related derivatives | | $ | — |
| | $ | 7 |
| | $ | — |
| | $ | — |
| | $ | 7 |
|
| | (in millions) | | | | | | | | | |
| Georgia Power | | | | | | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | 5 |
| $ | — |
| | $ | 9 |
| | $ | — |
| | $ | — |
| | $ | 9 |
|
Nuclear decommissioning trusts:(d) (e) | | | | | | | | | | |
Nuclear decommissioning trusts:(c)(d) | | | | | | | | | | |
| Domestic equity | 238 |
| | 1 |
| | — |
| | — |
| | 239 |
| 236 |
| | 1 |
| | — |
| | — |
| | 237 |
|
| Foreign equity | — |
| | 141 |
| | — |
| | — |
| | 141 |
| — |
| | 134 |
| | — |
| | — |
| | 134 |
|
| U.S. Treasury and government agency securities | — |
| | 241 |
| | — |
| | — |
| | 241 |
| — |
| | 265 |
| | — |
| | — |
| | 265 |
|
| Municipal bonds | — |
| | 76 |
| | — |
| | — |
| | 76 |
| — |
| | 72 |
| | — |
| | — |
| | 72 |
|
| Corporate bonds | — |
| | 168 |
| | — |
| | — |
| | 168 |
| — |
| | 160 |
| | — |
| | — |
| | 160 |
|
| Mortgage and asset backed securities | — |
| | 40 |
| | — |
| | — |
| | 40 |
| — |
| | 47 |
| | — |
| | — |
| | 47 |
|
| Other | 11 |
| | 14 |
| | — |
| | — |
| | 25 |
| 23 |
| | 4 |
| | — |
| | — |
| | 27 |
|
| Cash equivalents | 1,055 |
| | — |
| | — |
| | — |
| | 1,055 |
| |
| Total | $ | 1,304 |
| | $ | 686 |
| | $ | — |
| | $ | — |
| | $ | 1,990 |
| $ | 259 |
| | $ | 692 |
| | $ | — |
| | $ | — |
| | $ | 951 |
|
| Liabilities: | | | | | | | | | | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 18 |
| | $ | — |
| | $ | — |
| | $ | 18 |
| $ | — |
| | $ | 16 |
| | $ | — |
| | $ | — |
| | $ | 16 |
|
| Interest rate derivatives | — |
| | 8 |
| | — |
| | — |
| | 8 |
| — |
| | 2 |
| | — |
| | — |
| | 2 |
|
| Total | $ | — |
| | $ | 26 |
| | $ | — |
| | $ | — |
| | $ | 26 |
| $ | — |
| | $ | 18 |
| | $ | — |
| | $ | — |
| | $ | 18 |
|
| | | | | | | | | | | | | | | | | | | |
| Gulf Power | | | | | | | | | | |
| Assets: | | | | | | | | | | |
| Cash equivalents | $ | 27 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 27 |
| |
| Liabilities: | | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 17 |
| | $ | — |
| | $ | — |
| | $ | 17 |
| |
| | | | | | | | | | | |
| Mississippi Power | | | | | | | | | | |
| Assets: | | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | 2 |
| |
| Cash equivalents | 103 |
| | — |
| | — |
| | — |
| | 103 |
| |
| Total | $ | 103 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | 105 |
| |
| Liabilities: | | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 8 |
| | $ | — |
| | $ | — |
| | $ | 8 |
| |
| | | | | | | | | | | |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
| | | | Fair Value Measurements Using: | | | Fair Value Measurements Using: | | |
| As of March 31, 2018: | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Net Asset Value as a Practical Expedient (NAV) | | Total | |
| As of March 31, 2019: | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Net Asset Value as a Practical Expedient (NAV) | | Total |
| | | (in millions) |
| Mississippi Power | | | | | | | | | | |
| Assets: | | | | | | | | | | |
| Energy-related derivatives | | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
| Cash equivalents | | 202 |
| | — |
| | — |
| | — |
| | 202 |
|
| Total | | $ | 202 |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 205 |
|
| Liabilities: | | | | | | | | | | |
| Energy-related derivatives | | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | 6 |
|
| | (in millions) | | | | | | | | | |
| Southern Power | | | | | | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | 4 |
| $ | — |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| Foreign currency derivatives | — |
| | 182 |
| | — |
| | — |
| | 182 |
| — |
| | 38 |
| | — |
| | — |
|
| 38 |
|
| Cash equivalents | | 10 |
| | — |
| | — |
| | — |
| | 10 |
|
| Total | $ | — |
| | $ | 186 |
| | $ | — |
| | $ | — |
| | $ | 186 |
| $ | 10 |
| | $ | 39 |
| | $ | — |
| | $ | — |
| | $ | 49 |
|
| Liabilities: | | | | | | | | | | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 3 |
| $ | — |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
| Foreign currency derivatives | — |
| | 22 |
| | — |
| | — |
| | 22 |
| — |
| | 24 |
| | — |
| | — |
| | 24 |
|
| Contingent consideration | — |
| | — |
| | 22 |
| | — |
| | 22 |
| — |
| | — |
| | 21 |
| | — |
| | 21 |
|
| Total | $ | — |
|
| $ | 25 |
|
| $ | 22 |
|
| $ | — |
|
| $ | 47 |
| $ | — |
|
| $ | 27 |
|
| $ | 21 |
|
| $ | — |
|
| $ | 48 |
|
| | | | | | | | | | | | | | | | | | | |
| Southern Company Gas | | | | | | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | | | |
Energy-related derivatives(a)(b) | $ | 360 |
| | $ | 158 |
| | $ | — |
| | $ | — |
| | $ | 518 |
| $ | 322 |
| | $ | 108 |
| | $ | 4 |
| | $ | — |
| | $ | 434 |
|
| Non-qualified deferred compensation trusts: | | | | | | | | | | |
| Domestic equity | | — |
| | 11 |
| | — |
| | — |
| | 11 |
|
| Foreign equity | | — |
| | 4 |
| | — |
| | — |
| | 4 |
|
| Pooled funds – fixed income | | — |
| | 14 |
| | — |
| | — |
| | 14 |
|
| Cash equivalents | | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
| Cash equivalents | | 13 |
| | — |
| | — |
| | — |
| | 13 |
|
| Total | | $ | 336 |
|
| $ | 137 |
|
| $ | 4 |
|
| $ | — |
|
| $ | 477 |
|
| Liabilities: | | | | | | | | | | | | | | | | | | |
Energy-related derivatives(a)(b) | $ | 506 |
| | $ | 82 |
| | $ | — |
| | $ | — |
| | $ | 588 |
| $ | 466 |
| | $ | 73 |
| | $ | 23 |
| | $ | — |
| | $ | 562 |
|
| |
| (a) | Excludes $4Energy-related derivatives exclude $11 million associated with premiums and certain weather derivatives accounted for based on intrinsic value rather than fair value. |
| |
| (b) | ExcludesEnergy-related derivatives exclude cash collateral of $223 million.$190 million. |
| |
| (c) | For additional detail, see the nuclear decommissioning trusts sections for Alabama Power and Georgia Power in this table. |
| |
(d) | Excludes receivables related to investment income, pending investment sales, payables related to pending investment purchases, and currencies. See Note 6 to the financial statements in Item 8 of the Form 10-K for additional information. |
| |
(e)(d) | Includes the investment securities pledged to creditors and collateral received and excludes payables related to the securities lending program. As of March 31, 2018,2019, approximately $76$72 million of the fair market value of Georgia Power's nuclear decommissioning trust funds' securities were on loan to creditors under the funds' managers' securities lending program. See Note 6 to the financial statements in Item 8 of the Form 10-K for additional information. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Southern Company, Alabama Power, and Georgia Power continue to elect the option to fair value investment securities held in the nuclear decommissioning trust funds. The fair value of the funds, at Southern Company, including reinvested interest and dividends and excluding the funds' expenses, decreased by $11 millionincreased for the three months ended March 31, 2019 and increased by $63 milliondecreased for the three months ended March 31, 2018 and 2017, respectively. Alabama Powerby the amounts shown in the table below. The changes were recorded a decrease in fair value of $5 million and an increase of $34 million for the three months ended March 31, 2018 and 2017, respectively, as a change into the regulatory assets and liabilities related to its AROs.AROs for Georgia Power recorded a decrease in fair value of $6 million and an increase of $29 million for the three months ended March 31, 2018 and 2017, respectively, as a change in its regulatory asset related to its AROs.Alabama Power, respectively.
|
| | | | | | |
| | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 |
| | (in millions) |
| Southern Company | $ | 152 |
| $ | (11 | ) |
| Alabama Power | 87 |
| (5 | ) |
| Georgia Power | 65 |
| (6 | ) |
Valuation MethodologiesEffective Tax Rate
Details of significant changes in the effective tax rate for the applicable registrants are provided herein.
Southern Company
Southern Company's effective tax rate is typically lower than the statutory rate due to employee stock plans' dividend deduction, non-taxable AFUDC equity and flowback of excess deferred income taxes at the regulated utilities, and federal income tax benefits from ITCs and PTCs, primarily at Southern Power.
Southern Company's effective tax rate was 39.8% for the three months ended March 31, 2019 compared to 10.8% for the corresponding period in 2018. The energy-related derivativeseffective tax rate increase was primarily consist of exchange-traded and over-the-counter financial products for natural gas and physical power products, including, from time to time, basis swaps. These are standard products used within the energy industry and are valued using the market approach. The inputs used are mainly from observable market sources, such as forward natural gas prices, power prices, implied volatility, and overnight index swap interest rates. Interest rate derivatives are also standard over-the-counter products that are valued using observable market data and assumptions commonly used by market participants. The fair value of interest rate
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
derivatives reflects the net present value of expected payments and receipts under the swap agreement based on the market's expectation of future interest rates. Additional inputsdue to the net present value calculation may includetax impact from the contract terms, counterparty credit risk, and occasionally, implied volatilitysale of interestGulf Power. See Note (K) for additional information.
Alabama Power
Alabama Power's effective tax rate options.was 21.9% for the three months ended March 31, 2019 compared to 26.3% for the corresponding period in 2018. The fair value of cross-currency swaps reflects the net present value of expected payments and receipts under the swap agreement based on the market's expectation of future foreign currency exchange rates. Additional inputseffective tax rate decrease was primarily due to the net present value calculation may includeapplication in 2018 of the contract terms, counterparty credit risk, and discount rates. The interest rate derivatives and cross-currency swaps are categorized as Level 2 under Fair Value Measurements as these inputs are based on observable data and valuations of similar instruments.accounting order approved by the Alabama PSC in May 2018 related to the Tax Reform Legislation. See Note (I) for additional information on how these derivatives are used.
The NRC requires licensees of commissioned nuclear power reactors to establish a plan for providing reasonable assurance of funds for future decommissioning. For fair value measurements of the investments within the nuclear decommissioning trusts, external pricing vendors are designated for each asset class with each security specifically assigned a primary pricing source. For investments held within commingled funds, fair value is determined at the end of each business day through the net asset value, which is established by obtaining the underlying securities' individual prices from the primary pricing source. A market price secured from the primary source vendor is then evaluated by management in its valuation of the assets within the trusts. As a general approach, fixed income market pricing vendors gather market data (including indices and market research reports) and integrate relative credit information, observed market movements, and sector news into proprietary pricing models, pricing systems, and mathematical tools. Dealer quotes and other market information, including live trading levels and pricing analysts' judgments, are also obtained when available. See Note 12 to the financial statements under "Alabama Power – Tax Reform Accounting Order" in Item 8 of the Form 10-K for additional information.
Mississippi Power
Mississippi Power's effective tax rate was 15.5% for the three months ended March 31, 2019 compared to a benefit rate of (34.7)% for the corresponding period in 2018. The effective tax rate increase was primarily due to lower estimated losses on the Kemper IGCC in 2019, partially offset by an increase in the flowback of excess deferred income taxes as a result of a settlement agreement reached with wholesale customers under the MRA tariff. See Note (B) under "Mississippi Power" for additional information.
Southern Power
Southern Power's effective tax benefit rate was (49.8)% for the three months ended March 31, 2019 compared to (647.0)% for the corresponding period in 2018. The effective tax benefit rate decrease was primarily due to changes in state apportionment rates following the reorganization of Southern Power's legal entities that own and operate certain solar facilities and a reduction of tax benefits from wind PTCs primarily as a result of the sale of a noncontrolling tax equity interest in SP Wind.
Southern Company Alabama Power,Gas
Southern Company Gas' effective tax rate was 22.3% for the three months ended March 31, 2019 compared to 27.2% for the corresponding period in 2018. This decrease was primarily related to tax impacts of the goodwill impairment charge recorded in the first quarter 2018 and an increase in the flowback of excess deferred income taxes in 2019 primarily at Atlanta Gas Light as previously authorized by the Georgia PowerPSC. See Note 2 to the financial statements under "Nuclear Decommissioning""Southern Company Gas – Rate Proceedings" in Item 8 of the Form 10-K for additional information.
Southern Power has contingent payment obligations related to certain acquisitions whereby Southern Power is primarily obligated to make generation-based payments to the seller, which commenced at the commercial operation date of the respective facility and continue through 2026. The obligation is categorized as Level 3 under Fair Value Measurements as the fair value is determined using significant unobservable inputs for the forecasted facility generation in MW-hours, as well as other inputs such as a fixed dollar amount per MW-hour, and a discount rate. The fair value of contingent consideration reflects the net present value of expected payments and any periodic change arising from forecasted generation is expected to be immaterial."Other investments" include investments that are not traded in the open market. The fair value of these investments has been determined based on market factors including comparable multiples and the expectations regarding cash flows and business plan executions.
As of March 31, 2018, the fair value measurements of private equity investments held in the nuclear decommissioning trusts that are calculated at net asset value per share (or its equivalent) as a practical expedient, as well as the nature and risks of those investments, were as follows:
|
| | | | | | | | | | | |
| As of March 31, 2018: | Fair Value | | Unfunded Commitments | | Redemption Frequency | | Redemption Notice Period |
| | (in millions) | | | | |
| Southern Company | $ | 32 |
| | $ | 19 |
| | Not Applicable | | Not Applicable |
| Alabama Power | $ | 32 |
| | $ | 19 |
| | Not Applicable | | Not Applicable |
Private equity funds include a fund-of-funds that invests in high-quality private equity funds across several market sectors, funds that invest in real estate assets, and a fund that acquires companies to create resale value. Private equity funds do not have redemption rights. Distributions from these funds will be received as the underlying investments in the funds are liquidated. Liquidations are expected to occur at various times over the next 10 years.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
As of March 31, 2018, other financial instruments for which the carrying amount did not equal fair value were as follows:
|
| | | | | | | |
| | Carrying Amount | | Fair Value |
| | (in millions) |
| Long-term debt, including securities due within one year: | | | |
| Southern Company | $ | 47,479 |
| | $ | 48,836 |
|
| Alabama Power | 7,626 |
| | 8,093 |
|
| Georgia Power | 11,402 |
| | 11,851 |
|
| Gulf Power | 1,285 |
| | 1,317 |
|
| Mississippi Power | 1,781 |
| | 1,790 |
|
| Southern Power | 5,878 |
| | 6,006 |
|
| Southern Company Gas | 6,036 |
| | 6,276 |
|
The fair values are determined using Level 2 measurements and are based on quoted market prices for the same or similar issues or on the current rates available to Southern Company Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Southern Power, and Southern Company Gas.
Earnings per Share
For Southern Company, the only difference in computing basic and diluted earnings per share is attributable to awards outstanding under the stock option and performance share plans. See Note 8 to the financial statements of Southern Company in Item 8 of the Form 10-K for information on the stock option and performance share plans. The effect of both stock options and performance share award units was determined using the treasury stock method. Shares used to compute diluted earnings per share were as follows:
|
| | | | |
| | Three Months Ended March 31, 2018 | Three Months Ended March 31, 2017 |
| | (in millions) |
| As reported shares | 1,011 |
| 993 |
|
| Effect of options and performance share award units | 5 |
| 7 |
|
| Diluted shares | 1,016 |
| 1,000 |
|
Stock options and performance share award units that were not included in the diluted earnings per share calculation because they were anti-dilutive were immaterial for the three months ended March 31, 2018 and 2017.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Changes in Stockholders' Equity
The following table presents year-to-date changes in stockholders' equity of Southern Company:
|
| | | | | | | | | | | | | | | | | |
| | Number of Common Shares | | Common
Stockholders'
Equity | Preferred and Preference Stock of Subsidiaries | | Total
Stockholders'
Equity |
| | Issued | Treasury | | Noncontrolling Interests(*) |
| | (in thousands) | | (in millions) |
| Balance at December 31, 2017 | 1,008,532 |
| (929 | ) | | $ | 24,167 |
| $ | — |
| $ | 1,361 |
| $ | 25,528 |
|
| Consolidated net income attributable to Southern Company | — |
| — |
| | 938 |
| — |
| — |
| 938 |
|
| Other comprehensive income | — |
| — |
| | 30 |
| — |
| — |
| 30 |
|
| Stock issued | 4,055 |
| — |
| | 113 |
| — |
| — |
| 113 |
|
| Stock-based compensation | — |
| — |
| | 36 |
| — |
| — |
| 36 |
|
| Cash dividends on common stock | — |
| — |
| | (586 | ) | — |
| — |
| (586 | ) |
| Contributions from noncontrolling interests | — |
| — |
| | — |
| — |
| 9 |
| 9 |
|
| Distributions to noncontrolling interests | — |
| — |
| | — |
| — |
| (13 | ) | (13 | ) |
| Net income (loss) attributable to noncontrolling interests | — |
| — |
| | — |
| — |
| (6 | ) | (6 | ) |
| Other | — |
| (33 | ) | | (22 | ) | — |
| (2 | ) | (24 | ) |
| Balance at March 31, 2018 | 1,012,587 |
| (962 | ) | | $ | 24,676 |
| $ | — |
| $ | 1,349 |
| $ | 26,025 |
|
| | | | | | | | |
| Balance at December 31, 2016 | 991,213 |
| (819 | ) | | $ | 24,758 |
| $ | 609 |
| $ | 1,245 |
| $ | 26,612 |
|
| Consolidated net income attributable to Southern Company | — |
| — |
| | 658 |
| — |
| — |
| 658 |
|
| Other comprehensive income (loss) | — |
| — |
| | (9 | ) | — |
| — |
| (9 | ) |
| Stock issued | 4,240 |
| — |
| | 186 |
| — |
| — |
| 186 |
|
| Stock-based compensation | — |
| — |
| | 57 |
| — |
| — |
| 57 |
|
| Cash dividends on common stock | — |
| — |
| | (556 | ) | — |
| — |
| (556 | ) |
| Contributions from noncontrolling interests | — |
| — |
| | — |
| — |
| 71 |
| 71 |
|
| Distributions to noncontrolling interests | — |
| — |
| | — |
| — |
| (18 | ) | (18 | ) |
| Net income (loss) attributable to noncontrolling interests | — |
| — |
| | — |
| — |
| (4 | ) | (4 | ) |
| Other | — |
| (35 | ) | | — |
| — |
| (1 | ) | (1 | ) |
| Balance at March 31, 2017 | 995,453 |
| (854 | ) | | $ | 25,094 |
| $ | 609 |
| $ | 1,293 |
| $ | 26,996 |
|
| |
(*) | Primarily related to Southern Power Company and excludes redeemable noncontrolling interests. See Note 10 to the financial statements of Southern Power in Item 8 of the Form 10-K for additional information. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
See Note 6 to the financial statements of Southern Company and Georgia Power under "DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K for additional information regarding Georgia Power's Loan Guarantee Agreement.
Bank Credit Arrangements
Bank credit arrangements provide liquidity support to the registrants' commercial paper borrowings and the traditional electric operating companies' revenue bonds. The amount of variable rate revenue bonds of the traditional electric operating companies outstanding requiring liquidity support as of March 31, 2018 was approximately $1.5 billion (comprised of approximately $854 million at Alabama Power, $550 million at Georgia Power, $82 million at Gulf Power, and $40 million at Mississippi Power). In addition, at March 31, 2018, the traditional electric operating companies had approximately $437 million (comprised of approximately $120 million at Alabama Power, $192 million at Georgia Power, $75 million at Gulf Power, and $50 million at Mississippi Power) of revenue bonds outstanding that were required to be remarketed within the next 12 months. Subsequent to March 31, 2018, $55 million of these pollution control revenue bonds of Georgia Power were purchased and held by Georgia Power. See Note 6 to the financial statements of each registrant under "Bank Credit Arrangements" in Item 8 of the Form 10-K and "Financing Activities" herein for additional information.
The following table outlines the committed credit arrangements by company as of March 31, 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Expires | | | | Executable Term Loans | | Expires Within One Year |
| Company | 2018 | 2019 | 2020 | 2022 | | Total | | Unused | | One Year | | Two Years | | Term Out | | No Term Out |
| | (in millions) |
Southern Company(a) | $ | — |
| $ | — |
| $ | — |
| $ | 2,000 |
| | $ | 2,000 |
| | $ | 1,999 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Alabama Power | 35 |
| — |
| 500 |
| 800 |
| | 1,335 |
| | 1,335 |
| | — |
| | — |
| | — |
| | 35 |
|
| Georgia Power | — |
| — |
| — |
| 1,750 |
| | 1,750 |
| | 1,736 |
| | — |
| | — |
| | — |
| | — |
|
| Gulf Power | 20 |
| 25 |
| 235 |
| — |
| | 280 |
| | 280 |
| | 45 |
| | — |
| | 20 |
| | — |
|
| Mississippi Power | 100 |
| — |
| — |
| — |
| | 100 |
| | 100 |
| | — |
| | — |
| | — |
| | 100 |
|
Southern Power Company(b) | — |
| — |
| — |
| 750 |
| | 750 |
| | 728 |
| | — |
| | — |
| | — |
| | — |
|
Southern Company Gas(c) | — |
| — |
| — |
| 1,900 |
| | 1,900 |
| | 1,890 |
| | — |
| | — |
| | — |
| | — |
|
| Other | 30 |
| — |
| — |
| — |
| | 30 |
| | 30 |
| | 20 |
| | — |
| | 20 |
| | 10 |
|
| Southern Company Consolidated | $ | 185 |
| $ | 25 |
| $ | 735 |
| $ | 7,200 |
| | $ | 8,145 |
| | $ | 8,098 |
| | $ | 65 |
| | $ | — |
| | $ | 40 |
| | $ | 145 |
|
| |
(a) | Represents the Southern Company parent entity. |
| |
(b) | Does not include Southern Power's $120 million continuing letter of credit facility for standby letters of credit expiring in 2019, of which $21 million remains unused at March 31, 2018.
|
| |
(c) | Southern Company Gas, as the parent entity, guarantees the obligations of Southern Company Gas Capital, which is the borrower of $1.4 billion of these arrangements. Southern Company Gas' committed credit arrangements also include $500 million for which Nicor Gas is the borrower and which is restricted for working capital needs of Nicor Gas.
|
Subject to applicable market conditions, Southern Company and its subsidiaries expect to renew or replace their bank credit arrangements as needed, prior to expiration. In connection therewith, Southern Company and its subsidiaries may extend the maturity dates and/or increase or decrease the lending commitments thereunder.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Financing Activities
The following table outlines the long-term debt financing activities for Southern Company and its subsidiaries for the first three months of 2018:
|
| | | | | | | | | | | |
| Company | Senior Note Issuances | | Revenue Bond
Maturities, Redemptions, and
Repurchases | | Other Long-Term Debt Redemptions and Maturities(*) |
| | (in millions) |
| Georgia Power | $ | — |
| | $ | 278 |
| | $ | 102 |
|
| Mississippi Power | 600 |
| | — |
| | 900 |
|
| Other | — |
| | — |
| | 3 |
|
| Southern Company Consolidated | $ | 600 |
| | $ | 278 |
| | $ | 1,005 |
|
| |
(*) | Includes reductions in capital lease obligations resulting from cash payments under capital leases. |
Southern Company
In March 2018, Southern Company entered into a $900 million short-term floating rate bank loan bearing interest based on one-month LIBOR. The proceeds were used for working capital and other general corporate purposes.
Georgia Power
In January 2018, Georgia Power repaid its outstanding $150 million and $100 million floating rate bank loans due May 31, 2018 and October 26, 2018, respectively.
In March 2018, Georgia Power purchased and held $104.6 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), First Series 2013 and $173 million aggregate principal amount of Development Authority of Bartow County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Bowen Project), First Series 2009. Georgia Power may reoffer these bonds to the public at a later date.
Mississippi Power
In March 2018, Mississippi Power issued $300 million aggregate principal amount of Series 2018A Floating Rate Senior Notes due March 27, 2020 bearing interest based on three-month LIBOR and $300 million aggregate principal amount of Series 2018B 3.95% Senior Notes due March 30, 2028. In March 2018, Mississippi Power also entered into a $300 million short-term floating rate bank loan bearing interest based on one-month LIBOR, of which $125 million was repaid subsequent to March 31, 2018. Mississippi Power used the proceeds from these financings to repay the entire $900 million principal amount of its unsecured term loan.
Southern Company Gas
On January 4, 2018, Southern Company Gas issued a floating rate promissory note to Southern Company in an aggregate principal amount of $100 million bearing interest based on one-month LIBOR. On March 28, 2018, Southern Company Gas repaid this promissory note.
Subsequent to March 31, 2018, Pivotal Utility Holdings caused $20 million aggregate principal amount of gas facility revenue bonds to be redeemed and provided notice of its intent to cause, on May 23, 2018, the remaining $180 million aggregate principal amount of gas facility revenue bonds issued for its benefit to be redeemed. Subsequent to March 31, 2018, Pivotal Utility Holdings, as borrower, and Southern Company Gas, as guarantor, entered into a $181 million short-term delayed draw floating rate bank term loan agreement. Pivotal Utility Holdings has the right to borrow up to $181 million on or before May 31, 2018, upon satisfaction of certain customary conditions. Pivotal Utility Holdings expects the proceeds to be used to repay the remaining $180 million of gas facility revenue bonds.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
On January 1, 2018, the qualified defined benefit pension plan of Southern Company Gas was merged into the qualified defined benefit pension plan of Southern Company. Following the plan merger, Southern Companysystem has a qualified defined benefit, trusteed, pension plan covering substantially all employees, with the exception of employees at PowerSecure. The Southern Company qualified defined benefit pension plan is funded in accordance with requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA). No mandatory contributions to the Southern Company qualified defined benefit pension plan are anticipated for the year ending December 31, 2018.2019. The Southern
In addition, the Southern
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Company Gas non-qualified retirement plans were merged into the Southern Company non-qualified retirement plan (defined benefit and defined contribution). Following the non-qualified retirement plan mergers, Southern Company continues to providesystem also provides certain non-qualified defined benefits for a select group of management and highly compensated employees, which are funded on a cash basis.
Furthermore, In addition, the Southern Company system provides certain medical care and life insurance benefits for retired employees through other postretirement benefit plans. The traditional electric operating companies fund related other postretirement trusts to the extent required by their respective regulatory commissions. Southern Company Gas also provides certain medical care and life insurance benefits for eligible retired employees through a postretirement benefit plan. Southern Company Gas has a separate unfunded supplemental retirement health care plan that provides medical care and life insurance benefits to employees of discontinued businesses.
As indicated in Note (A), the registrants adopted ASU 2017-07 as of January 1, 2018. ASU 2017-07 requires that an employer report the service cost component of net periodic benefit costs in the same line item or items as other compensation costs and requires the other components of net periodic benefit costs to be separately presented in the statements of income outside of income from operations. The presentation requirements of ASU 2017-07 have been applied retrospectively with the service cost component of net periodic benefit costs included in operations and maintenance and all other components of net periodic benefit costs included in other income (expense), net in the statements of income for the three months ended March 31, 2017.
With respect to the presentation requirements, the registrants have used the practical expedient provided by ASU 2017-07, which permits an employer to use the amounts disclosed in its retirement benefits footnote for prior comparative periods as the estimation basis for applying the retrospective presentation requirements to those periods. The amounts of the other components of net periodic benefit costs reclassified for the prior period are presented in the following tables.
See Note 211 to the financial statements of each registrant in Item 8 of the Form 10-K for additional information.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Components of the net periodic benefit costs for the three months ended March 31, 20182019 and 20172018 are presented in the following tables.
| | | Three Months Ended March 31, 2018 | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power | | Southern Power | | Southern Company Gas | |
Three Months Ended March 31, 2019 | | Southern Company | | Alabama Power | | Georgia Power | | Mississippi Power | | Southern Power | | Southern Company Gas |
| | (in millions) | (in millions) |
Pension Plans | | Service cost | $ | 90 |
| | $ | 19 |
| | $ | 22 |
| | $ | 4 |
| | $ | 4 |
| | $ | 2 |
| | $ | 8 |
| $ | 73 |
| | $ | 17 |
| | $ | 19 |
| | $ | 3 |
| | $ | 2 |
| | $ | 6 |
|
| Interest cost | 116 |
| | 25 |
| | 35 |
| | 5 |
| | 5 |
| | 1 |
| | 10 |
| 123 |
| | 28 |
| | 39 |
| | 6 |
| | 1 |
| | 9 |
|
| Expected return on plan assets | (236 | ) | | (51 | ) | | (74 | ) | | (10 | ) | | (10 | ) | | (3 | ) | | (18 | ) | (221 | ) | | (51 | ) | | (73 | ) | | (10 | ) | | (2 | ) | | (15 | ) |
| Amortization: | | | | | | | | | | | | | | | | | | | | | | | | |
| Prior service costs | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) |
| Regulatory asset | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
|
| Net (gain)/loss | 53 |
| | 14 |
| | 17 |
| | 2 |
| | 3 |
| | 1 |
| | 3 |
| 30 |
| | 9 |
| | 11 |
| | 1 |
| | — |
| | 1 |
|
| Net periodic pension cost (income) | $ | 24 |
| | $ | 7 |
| | $ | — |
| | $ | 1 |
| | $ | 2 |
| | $ | 1 |
| | $ | 5 |
| $ | 5 |
| | $ | 3 |
| | $ | (4 | ) | | $ | — |
| | $ | 1 |
| | $ | 3 |
|
Postretirement Benefits | | Service cost | $ | 6 |
| | $ | 1 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| $ | 5 |
| | $ | 1 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| Interest cost | 19 |
| | 4 |
| | 7 |
| | 1 |
| | 1 |
| | — |
| | 2 |
| 17 |
| | 4 |
| | 7 |
| | 1 |
| | — |
| | 2 |
|
| Expected return on plan assets | (17 | ) | | (6 | ) | | (6 | ) | | — |
| | — |
| | — |
| | (2 | ) | (16 | ) | | (6 | ) | | (6 | ) | | — |
| | — |
| | (2 | ) |
| Amortization: | | | | | | | | | | | | | | | | | | | | | | | | |
| Prior service costs | 2 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| 1 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
| Regulatory asset | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
|
| Net (gain)/loss | 3 |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| (1 | ) | | — |
| | — |
| | — |
| | — |
| | (1 | ) |
| Net periodic postretirement benefit cost | $ | 13 |
| | $ | — |
| | $ | 5 |
| | $ | 1 |
| | $ | 1 |
| | $ | — |
| | $ | 2 |
| $ | 6 |
| | $ | — |
| | $ | 2 |
| | $ | 1 |
| | $ | — |
| | $ | 2 |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
| | Three Months Ended March 31, 2017(*) | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power | | Southern Company Gas | |
Three Months Ended March 31, 2018 | | Southern Company | | Alabama Power | | Georgia Power | | Mississippi Power | | Southern Power | | Southern Company Gas |
| | (in millions) | (in millions) |
Pension Plans | | Service cost | $ | 73 |
|
| $ | 16 |
|
| $ | 19 |
|
| $ | 3 |
|
| $ | 4 |
|
| $ | 6 |
| $ | 90 |
|
| $ | 19 |
|
| $ | 22 |
|
| $ | 4 |
|
| $ | 2 |
|
| $ | 8 |
|
| Interest cost | 114 |
|
| 24 |
|
| 34 |
|
| 5 |
|
| 5 |
|
| 10 |
| 116 |
|
| 25 |
|
| 35 |
|
| 5 |
|
| 1 |
|
| 10 |
|
| Expected return on plan assets | (224 | ) |
| (49 | ) |
| (71 | ) |
| (10 | ) |
| (10 | ) |
| (18 | ) | (236 | ) |
| (51 | ) |
| (74 | ) |
| (10 | ) |
| (3 | ) |
| (18 | ) |
| Amortization: | | | | | | | | | | | | | | | | | | | | | | |
| Prior service costs | 3 |
|
| 1 |
|
| 1 |
|
| — |
|
| — |
|
| — |
| 1 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1 | ) |
| Regulatory asset | | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
|
| Net (gain)/loss | 40 |
|
| 10 |
|
| 14 |
|
| 2 |
|
| 2 |
|
| 5 |
| 53 |
|
| 14 |
|
| 17 |
|
| 3 |
|
| 1 |
|
| 3 |
|
| Net periodic pension cost (income) | $ | 6 |
|
| $ | 2 |
|
| $ | (3 | ) |
| $ | — |
|
| $ | 1 |
|
| $ | 3 |
| $ | 24 |
|
| $ | 7 |
|
| $ | — |
|
| $ | 2 |
|
| $ | 1 |
|
| $ | 5 |
|
Postretirement Benefits | | Service cost | $ | 6 |
| | $ | 1 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | 1 |
| $ | 6 |
| | $ | 1 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| Interest cost | 20 |
| | 5 |
| | 7 |
| | 1 |
| | 1 |
| | 3 |
| 19 |
| | 4 |
| | 7 |
| | 1 |
| | — |
| | 2 |
|
| Expected return on plan assets | (16 | ) | | (6 | ) | | (6 | ) | | — |
| | — |
| | (2 | ) | (17 | ) | | (6 | ) | | (6 | ) | | — |
| | — |
| | (2 | ) |
| Amortization: | | | | | | | | | | | | | | | | | | | | | | |
| Prior service costs | 2 |
| | 1 |
| | — |
| | — |
| | — |
| | (1 | ) | 2 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
| Regulatory asset | | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
| Net (gain)/loss | 2 |
| | — |
| | 2 |
| | — |
| | — |
| | 1 |
| 3 |
| | — |
| | 2 |
| | — |
| | — |
| | — |
|
| Net periodic postretirement benefit cost | $ | 14 |
| | $ | 1 |
| | $ | 5 |
| | $ | 1 |
| | $ | 1 |
| | $ | 2 |
| $ | 13 |
| | $ | — |
| | $ | 5 |
| | $ | 1 |
| | $ | — |
| | $ | 2 |
|
| |
(*) | Excludes Southern Power since Southern Power did not participate in the qualified pension and postretirement benefit plans until December 2017. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
(I) FAIR VALUE MEASUREMENTS
As of March 31, 2019, assets and liabilities measured at fair value on a recurring basis during the period, together with their associated level of the fair value hierarchy, were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using: | | |
| As of March 31, 2019: | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Net Asset Value as a Practical Expedient (NAV) | | Total |
| | (in millions) |
| Southern Company | | | | | | | | | |
| Assets: | | | | | | | | | |
Energy-related derivatives(a)(b) | $ | 322 |
| | $ | 128 |
| | $ | 4 |
| | $ | — |
| | $ | 454 |
|
| Foreign currency derivatives | — |
| | 38 |
| | — |
| | — |
| | 38 |
|
Investments in trusts:(c)(d) | | | | | | | | | |
| Domestic equity | 682 |
| | 120 |
| | — |
| | — |
| | 802 |
|
| Foreign equity | 60 |
| | 195 |
| | — |
| | — |
| | 255 |
|
| U.S. Treasury and government agency securities | — |
| | 283 |
| | — |
| | — |
| | 283 |
|
| Municipal bonds | — |
| | 73 |
| | — |
| | — |
| | 73 |
|
| Pooled funds – fixed income | — |
| | 14 |
| | — |
| | — |
| | 14 |
|
| Corporate bonds | 24 |
| | 298 |
| | — |
| | — |
| | 322 |
|
| Mortgage and asset backed securities | — |
| | 72 |
| | — |
| | — |
| | 72 |
|
| Private equity | — |
| | — |
| | — |
| | 48 |
| | 48 |
|
| Cash and cash equivalents | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
| Other | 28 |
| | 4 |
| | — |
| | — |
| | 32 |
|
| Cash equivalents | 907 |
| | 3 |
| | — |
| | — |
| | 910 |
|
| Other investments | 9 |
| | 14 |
| | — |
| | — |
| | 23 |
|
| Total | $ | 2,033 |
| | $ | 1,242 |
| | $ | 4 |
| | $ | 48 |
| | $ | 3,327 |
|
| Liabilities: | | | | | | | | | |
Energy-related derivatives(a)(b) | $ | 466 |
| | $ | 106 |
| | $ | 23 |
| | $ | — |
| | $ | 595 |
|
| Interest rate derivatives | — |
| | 35 |
| | — |
| | — |
| | 35 |
|
| Foreign currency derivatives | — |
| | 24 |
| | — |
| | — |
| | 24 |
|
| Contingent consideration | — |
| | — |
| | 21 |
| | — |
| | 21 |
|
| Total | $ | 466 |
| | $ | 165 |
| | $ | 44 |
| | $ | — |
| | $ | 675 |
|
| | | | | | | | | | |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using: | | |
| As of March 31, 2019: | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Net Asset Value as a Practical Expedient (NAV) | | Total |
| | (in millions) |
| Alabama Power | | | | | | | | | |
| Assets: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | 6 |
|
Nuclear decommissioning trusts:(c) | | | | | | | | |
|
|
| Domestic equity | 446 |
| | 108 |
| | — |
| | — |
| | 554 |
|
| Foreign equity | 60 |
| | 57 |
| | — |
| | — |
| | 117 |
|
| U.S. Treasury and government agency securities | — |
| | 18 |
| | — |
| | — |
| | 18 |
|
| Municipal bonds | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
| Corporate bonds | 24 |
| | 139 |
| | — |
| | — |
| | 163 |
|
| Mortgage and asset backed securities | — |
| | 24 |
| | — |
| | — |
| | 24 |
|
| Private equity | — |
| | — |
| | — |
| | 48 |
| | 48 |
|
| Other | 5 |
| | — |
| | — |
| | — |
| | 5 |
|
| Cash equivalents | 569 |
| | 3 |
| | — |
| | — |
| | 572 |
|
| Other investments | — |
| | 14 |
| | — |
| | — |
| | 14 |
|
| Total | $ | 1,104 |
| | $ | 370 |
| | $ | — |
| | $ | 48 |
| | $ | 1,522 |
|
| Liabilities: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 7 |
| | $ | — |
| | $ | — |
| | $ | 7 |
|
| | | | | | | | | | |
| Georgia Power | | | | | | | | | |
| Assets: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 9 |
| | $ | — |
| | $ | — |
| | $ | 9 |
|
Nuclear decommissioning trusts:(c)(d) | | | | | | | | | |
| Domestic equity | 236 |
| | 1 |
| | — |
| | — |
| | 237 |
|
| Foreign equity | — |
| | 134 |
| | — |
| | — |
| | 134 |
|
| U.S. Treasury and government agency securities | — |
| | 265 |
| | — |
| | — |
| | 265 |
|
| Municipal bonds | — |
| | 72 |
| | — |
| | — |
| | 72 |
|
| Corporate bonds | — |
| | 160 |
| | — |
| | — |
| | 160 |
|
| Mortgage and asset backed securities | — |
| | 47 |
| | — |
| | — |
| | 47 |
|
| Other | 23 |
| | 4 |
| | — |
| | — |
| | 27 |
|
| Total | $ | 259 |
| | $ | 692 |
| | $ | — |
| | $ | — |
| | $ | 951 |
|
| Liabilities: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 16 |
| | $ | — |
| | $ | — |
| | $ | 16 |
|
| Interest rate derivatives | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
| Total | $ | — |
| | $ | 18 |
| | $ | — |
| | $ | — |
| | $ | 18 |
|
| | | | | | | | | | |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using: | | |
| As of March 31, 2019: | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Net Asset Value as a Practical Expedient (NAV) | | Total |
| | (in millions) |
| Mississippi Power | | | | | | | | | |
| Assets: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
| Cash equivalents | 202 |
| | — |
| | — |
| | — |
| | 202 |
|
| Total | $ | 202 |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 205 |
|
| Liabilities: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | 6 |
|
| | | | | | | | | | |
| Southern Power | | | | | | | | | |
| Assets: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| Foreign currency derivatives | — |
| | 38 |
| | — |
| | — |
|
| 38 |
|
| Cash equivalents | 10 |
| | — |
| | — |
| | — |
| | 10 |
|
| Total | $ | 10 |
| | $ | 39 |
| | $ | — |
| | $ | — |
| | $ | 49 |
|
| Liabilities: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
| Foreign currency derivatives | — |
| | 24 |
| | — |
| | — |
| | 24 |
|
| Contingent consideration | — |
| | — |
| | 21 |
| | — |
| | 21 |
|
| Total | $ | — |
|
| $ | 27 |
|
| $ | 21 |
|
| $ | — |
|
| $ | 48 |
|
| | | | | | | | | | |
| Southern Company Gas | | | | | | | | | |
| Assets: | | | | | | | | | |
Energy-related derivatives(a)(b) | $ | 322 |
| | $ | 108 |
| | $ | 4 |
| | $ | — |
| | $ | 434 |
|
| Non-qualified deferred compensation trusts: | | | | | | | | | |
| Domestic equity | — |
| | 11 |
| | — |
| | — |
| | 11 |
|
| Foreign equity | — |
| | 4 |
| | — |
| | — |
| | 4 |
|
| Pooled funds – fixed income | — |
| | 14 |
| | — |
| | — |
| | 14 |
|
| Cash equivalents | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
| Cash equivalents | 13 |
| | — |
| | — |
| | — |
| | 13 |
|
| Total | $ | 336 |
|
| $ | 137 |
|
| $ | 4 |
|
| $ | — |
|
| $ | 477 |
|
| Liabilities: | | | | | | | | | |
Energy-related derivatives(a)(b) | $ | 466 |
| | $ | 73 |
| | $ | 23 |
| | $ | — |
| | $ | 562 |
|
| |
(H)(a) | INCOME TAXESEnergy-related derivatives exclude $11 million associated with premiums and certain weather derivatives accounted for based on intrinsic value rather than fair value. |
| |
| (b) | Energy-related derivatives exclude cash collateral of $190 million. |
| |
| (c) | Excludes receivables related to investment income, pending investment sales, payables related to pending investment purchases, and currencies. See Note 6 to the financial statements in Item 8 of the Form 10-K for additional information. |
| |
| (d) | Includes investment securities pledged to creditors and collateral received and excludes payables related to the securities lending program. As of March 31, 2019, approximately $72 million of the fair market value of Georgia Power's nuclear decommissioning trust funds' securities were on loan to creditors under the funds' managers' securities lending program. See Note 6 to the financial statements in Item 8 of the Form 10-K for additional information. |
See Note 5
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Southern Company, Alabama Power, and Georgia Power continue to elect the financial statements of each registrantoption to fair value investment securities held in Item 8the nuclear decommissioning trust funds. The fair value of the Form 10-K for additional tax information.
Federal Tax Reform Legislation
Followingfunds, including reinvested interest and dividends and excluding the enactment of the Tax Reform Legislation, the SEC staff issued Staff Accounting Bulletin 118 – "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" (SAB 118), which provides for a measurement period of up to one year from the enactment date to complete accounting under GAAPfunds' expenses, increased for the tax effects ofthree months ended March 31, 2019 and decreased for the legislation. Due tothree months ended March 31, 2018 by the complex and comprehensive nature of the enacted tax law changes, and their application under GAAP, the registrants consider all amounts recordedshown in the financial statementstable below. The changes were recorded as a result ofchange to the Tax Reform Legislation to be "provisional" as discussed in SAB 118 and subject to revision. Each of the registrants are awaiting additional guidance from industry and income tax authorities in order to finalize its accounting. The ultimate impact of the Tax Reform Legislation on deferred income tax assets and liabilities and the related regulatory assets and liabilities cannot be determined at this time. See Note (B) under "Regulatory Matters" for additional information.
Current and Deferred Income Taxes
Tax Credit Carryforwards
Southern Company had federal ITC and PTC carryforwards (primarily related to Southern Power) totaling $2.3 billion as of March 31, 2018 compared to $2.1 billion as of December 31, 2017.AROs for Georgia Power and Alabama Power, respectively.
The federal ITC carryforwards begin expiring in 2034 but are expected to be fully utilized by 2027. The PTC carryforwards begin expiring in 2032 but are expected to be utilized by 2027. The estimated tax credit utilization reflects a 2018 abandonment loss related to certain Kemper County energy facility expenditures. The expected utilization of tax credit carryforwards could be further delayed by numerous factors, including the acquisition of additional renewable projects and increased generation at existing wind facilities. The ultimate outcome of these matters cannot be determined at this time. |
| | | | | | |
| | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 |
| | (in millions) |
| Southern Company | $ | 152 |
| $ | (11 | ) |
| Alabama Power | 87 |
| (5 | ) |
| Georgia Power | 65 |
| (6 | ) |
Effective Tax Rate
Each registrant'sDetails of significant changes in the effective tax rate for the three months ended March 31, 2018 varied significantly as compared to the corresponding period in 2017 due to the 14% lower 2018 federal tax rate resulting from the Tax Reform Legislation.applicable registrants are provided herein.
Southern Company
Southern Company's effective tax rate is typically lower than the statutory rate due to employee stock plans' dividend deduction, non-taxable AFUDC equity and flowback of excess deferred income taxes at the regulated utilities, and federal income tax benefits from ITCs and PTCs.PTCs, primarily at Southern Power.
Southern Company's effective tax rate was 10.8%39.8% for the three months ended March 31, 20182019 compared to 32.1%10.8% for the corresponding period in 2017.2018. The effective tax rate increase was primarily due to the tax impact from the sale of Gulf Power. See Note (K) for additional information.
Alabama Power
Alabama Power's effective tax rate was 21.9% for the three months ended March 31, 2019 compared to 26.3% for the corresponding period in 2018. The effective tax rate decrease was primarily due to the lower federal tax rateapplication in 2018 as a result of the accounting order approved by the Alabama PSC in May 2018 related to the Tax Reform Legislation, as well as net state income tax benefits relatedLegislation. See Note 2 to changesthe financial statements under "Alabama Power – Tax Reform Accounting Order" in state apportionment rates arising fromItem 8 of the reorganization of Southern Power's legal entities as discussed further herein.
Southern Company recognizes PTCs when wind energy is generated and sold (using the prescribed KWH rate in applicable federal and state statutes), which may differ significantly from amounts computed on a quarterly basis using an overall estimated annual effective income tax rate. Southern Company uses this method of recognition since the amount of PTCs can be significantly impacted by wind generation. This method can significantly affect the effective income tax rateForm 10-K for the period depending on the amount of pretax income.additional information.
Mississippi Power
Mississippi Power's effective tax (benefit) rate was (34.7)%15.5% for the three months ended March 31, 20182019 compared to (58.7)a benefit rate of (34.7)% for the corresponding period in 2017. In addition to the reduction in the federal corporate income tax rate as a result of the Tax Reform Legislation, the2018. The effective tax rate increase was primarily due to lower estimated losses on the Kemper IGCC in 2019, partially offset by an increase in the flowback of excess deferred income taxes as a result of a settlement agreement reached with wholesale customers under the MRA tariff. See Note (B) under "Mississippi Power" for additional information.
Southern Power
Southern Power's effective tax benefit rate was (49.8)% for the three months ended March 31, 2019 compared to (647.0)% for the corresponding period in 2018. The effective tax benefit rate decrease was primarily due to changes in state apportionment rates following the reorganization of Southern Power's legal entities that own and operate certain solar facilities and a reduction of tax benefits from wind PTCs primarily as a result of the sale of a noncontrolling tax equity interest in SP Wind.
Southern Company Gas
Southern Company Gas' effective tax rate was 22.3% for the three months ended March 31, 2019 compared to 27.2% for the corresponding period in 2018. This decrease was primarily related to tax impacts of the goodwill impairment charge recorded in the first quarter 2018 and an increase in the flowback of excess deferred income taxes in 2019 primarily at Atlanta Gas Light as previously authorized by the Georgia PSC. See Note 2 to the financial statements under "Southern Company Gas – Rate Proceedings" in Item 8 of the Form 10-K for additional information.
(H) RETIREMENT BENEFITS
The Southern Company system has a qualified defined benefit, trusteed, pension plan covering substantially all employees, with the exception of employees at PowerSecure. The qualified pension plan is funded in accordance with requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA). No mandatory contributions to the qualified pension plan are anticipated for the year ending December 31, 2019. The Southern
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Company system also provides certain non-qualified defined benefits for a select group of management and highly compensated employees, which are funded on a cash basis. In addition, the Kemper IGCCSouthern Company system provides certain medical care and life insurance benefits for the three months ended March 31, 2018 comparedretired employees through other postretirement benefit plans. The traditional electric operating companies fund other postretirement trusts to the corresponding period in 2017, partially offsetextent required by non-deductible AFUDC equity in 2017.
their respective regulatory commissions. Southern Power
Southern Power's effective tax (benefit) rate was (647.0)% for the three months ended March 31, 2018 comparedCompany Gas has a separate unfunded supplemental retirement health care plan that provides medical care and life insurance benefits to (385.9)% for the corresponding period in 2017. In addition to the reduction in the federal corporate income tax rate as a resultemployees of the Tax Reform Legislation, the effective tax rate decrease was primarily due to net state income tax benefits related to certain changes in apportionment rates arising from the reorganization of Southern Power's legal entities as described below.
Southern Power recognizes PTCs when wind energy is generated and sold (using the prescribed KWH rate in applicable federal and state statutes), which may differ significantly from amounts computed on a quarterly basis using an overall estimated annual effective income tax rate. Southern Power uses this method of recognition since the amount of PTCs can be significantly impacted by wind generation. This method can significantly affect the effective income tax rate for the period depending on the amount of pretax income.
Legal Entity Reorganization
In March 2018, Southern Power substantially completed a legal entity reorganization of various direct and indirect subsidiaries that own and operate substantially all of its solar facilities, including certain subsidiaries owned in partnership with various third parties. The reorganization resulted in net state tax benefits related to certain changes in apportionment rates totaling approximately $50 million, which were recorded in the first quarter 2018. In April 2018, Southern Power completed the final stage of the reorganization resulting in additional net state tax benefits of approximately $4 million.
Unrecognized Tax Benefitsdiscontinued businesses.
See Note 511 to the financial statements of each registrant under "Unrecognized Tax Benefits" in Item 8 of the Form 10-K for additional information.
The registrants had no unrecognized tax benefits asComponents of the net periodic benefit costs for the three months ended March 31, 2019 and 2018 are presented in the following tables.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2019 | Southern Company | | Alabama Power | | Georgia Power | | Mississippi Power | | Southern Power | | Southern Company Gas |
| | (in millions) |
| Pension Plans |
| Service cost | $ | 73 |
| | $ | 17 |
| | $ | 19 |
| | $ | 3 |
| | $ | 2 |
| | $ | 6 |
|
| Interest cost | 123 |
| | 28 |
| | 39 |
| | 6 |
| | 1 |
| | 9 |
|
| Expected return on plan assets | (221 | ) | | (51 | ) | | (73 | ) | | (10 | ) | | (2 | ) | | (15 | ) |
| Amortization: | | | | | | | | | | | |
| Prior service costs | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) |
| Regulatory asset | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
|
| Net (gain)/loss | 30 |
| | 9 |
| | 11 |
| | 1 |
| | — |
| | 1 |
|
| Net periodic pension cost (income) | $ | 5 |
| | $ | 3 |
| | $ | (4 | ) | | $ | — |
| | $ | 1 |
| | $ | 3 |
|
| Postretirement Benefits |
| Service cost | $ | 5 |
| | $ | 1 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| Interest cost | 17 |
| | 4 |
| | 7 |
| | 1 |
| | — |
| | 2 |
|
| Expected return on plan assets | (16 | ) | | (6 | ) | | (6 | ) | | — |
| | — |
| | (2 | ) |
| Amortization: | | | | | | | | | | | |
| Prior service costs | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
| Regulatory asset | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
|
| Net (gain)/loss | (1 | ) | | — |
| | — |
| | — |
| | — |
| | (1 | ) |
| Net periodic postretirement benefit cost | $ | 6 |
| | $ | — |
| | $ | 2 |
| | $ | 1 |
| | $ | — |
| | $ | 2 |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2018 | Southern Company | | Alabama Power | | Georgia Power | | Mississippi Power | | Southern Power | | Southern Company Gas |
| | (in millions) |
| Pension Plans |
| Service cost | $ | 90 |
|
| $ | 19 |
|
| $ | 22 |
|
| $ | 4 |
|
| $ | 2 |
|
| $ | 8 |
|
| Interest cost | 116 |
|
| 25 |
|
| 35 |
|
| 5 |
|
| 1 |
|
| 10 |
|
| Expected return on plan assets | (236 | ) |
| (51 | ) |
| (74 | ) |
| (10 | ) |
| (3 | ) |
| (18 | ) |
| Amortization: | | | | | | | | | | | |
| Prior service costs | 1 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1 | ) |
| Regulatory asset | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
|
| Net (gain)/loss | 53 |
|
| 14 |
|
| 17 |
|
| 3 |
|
| 1 |
|
| 3 |
|
| Net periodic pension cost (income) | $ | 24 |
|
| $ | 7 |
|
| $ | — |
|
| $ | 2 |
|
| $ | 1 |
|
| $ | 5 |
|
| Postretirement Benefits |
| Service cost | $ | 6 |
| | $ | 1 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| Interest cost | 19 |
| | 4 |
| | 7 |
| | 1 |
| | — |
| | 2 |
|
| Expected return on plan assets | (17 | ) | | (6 | ) | | (6 | ) | | — |
| | — |
| | (2 | ) |
| Amortization: | | | | | | | | | | | |
| Prior service costs | 2 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
| Regulatory asset | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
| Net (gain)/loss | 3 |
| | — |
| | 2 |
| | — |
| | — |
| | — |
|
| Net periodic postretirement benefit cost | $ | 13 |
| | $ | — |
| | $ | 5 |
| | $ | 1 |
| | $ | — |
| | $ | 2 |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
(I) FAIR VALUE MEASUREMENTS
As of March 31, 2018. It is reasonably possible that2019, assets and liabilities measured at fair value on a recurring basis during the amountperiod, together with their associated level of the unrecognized tax benefits could change within 12 months. The settlementfair value hierarchy, were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using: | | |
| As of March 31, 2019: | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Net Asset Value as a Practical Expedient (NAV) | | Total |
| | (in millions) |
| Southern Company | | | | | | | | | |
| Assets: | | | | | | | | | |
Energy-related derivatives(a)(b) | $ | 322 |
| | $ | 128 |
| | $ | 4 |
| | $ | — |
| | $ | 454 |
|
| Foreign currency derivatives | — |
| | 38 |
| | — |
| | — |
| | 38 |
|
Investments in trusts:(c)(d) | | | | | | | | | |
| Domestic equity | 682 |
| | 120 |
| | — |
| | — |
| | 802 |
|
| Foreign equity | 60 |
| | 195 |
| | — |
| | — |
| | 255 |
|
| U.S. Treasury and government agency securities | — |
| | 283 |
| | — |
| | — |
| | 283 |
|
| Municipal bonds | — |
| | 73 |
| | — |
| | — |
| | 73 |
|
| Pooled funds – fixed income | — |
| | 14 |
| | — |
| | — |
| | 14 |
|
| Corporate bonds | 24 |
| | 298 |
| | — |
| | — |
| | 322 |
|
| Mortgage and asset backed securities | — |
| | 72 |
| | — |
| | — |
| | 72 |
|
| Private equity | — |
| | — |
| | — |
| | 48 |
| | 48 |
|
| Cash and cash equivalents | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
| Other | 28 |
| | 4 |
| | — |
| | — |
| | 32 |
|
| Cash equivalents | 907 |
| | 3 |
| | — |
| | — |
| | 910 |
|
| Other investments | 9 |
| | 14 |
| | — |
| | — |
| | 23 |
|
| Total | $ | 2,033 |
| | $ | 1,242 |
| | $ | 4 |
| | $ | 48 |
| | $ | 3,327 |
|
| Liabilities: | | | | | | | | | |
Energy-related derivatives(a)(b) | $ | 466 |
| | $ | 106 |
| | $ | 23 |
| | $ | — |
| | $ | 595 |
|
| Interest rate derivatives | — |
| | 35 |
| | — |
| | — |
| | 35 |
|
| Foreign currency derivatives | — |
| | 24 |
| | — |
| | — |
| | 24 |
|
| Contingent consideration | — |
| | — |
| | 21 |
| | — |
| | 21 |
|
| Total | $ | 466 |
| | $ | 165 |
| | $ | 44 |
| | $ | — |
| | $ | 675 |
|
| | | | | | | | | | |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using: | | |
| As of March 31, 2019: | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Net Asset Value as a Practical Expedient (NAV) | | Total |
| | (in millions) |
| Alabama Power | | | | | | | | | |
| Assets: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | 6 |
|
Nuclear decommissioning trusts:(c) | | | | | | | | |
|
|
| Domestic equity | 446 |
| | 108 |
| | — |
| | — |
| | 554 |
|
| Foreign equity | 60 |
| | 57 |
| | — |
| | — |
| | 117 |
|
| U.S. Treasury and government agency securities | — |
| | 18 |
| | — |
| | — |
| | 18 |
|
| Municipal bonds | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
| Corporate bonds | 24 |
| | 139 |
| | — |
| | — |
| | 163 |
|
| Mortgage and asset backed securities | — |
| | 24 |
| | — |
| | — |
| | 24 |
|
| Private equity | — |
| | — |
| | — |
| | 48 |
| | 48 |
|
| Other | 5 |
| | — |
| | — |
| | — |
| | 5 |
|
| Cash equivalents | 569 |
| | 3 |
| | — |
| | — |
| | 572 |
|
| Other investments | — |
| | 14 |
| | — |
| | — |
| | 14 |
|
| Total | $ | 1,104 |
| | $ | 370 |
| | $ | — |
| | $ | 48 |
| | $ | 1,522 |
|
| Liabilities: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 7 |
| | $ | — |
| | $ | — |
| | $ | 7 |
|
| | | | | | | | | | |
| Georgia Power | | | | | | | | | |
| Assets: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 9 |
| | $ | — |
| | $ | — |
| | $ | 9 |
|
Nuclear decommissioning trusts:(c)(d) | | | | | | | | | |
| Domestic equity | 236 |
| | 1 |
| | — |
| | — |
| | 237 |
|
| Foreign equity | — |
| | 134 |
| | — |
| | — |
| | 134 |
|
| U.S. Treasury and government agency securities | — |
| | 265 |
| | — |
| | — |
| | 265 |
|
| Municipal bonds | — |
| | 72 |
| | — |
| | — |
| | 72 |
|
| Corporate bonds | — |
| | 160 |
| | — |
| | — |
| | 160 |
|
| Mortgage and asset backed securities | — |
| | 47 |
| | — |
| | — |
| | 47 |
|
| Other | 23 |
| | 4 |
| | — |
| | — |
| | 27 |
|
| Total | $ | 259 |
| | $ | 692 |
| | $ | — |
| | $ | — |
| | $ | 951 |
|
| Liabilities: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 16 |
| | $ | — |
| | $ | — |
| | $ | 16 |
|
| Interest rate derivatives | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
| Total | $ | — |
| | $ | 18 |
| | $ | — |
| | $ | — |
| | $ | 18 |
|
| | | | | | | | | | |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using: | | |
| As of March 31, 2019: | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Net Asset Value as a Practical Expedient (NAV) | | Total |
| | (in millions) |
| Mississippi Power | | | | | | | | | |
| Assets: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
| Cash equivalents | 202 |
| | — |
| | — |
| | — |
| | 202 |
|
| Total | $ | 202 |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 205 |
|
| Liabilities: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | 6 |
|
| | | | | | | | | | |
| Southern Power | | | | | | | | | |
| Assets: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| Foreign currency derivatives | — |
| | 38 |
| | — |
| | — |
|
| 38 |
|
| Cash equivalents | 10 |
| | — |
| | — |
| | — |
| | 10 |
|
| Total | $ | 10 |
| | $ | 39 |
| | $ | — |
| | $ | — |
| | $ | 49 |
|
| Liabilities: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
| Foreign currency derivatives | — |
| | 24 |
| | — |
| | — |
| | 24 |
|
| Contingent consideration | — |
| | — |
| | 21 |
| | — |
| | 21 |
|
| Total | $ | — |
|
| $ | 27 |
|
| $ | 21 |
|
| $ | — |
|
| $ | 48 |
|
| | | | | | | | | | |
| Southern Company Gas | | | | | | | | | |
| Assets: | | | | | | | | | |
Energy-related derivatives(a)(b) | $ | 322 |
| | $ | 108 |
| | $ | 4 |
| | $ | — |
| | $ | 434 |
|
| Non-qualified deferred compensation trusts: | | | | | | | | | |
| Domestic equity | — |
| | 11 |
| | — |
| | — |
| | 11 |
|
| Foreign equity | — |
| | 4 |
| | — |
| | — |
| | 4 |
|
| Pooled funds – fixed income | — |
| | 14 |
| | — |
| | — |
| | 14 |
|
| Cash equivalents | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
| Cash equivalents | 13 |
| | — |
| | — |
| | — |
| | 13 |
|
| Total | $ | 336 |
|
| $ | 137 |
|
| $ | 4 |
|
| $ | — |
|
| $ | 477 |
|
| Liabilities: | | | | | | | | | |
Energy-related derivatives(a)(b) | $ | 466 |
| | $ | 73 |
| | $ | 23 |
| | $ | — |
| | $ | 562 |
|
| |
(I)(a) | DERIVATIVESEnergy-related derivatives exclude $11 million associated with premiums and certain weather derivatives accounted for based on intrinsic value rather than fair value. |
| |
| (b) | Energy-related derivatives exclude cash collateral of $190 million. |
| |
| (c) | Excludes receivables related to investment income, pending investment sales, payables related to pending investment purchases, and currencies. See Note 6 to the financial statements in Item 8 of the Form 10-K for additional information. |
| |
| (d) | Includes investment securities pledged to creditors and collateral received and excludes payables related to the securities lending program. As of March 31, 2019, approximately $72 million of the fair market value of Georgia Power's nuclear decommissioning trust funds' securities were on loan to creditors under the funds' managers' securities lending program. See Note 6 to the financial statements in Item 8 of the Form 10-K for additional information. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Southern Company, Alabama Power, and Georgia Power continue to elect the option to fair value investment securities held in the nuclear decommissioning trust funds. The fair value of the funds, including reinvested interest and dividends and excluding the funds' expenses, increased for the three months ended March 31, 2019 and decreased for the three months ended March 31, 2018 by the amounts shown in the table below. The changes were recorded as a change to the regulatory assets and liabilities related to AROs for Georgia Power and Alabama Power, respectively.
|
| | | | | | |
| | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 |
| | (in millions) |
| Southern Company | $ | 152 |
| $ | (11 | ) |
| Alabama Power | 87 |
| (5 | ) |
| Georgia Power | 65 |
| (6 | ) |
Valuation Methodologies
The energy-related derivatives primarily consist of exchange-traded and over-the-counter financial products for natural gas and physical power products, including, from time to time, basis swaps. These are standard products used within the energy industry and are valued using the market approach. The inputs used are mainly from observable market sources, such as forward natural gas prices, power prices, implied volatility, and overnight index swap interest rates. Interest rate derivatives are also standard over-the-counter products that are valued using observable market data and assumptions commonly used by market participants. The fair value of interest rate derivatives reflects the net present value of expected payments and receipts under the swap agreement based on the market's expectation of future interest rates. Additional inputs to the net present value calculation may include the contract terms, counterparty credit risk, and occasionally, implied volatility of interest rate options. The fair value of cross-currency swaps reflects the net present value of expected payments and receipts under the swap agreement based on the market's expectation of future foreign currency exchange rates. Additional inputs to the net present value calculation may include the contract terms, counterparty credit risk, and discount rates. The interest rate derivatives and cross-currency swaps are categorized as Level 2 under Fair Value Measurements as these inputs are based on observable data and valuations of similar instruments. See Note (J) for additional information on how these derivatives are used.
For fair value measurements of the investments within the nuclear decommissioning trusts and the non-qualified deferred compensation trusts, external pricing vendors are designated for each asset class with each security specifically assigned a primary pricing source. For investments held within commingled funds, fair value is determined at the end of each business day through the net asset value, which is established by obtaining the underlying securities' individual prices from the primary pricing source. A market price secured from the primary source vendor is then evaluated by management in its valuation of the assets within the trusts. As a general approach, fixed income market pricing vendors gather market data (including indices and market research reports) and integrate relative credit information, observed market movements, and sector news into proprietary pricing models, pricing systems, and mathematical tools. Dealer quotes and other market information, including live trading levels and pricing analysts' judgments, are also obtained when available.
The NRC requires licensees of commissioned nuclear power reactors to establish a plan for providing reasonable assurance of funds for future decommissioning. See Note 6 to the financial statements under "Nuclear Decommissioning" in Item 8 of the Form 10-K for additional information.
Southern Power has contingent payment obligations related to certain acquisitions whereby Southern Power is primarily obligated to make generation-based payments to the seller, which commenced at the commercial operation of the respective facility and continue through 2026. The obligation is categorized as Level 3 under Fair Value Measurements as the fair value is determined using significant unobservable inputs for the forecasted facility generation in MW-hours, as well as other inputs such as a fixed dollar amount per MW-hour, and a discount rate.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
The fair value of contingent consideration reflects the net present value of expected payments and any periodic change arising from forecasted generation is expected to be immaterial.
As of March 31, 2019, the fair value measurements of private equity investments held in Alabama Power's nuclear decommissioning trusts that are calculated at net asset value per share (or its equivalent) as a practical expedient totaled $48 million and unfunded commitments related to the private equity investments totaled $49 million. Private equity funds include funds-of-funds that invest in high-quality private equity funds across several market sectors, funds that invest in real estate assets, and a fund that acquires companies to create resale value. Private equity funds do not have redemption rights. Distributions from these funds will be received as the underlying investments in the funds are liquidated.
As of March 31, 2019, other financial instruments for which the carrying amount did not equal fair value were as follows:
|
| | | | | | | | | | | | | | | | | | |
| | Southern Company | Alabama Power | Georgia Power | Mississippi Power | Southern Power | Southern Company Gas(*) |
| | (in millions) |
| Long-term debt, including securities due within one year: | | | | |
| Carrying amount | $ | 42,535 |
| $ | 7,921 |
| $ | 10,910 |
| $ | 1,619 |
| $ | 4,995 |
| $ | 5,928 |
|
| Fair value | 43,910 |
| 8,424 |
| 11,249 |
| 1,619 |
| 5,131 |
| 6,176 |
|
| |
| (*) | The long-term debt of Southern Company Gas is recorded at amortized cost, including the fair value adjustments at the effective date of the Merger. Southern Company Gas amortizes the fair value adjustments over the lives of the respective bonds. |
The fair values are determined using Level 2 measurements and are based on quoted market prices for the same or similar issues or on the current rates available to Southern Company, Alabama Power, Georgia Power, Mississippi Power, Southern Power, and Southern Company Gas.
Commodity Contracts with Level 3 Valuation Inputs
As of March 31, 2019, the fair value of Southern Company Gas' Level 3 physical natural gas forward contracts was $19 million. Since commodity contracts classified as Level 3 typically include a combination of observable and unobservable components, the changes in fair value may include amounts due in part to observable market factors, or changes to assumptions on the unobservable components. The following table includes transfers to Level 3, which represent the fair value of Southern Company Gas' commodity derivative contracts that include a significant unobservable component for the first time during the period.
|
| | | |
| | Three Months Ended March 31, 2019 |
| | (in millions) |
| Beginning balance | $ | — |
|
| Transfers to Level 3 | (30 | ) |
| Changes in fair value | 11 |
|
| Ending balance | $ | (19 | ) |
Changes in fair value of Level 3 instruments represent changes in gains and losses for the periods that are reported on Southern Company Gas' statements of income in natural gas revenues.
The valuation of certain commodity contracts requires the use of certain unobservable inputs. All forward pricing used in the valuation of such contracts is directly based on third-party market data, such as broker quotes and exchange settlements, when that data is available. If third-party market data is not available, then industry standard methodologies are used to develop inputs that maximize the use of relevant observable inputs and minimize the use of unobservable inputs. Observable inputs, including some forward prices used for determining fair value, reflect the best available market information. Unobservable inputs are updated using industry standard techniques such as
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
extrapolation, combining observable forward inputs supplemented by historical market and other relevant data. Level 3 physical natural gas forward contracts include unobservable forward price inputs (ranging from $0.07 to $1.15 per mmBtu). Forward price increases (decreases) as of March 31, 2019 would have resulted in higher (lower) values on a net basis.
(J) DERIVATIVES
Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas are exposed to market risks, including commodity price risk, interest rate risk, weather risk, and occasionally foreign currency exchange rate risk. To manage the volatility attributable to these exposures, each company nets its exposures, where possible, to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to each company's policies in areas such as counterparty exposure and risk management practices. Southern Company Gas' wholesale gas operations use various contracts in its commercial activities that generally meet the definition of derivatives. For the traditional electric operating companies, Southern Power, and Southern Company Gas' other businesses, each company's policy is that derivatives are to be used primarily for hedging purposes and mandates strict adherence to all applicable risk management policies. Derivative positions are monitored using techniques including, but not limited to, market valuation, value at risk, stress testing, and sensitivity analysis. Derivative instruments are recognized at fair value in the balance sheets as either assets or liabilities and are presented on a net basis. See Note (D)(I) for additional fair value information. In the statements of cash flows, theany cash impacts of settled energy-related and interest rate derivatives are recorded as operating activities. TheAny cash impacts of settled foreign currency derivatives are classified as operating or financing activities to correspond with classification of the hedged interest or principal, respectively.
The registrants adopted ASU 2017-12 as of January 1, 2018. See Note (A)1 to the financial statements under "Recently Adopted Accounting Standards – Other""Financial Instruments" in Item 8 of the Form 10-K for additional information.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Energy-Related Derivatives
Southern Company, theThe traditional electric operating companies, Southern Power, and Southern Company Gas enter into energy-related derivatives to hedge exposures to electricity, natural gas, and other fuel price changes. However, due to cost-based rate regulations and other various cost recovery mechanisms, the traditional electric operating companies and the natural gas distribution utilities have limited exposure to market volatility in energy-related commodity prices. Each of the traditional electric operating companies and certain of the natural gas distribution utilities of Southern Company Gas manage fuel-hedging programs, implemented per the guidelines of their respective state PSCs or other applicable state regulatory agencies, through the use of financial derivative contracts, which isare expected to continue to mitigate price volatility. The Florida PSC extended the moratorium on Gulf Power's fuel-hedging program until January 1, 2021 in connection with the 2017 Gulf Power Rate Case Settlement Agreement. The moratorium does not have an impact on the recovery of existing hedges entered into under the previously-approved hedging program. The traditional electric operating companies (with respect to wholesale generating capacity) and Southern Power have limited exposure to market volatility in energy-related commodity prices because their long-term sales contracts shift substantially all fuel cost responsibility to the purchaser. However, the traditional electric operating companies and Southern Power may be exposed to market volatility in energy-related commodity prices to the extent any uncontracted capacity is used to sell electricity. Southern Company Gas retains exposure to price changes that can, in a volatile energy market, be material and can adversely affect its results of operations.
Southern Company Gas also enters into weather derivative contracts as economic hedges of operating margins in the event of warmer-than-normal weather. Exchange-traded options are carried at fair value, with changes reflected in operating revenues. Non exchange-tradedNon-exchange-traded options are accounted for using the intrinsic value method. Changes in the intrinsic value for non-exchange-traded contracts are reflected in the statementsoperating revenues.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Energy-related derivative contracts are accounted for under one of three methods:
Regulatory Hedges — Energy-related derivative contracts which are designated as regulatory hedges relate primarily to the traditional electric operating companies' and the natural gas distribution utilities' fuel-hedging programs, where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as the underlying fuel is used in operations and ultimately recovered through the respective fuel cost recovery clauses.
Cash Flow Hedges — Gains and losses on energy-related derivatives designated as cash flow hedges (which are mainly used to hedge anticipated purchases and sales) are initially deferred in accumulated OCI before being recognized in the statements of income in the same period and in the same income statement line item as the earnings effect of the hedged transactions.
Not Designated — Gains and losses on energy-related derivative contracts that are not designated or fail to qualify as hedges are recognized in the statements of income as incurred.
Some energy-related derivative contracts require physical delivery as opposed to financial settlement, and this type of derivative is both common and prevalent within the electric and natural gas industries. When an energy-related derivative contract is settled physically, any cumulative unrealized gain or loss is reversed and the contract price is recognized in the respective line item representing the actual price of the underlying goods being delivered.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
At March 31, 2018,2019, the net volume of energy-related derivative contracts for natural gas positions, for the Southern Company system, together with the longest hedge date over which the respective entity is hedging its exposure to the variability in future cash flows for forecasted transactions and the longest non-hedge date for derivatives not designated as hedges, were as follows:
| | | | Net Purchased mmBtu | | Longest Hedge Date | | Longest Non-Hedge Date | Net Purchased mmBtu | | Longest Hedge Date | | Longest Non-Hedge Date |
| | (in millions) | | (in millions) | |
Southern Company(*) | 670 | | 2021 | | 2026 | 538 | | 2022 | | 2029 |
| Alabama Power | 74 | | 2021 | | — | 72 | | 2022 | | — |
| Georgia Power | 167 | | 2021 | | — | 153 | | 2022 | | — |
| Gulf Power | 17 | | 2020 | | — | |
| Mississippi Power | 59 | | 2021 | | — | 61 | | 2022 | | — |
| Southern Power | 14 | | 2020 | | 2018 | 9 | | 2020 | | — |
Southern Company Gas(*) | 339 | | 2020 | | 2026 | 243 | | 2021 | | 2029 |
| |
| (*) | Southern Company's and Southern Company Gas' derivative instruments include both long and short natural gas positions. A long position is a contract to purchase natural gas and a short position is a contract to sell natural gas. Southern Company Gas' volume represents the net of long natural gas positions of 3.63.8 billion mmBtu and short natural gas positions of 3.33.6 billion mmBtu as of March 31, 2018,2019, which is also included in Southern Company's total volume. |
In addition to the volumes discussed above, the traditional electric operating companies and Southern Power enter into physical natural gas supply contracts that provide the option to sell back excess natural gas due to operational constraints. The maximum expected volume of natural gas subject to such a feature is 3140 million mmBtu for Southern Company, 5which includes 6 million mmBtu for Alabama Power, 912 million mmBtu for Georgia Power, 3 million mmBtu for Gulf Power, 45 million mmBtu for Mississippi Power, and 1013 million mmBtu for Southern Power.
For cash flow hedges of energy-related derivatives, the amountsestimated pre-tax gains (losses) expected to be reclassified from accumulated OCI to earnings for the next 12-month period ending March 31, 20192020 are immaterial for all registrants.
Interest Rate Derivatives
Southern Company and certain subsidiaries may also enter into interest rate derivatives to hedge exposure to changes in interest rates. The derivatives employed as hedging instruments are structured to minimize ineffectiveness. Derivatives related to existing variable rate securities or forecasted transactions are accounted for as cash flow
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
hedges where the derivatives' fair value gains or losses are recorded in OCI and are reclassified into earnings at the same time and presented on the same income statement line item as the earnings effect of the hedged transactions. Derivatives related to existing fixed rate securities are accounted for as fair value hedges, where the derivatives' fair value gains or losses and hedged items' fair value gains or losses are both recorded directly to earnings on the same income statement line item. Fair value gains or losses on derivatives that are not designated or fail to qualify as hedges are recognized in the statements of income as incurred.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
At March 31, 2018,2019, the following interest rate derivatives were outstanding:
| | | | Notional Amount | | Interest Rate Received | Weighted Average Interest Rate Paid | Hedge Maturity Date | | Fair Value Gain (Loss) at March 31, 2018 | Notional Amount | | Interest Rate Received | Weighted Average Interest Rate Paid | Hedge Maturity Date | | Fair Value Gain (Loss) at March 31, 2019 |
| | (in millions) | | | | (in millions) | (in millions) | | | | (in millions) |
| Fair Value Hedges of Existing Debt | Fair Value Hedges of Existing Debt | | | Fair Value Hedges of Existing Debt | | |
Southern Company(*) | $ | 300 |
| | 2.75% | 3-month
LIBOR + 0.92% | June 2020 | | $ | (5 | ) | $ | 300 |
| | 2.75% | 3-month LIBOR+0.92% | June 2020 | | $ | (3 | ) |
Southern Company(*) | 1,500 |
| | 2.35% | 1-month
LIBOR + 0.87% | July 2021 | | (50 | ) | 1,500 |
| | 2.35% | 1-month LIBOR+0.87% | July 2021 | | (30 | ) |
| Georgia Power | 250 |
| | 5.40% | 3-month
LIBOR + 4.02% | June 2018 | | (1 | ) | 200 |
| | 4.25% | 3-month LIBOR+2.46% | December 2019 | | (2 | ) |
| Georgia Power | 500 |
| | 1.95% | 3-month
LIBOR + 0.76% | December 2018 | | (4 | ) | |
| Georgia Power | 200 |
| | 4.25% | 3-month
LIBOR + 2.46% | December 2019 | | (2 | ) | |
| Southern Company Consolidated | $ | 2,750 |
| | $ | (62 | ) | $ | 2,000 |
| | $ | (35 | ) |
| |
| (*) | Represents the Southern Company parent entity. |
The estimated pre-tax gains (losses) related to interest rate derivatives expected to be reclassified from accumulated OCI to interest expense for the next 12-month period ending March 31, 20192020 are $(20)$(19) million for Southern Company and immaterial for all other registrants. Southern Company and certain subsidiaries have deferredDeferred gains and losses related to interest rate derivatives are expected to be amortized into earnings through 2046.2046 for the Southern Company parent entity, 2035 for Alabama Power, 2037 for Georgia Power, 2028 for Mississippi Power, and 2046 for Southern Company Gas.
Foreign Currency Derivatives
Southern Company and certain subsidiaries, including Southern Power, may also enter into foreign currency derivatives to hedge exposure to changes in foreign currency exchange rates, such as that arising from the issuance of debt denominated in a currency other than U.S. dollars. Derivatives related to forecasted transactions are accounted for as cash flow hedges where the derivatives' fair value gains or losses are recorded in OCI and are reclassified into earnings at the same time and on the same income statement line as the earnings effect of the hedged transactions, including foreign currency gains or losses arising from changes in the U.S. currency exchange rates. The derivatives employed as hedging instruments are structured to minimize ineffectiveness.
At March 31, 2018,2019, the following foreign currency derivatives were outstanding:
| |
| Pay Notional | Pay Rate | Receive Notional | Receive Rate | Hedge
Maturity Date | Fair Value Gain (Loss) at March 31, 2018 | Pay Notional | Pay Rate | Receive Notional | Receive Rate | Hedge
Maturity Date | Fair Value Gain (Loss) at March 31, 2019 |
| (in millions) | | (in millions) | | | (in millions) | (in millions) | | (in millions) | | | (in millions) |
| Cash Flow Hedges of Existing Debt | Cash Flow Hedges of Existing Debt | | | | | Cash Flow Hedges of Existing Debt | | | | |
| Southern Power | $ | 677 |
| 2.95% | € | 600 |
| 1.00% | June 2022 | $ | 83 |
| $ | 677 |
| 2.95% | € | 600 |
| 1.00% | June 2022 | $ | 2 |
|
| Southern Power | 564 |
| 3.78% | 500 |
| 1.85% | June 2026 | 77 |
| 564 |
| 3.78% | 500 |
| 1.85% | June 2026 | 11 |
|
| Total | $ | 1,241 |
| | € | 1,100 |
| | $ | 160 |
| $ | 1,241 |
| | € | 1,100 |
| | $ | 13 |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
The estimated pre-tax gains (losses) related to Southern Power's foreign currency derivatives that willexpected to be reclassified from accumulated OCI to earnings for the next 12-month period ending March 31, 20192020 are $(22) million for Southern Company and Southern Power.$(24) million.
Derivative Financial Statement Presentation and Amounts
Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas enter into derivative contracts that may contain certain provisions that permit intra-contract netting of derivative receivables and payables for routine billing and offsets related to events of default and settlements. Southern Company and certain subsidiaries also utilize master netting agreements to mitigate exposure to counterparty credit risk. These agreements may contain provisions that permit netting across product lines and against cash collateral. The fair value amounts of derivative assets and liabilities on the balance sheet are presented net to the extent that there are netting arrangements or similar agreements with the counterparties.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
The fair value of energy-related derivatives, interest rate derivatives, and foreign currency derivatives was reflected in the balance sheets as follows:
| | | | As of March 31, 2018 | As of December 31, 2017 | As of March 31, 2019 | As of December 31, 2018 |
| Derivative Category and Balance Sheet Location | Assets | Liabilities | Assets | Liabilities | Assets | Liabilities | Assets | Liabilities |
| | (in millions) | (in millions) |
| Southern Company | | |
| Derivatives designated as hedging instruments for regulatory purposes | | |
| Energy-related derivatives: | | |
| Other current assets/Other current liabilities | $ | 7 |
| $ | 28 |
| $ | 10 |
| $ | 43 |
| $ | 12 |
| $ | 10 |
| $ | 8 |
| $ | 23 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 4 |
| 27 |
| 7 |
| 24 |
| 11 |
| 21 |
| 9 |
| 26 |
|
| Assets held for sale, current/Liabilities held for sale, current | | — |
| — |
| — |
| 6 |
|
| Total derivatives designated as hedging instruments for regulatory purposes | $ | 11 |
| $ | 55 |
| $ | 17 |
| $ | 67 |
| $ | 23 |
| $ | 31 |
| $ | 17 |
| $ | 55 |
|
| Derivatives designated as hedging instruments in cash flow and fair value hedges | | |
| Energy-related derivatives: | | |
| Other current assets/Other current liabilities | $ | 3 |
| $ | 3 |
| $ | 3 |
| $ | 14 |
| $ | 1 |
| $ | 3 |
| $ | 3 |
| $ | 7 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 1 |
| 1 |
| — |
| — |
| — |
| 1 |
| 1 |
| 2 |
|
| Interest rate derivatives: | | |
| Other current assets/Other current liabilities | — |
| 14 |
| 1 |
| 4 |
| — |
| 20 |
| — |
| 19 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | — |
| 47 |
| — |
| 34 |
| — |
| 15 |
| — |
| 30 |
|
| Foreign currency derivatives: | | |
| Other current assets/Other current liabilities | — |
| 22 |
| — |
| 23 |
| — |
| 24 |
| — |
| 23 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 182 |
| — |
| 129 |
| — |
| 38 |
| — |
| 75 |
| — |
|
| Total derivatives designated as hedging instruments in cash flow and fair value hedges | $ | 186 |
| $ | 87 |
| $ | 133 |
| $ | 75 |
| $ | 39 |
| $ | 63 |
| $ | 79 |
| $ | 81 |
|
| Derivatives not designated as hedging instruments | | |
| Energy-related derivatives: | | |
| Other current assets/Other current liabilities | $ | 283 |
| $ | 299 |
| $ | 380 |
| $ | 437 |
| $ | 259 |
| $ | 291 |
| $ | 561 |
| $ | 575 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 234 |
| 284 |
| 170 |
| 215 |
| 171 |
| 269 |
| 180 |
| 325 |
|
| Total derivatives not designated as hedging instruments | $ | 517 |
| $ | 583 |
| $ | 550 |
| $ | 652 |
| $ | 430 |
| $ | 560 |
| $ | 741 |
| $ | 900 |
|
| Gross amounts recognized | $ | 714 |
| $ | 725 |
| $ | 700 |
| $ | 794 |
| $ | 492 |
| $ | 654 |
| $ | 837 |
| $ | 1,036 |
|
Gross amounts offset(a) | $ | (336 | ) | $ | (559 | ) | $ | (405 | ) | $ | (598 | ) | $ | (333 | ) | $ | (523 | ) | $ | (524 | ) | $ | (801 | ) |
Net amounts recognized in the Balance Sheets(b) | $ | 378 |
| $ | 166 |
| $ | 295 |
| $ | 196 |
| $ | 159 |
| $ | 131 |
| $ | 313 |
| $ | 235 |
|
| | | |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
| | | | As of March 31, 2018 | As of December 31, 2017 | As of March 31, 2019 | As of December 31, 2018 |
| Derivative Category and Balance Sheet Location | Assets | Liabilities | Assets | Liabilities | Assets | Liabilities | Assets | Liabilities |
| | (in millions) | (in millions) |
| Alabama Power | | |
| Derivatives designated as hedging instruments for regulatory purposes | | |
| Energy-related derivatives: | | |
| Other current assets/Other current liabilities | $ | 2 |
| $ | 3 |
| $ | 2 |
| $ | 6 |
| $ | 3 |
| $ | 2 |
| $ | 3 |
| $ | 4 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 1 |
| 5 |
| 2 |
| 4 |
| 3 |
| 5 |
| 3 |
| 6 |
|
| Total derivatives designated as hedging instruments for regulatory purposes | $ | 3 |
| $ | 8 |
| $ | 4 |
| $ | 10 |
| $ | 6 |
| $ | 7 |
| $ | 6 |
| $ | 10 |
|
| Gross amounts recognized | $ | 3 |
| $ | 8 |
| $ | 4 |
| $ | 10 |
| $ | 6 |
| $ | 7 |
| $ | 6 |
| $ | 10 |
|
| Gross amounts offset | $ | (2 | ) | $ | (2 | ) | $ | (4 | ) | $ | (4 | ) | $ | (5 | ) | $ | (5 | ) | $ | (4 | ) | $ | (4 | ) |
| Net amounts recognized in the Balance Sheets | $ | 1 |
| $ | 6 |
| $ | — |
| $ | 6 |
| $ | 1 |
| $ | 2 |
| $ | 2 |
| $ | 6 |
|
| | | |
| Georgia Power | | |
| Derivatives designated as hedging instruments for regulatory purposes | | |
| Energy-related derivatives: | | |
| Other current assets/Other current liabilities | $ | 3 |
| $ | 6 |
| $ | 2 |
| $ | 9 |
| $ | 4 |
| $ | 5 |
| $ | 2 |
| $ | 8 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 2 |
| 12 |
| 4 |
| 10 |
| 5 |
| 11 |
| 4 |
| 13 |
|
| Total derivatives designated as hedging instruments for regulatory purposes | $ | 5 |
| $ | 18 |
| $ | 6 |
| $ | 19 |
| $ | 9 |
| $ | 16 |
| $ | 6 |
| $ | 21 |
|
| Derivatives designated as hedging instruments in cash flow and fair value hedges | | |
| Interest rate derivatives: | | |
| Other current assets/Other current liabilities | $ | — |
| $ | 6 |
| $ | — |
| $ | 4 |
| $ | — |
| $ | 2 |
| $ | — |
| $ | 2 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | — |
| 2 |
| — |
| 1 |
| |
| Total derivatives designated as hedging instruments in cash flow and fair value hedges | $ | — |
| $ | 8 |
| $ | — |
| $ | 5 |
| $ | — |
| $ | 2 |
| $ | — |
| $ | 2 |
|
| Gross amounts recognized | $ | 5 |
| $ | 26 |
| $ | 6 |
| $ | 24 |
| $ | 9 |
| $ | 18 |
| $ | 6 |
| $ | 23 |
|
| Gross amounts offset | $ | (5 | ) | $ | (5 | ) | $ | (6 | ) | $ | (6 | ) | $ | (8 | ) | $ | (8 | ) | $ | (6 | ) | $ | (6 | ) |
| Net amounts recognized in the Balance Sheets | $ | — |
| $ | 21 |
| $ | — |
| $ | 18 |
| $ | 1 |
| $ | 10 |
| $ | — |
| $ | 17 |
|
| | | |
| Gulf Power | | |
| Derivatives designated as hedging instruments for regulatory purposes | | |
| Energy-related derivatives: | | |
| Other current assets/Other current liabilities | $ | — |
| $ | 11 |
| $ | — |
| $ | 14 |
| |
| Other deferred charges and assets/Other deferred credits and liabilities | — |
| 6 |
| — |
| 7 |
| |
| Total derivatives designated as hedging instruments for regulatory purposes | $ | — |
| $ | 17 |
| $ | — |
| $ | 21 |
| |
| Gross amounts recognized | $ | — |
| $ | 17 |
| $ | — |
| $ | 21 |
| |
| Gross amounts offset | $ | — |
| $ | — |
| $ | — |
| $ | — |
| |
| Net amounts recognized in the Balance Sheets | $ | — |
| $ | 17 |
| $ | — |
| $ | 21 |
| |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
| | | | As of March 31, 2018 | As of December 31, 2017 | As of March 31, 2019 | As of December 31, 2018 |
| Derivative Category and Balance Sheet Location | Assets | Liabilities | Assets | Liabilities | Assets | Liabilities | Assets | Liabilities |
| | (in millions) | |
| | | (in millions) |
| Mississippi Power | | |
| Derivatives designated as hedging instruments for regulatory purposes | | |
| Energy-related derivatives: | | |
| Other current assets/Other current liabilities | $ | 1 |
| $ | 4 |
| $ | 1 |
| $ | 6 |
| $ | 2 |
| $ | 2 |
| $ | 1 |
| $ | 3 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 1 |
| 4 |
| 1 |
| 3 |
| 1 |
| 4 |
| 2 |
| 6 |
|
| Total derivatives designated as hedging instruments for regulatory purposes | $ | 2 |
| $ | 8 |
| $ | 2 |
| $ | 9 |
| $ | 3 |
| $ | 6 |
| $ | 3 |
| $ | 9 |
|
| Derivatives designated as hedging instruments in cash flow and fair value hedges | | |
| Interest rate derivatives: | | |
| Other current assets/Other current liabilities | $ | — |
| $ | — |
| $ | 1 |
| $ | — |
| |
| Total derivatives designated as hedging instruments in cash flow and fair value hedges | $ | — |
| $ | — |
| $ | 1 |
| $ | — |
| |
| Gross amounts recognized | $ | 2 |
| $ | 8 |
| $ | 3 |
| $ | 9 |
| $ | 3 |
| $ | 6 |
| $ | 3 |
| $ | 9 |
|
| Gross amounts offset | $ | (2 | ) | $ | (2 | ) | $ | (2 | ) | $ | (2 | ) | $ | (3 | ) | $ | (3 | ) | $ | (2 | ) | $ | (2 | ) |
| Net amounts recognized in the Balance Sheets | $ | — |
| $ | 6 |
| $ | 1 |
| $ | 7 |
| $ | — |
| $ | 3 |
| $ | 1 |
| $ | 7 |
|
| | | |
| Southern Power | | |
| Derivatives designated as hedging instruments in cash flow and fair value hedges | | |
| Energy-related derivatives: | | |
| Other current assets/Other current liabilities | $ | 3 |
| $ | 2 |
| $ | 3 |
| $ | 11 |
| $ | 1 |
| $ | 2 |
| $ | 3 |
| $ | 6 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 1 |
| 1 |
| — |
| — |
| — |
| 1 |
| 1 |
| 2 |
|
| Foreign currency derivatives: | | |
| Other current assets/Other current liabilities | — |
| 22 |
| — |
| 23 |
| — |
| 24 |
| — |
| 23 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 182 |
| — |
| 129 |
| — |
| 38 |
| — |
| 75 |
| — |
|
| Total derivatives designated as hedging instruments in cash flow and fair value hedges | $ | 186 |
| $ | 25 |
| $ | 132 |
| $ | 34 |
| $ | 39 |
| $ | 27 |
| $ | 79 |
| $ | 31 |
|
| Derivatives not designated as hedging instruments | | |
| Energy-related derivatives: | | |
| Other current assets/Other current liabilities | $ | — |
| $ | — |
| $ | — |
| $ | 2 |
| |
| Gross amounts recognized | $ | 186 |
| $ | 25 |
| $ | 132 |
| $ | 36 |
| $ | 39 |
| $ | 27 |
| $ | 79 |
| $ | 31 |
|
| Gross amounts offset | $ | (1 | ) | $ | (1 | ) | $ | (3 | ) | $ | (3 | ) | $ | (1 | ) | $ | (1 | ) | $ | (3 | ) | $ | (3 | ) |
| Net amounts recognized in the Balance Sheets | $ | 185 |
| $ | 24 |
| $ | 129 |
| $ | 33 |
| $ | 38 |
| $ | 26 |
| $ | 76 |
| $ | 28 |
|
| | | |
| Southern Company Gas | | |
| Derivatives designated as hedging instruments for regulatory purposes | | |
| Energy-related derivatives: | | |
| Assets from risk management activities/Liabilities from risk management activities-current | | $ | 3 |
| $ | 1 |
| $ | 2 |
| $ | 8 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | | 1 |
| — |
| — |
| 1 |
|
| Total derivatives designated as hedging instruments for regulatory purposes | | $ | 4 |
| $ | 1 |
| $ | 2 |
| $ | 9 |
|
| Derivatives designated as hedging instruments in cash flow and fair value hedges | | |
| Energy-related derivatives: | | |
| Assets from risk management activities/Liabilities from risk management activities-current | | $ | — |
| $ | 1 |
| $ | — |
| $ | 1 |
|
| Total derivatives designated as hedging instruments in cash flow and fair value hedges | | $ | — |
| $ | 1 |
| $ | — |
| $ | 1 |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
| | | | As of March 31, 2018 | As of December 31, 2017 | As of March 31, 2019 | As of December 31, 2018 |
| Derivative Category and Balance Sheet Location | Assets | Liabilities | Assets | Liabilities | Assets | Liabilities | Assets | Liabilities |
| | (in millions) | (in millions) |
| | | |
| Southern Company Gas | | |
| Derivatives designated as hedging instruments for regulatory purposes | | |
| Energy-related derivatives: | | |
| Assets from risk management activities/Liabilities from risk management activities-current | $ | 1 |
| $ | 4 |
| $ | 5 |
| $ | 8 |
| |
| Derivatives designated as hedging instruments in cash flow and fair value hedges | | |
| Energy-related derivatives: | | |
| Assets from risk management activities/Liabilities from risk management activities-current | $ | — |
| $ | 1 |
| $ | — |
| $ | 3 |
| |
| Derivatives not designated as hedging instruments | | |
| Energy-related derivatives: | | |
| Assets from risk management activities/Liabilities from risk management activities-current | $ | 283 |
| $ | 299 |
| $ | 379 |
| $ | 434 |
| $ | 259 |
| $ | 291 |
| $ | 559 |
| $ | 574 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 234 |
| 284 |
| 170 |
| 215 |
| 171 |
| 269 |
| 180 |
| 325 |
|
| Total derivatives not designated as hedging instruments | $ | 517 |
| $ | 583 |
| $ | 549 |
| $ | 649 |
| $ | 430 |
| $ | 560 |
| $ | 739 |
| $ | 899 |
|
| Gross amounts of recognized | $ | 518 |
| $ | 588 |
| $ | 554 |
| $ | 660 |
| $ | 434 |
| $ | 562 |
| $ | 741 |
| $ | 909 |
|
Gross amounts offset(a) | $ | (325 | ) | $ | (548 | ) | $ | (390 | ) | $ | (583 | ) | $ | (316 | ) | $ | (506 | ) | $ | (508 | ) | $ | (785 | ) |
Net amounts recognized in the Balance Sheets(b) | $ | 193 |
| $ | 40 |
| $ | 164 |
| $ | 77 |
| $ | 118 |
| $ | 56 |
| $ | 233 |
| $ | 124 |
|
| |
| (a) | Gross amounts offset include cash collateral held on deposit in broker margin accounts of $223$190 million and $193$277 million as of March 31, 20182019 and December 31, 2017,2018, respectively. |
| |
| (b) | Net amounts of derivative instruments outstanding exclude premium and intrinsic value associated with weather derivatives of $4$11 million and $11$8 million as of March 31, 20182019 and December 31, 2017,2018, respectively. |
At March 31, 20182019 and December 31, 2017,2018, the pre-tax effects of unrealized derivative gains (losses) arising from energy-related derivative instruments designated as regulatory hedging instruments and deferred were as follows:
| | | Regulatory Hedge Unrealized Gain (Loss) Recognized in the Balance Sheet at March 31, 2018 | |
| Regulatory Hedge Unrealized Gain (Loss) Recognized in the Balance Sheet at March 31, 2019 | | Regulatory Hedge Unrealized Gain (Loss) Recognized in the Balance Sheet at March 31, 2019 |
Derivative Category and Balance Sheet Location | Southern Company(*) | Alabama Power | Georgia Power | Gulf Power | Mississippi Power | Southern Company Gas(*) | Southern Company(*) | Alabama Power | Georgia Power | Mississippi Power | Southern Company Gas(*) |
| | (in millions) | | (in millions) |
| Energy-related derivatives: | | |
| Other regulatory assets, current | $ | (20 | ) | $ | (1 | ) | $ | (3 | ) | $ | (11 | ) | $ | (3 | ) | $ | (2 | ) | $ | (5 | ) | $ | (1 | ) | $ | (2 | ) | $ | (1 | ) | $ | (1 | ) |
| Other regulatory assets, deferred | (23 | ) | (4 | ) | (10 | ) | (6 | ) | (3 | ) | — |
| (11 | ) | (2 | ) | (6 | ) | (3 | ) | — |
|
| Other regulatory liabilities, current | 7 |
| — |
| — |
| — |
| — |
| 7 |
| 7 |
| 1 |
| 1 |
| 1 |
| 4 |
|
| Total energy-related derivative gains (losses) | $ | (36 | ) | $ | (5 | ) | $ | (13 | ) | $ | (17 | ) | $ | (6 | ) | $ | 5 |
| $ | (9 | ) | $ | (2 | ) | $ | (7 | ) | $ | (3 | ) | $ | 3 |
|
| |
| (*) | Fair value gains and losses recorded in regulatory assets and liabilities include cash collateral held on deposit in broker margin accounts of $8$2 million at March 31, 2018.2019. |
|
| | | | | | | | | | | | | | | |
| Regulatory Hedge Unrealized Gain (Loss) Recognized in the Balance Sheet at December 31, 2018 |
Derivative Category and Balance Sheet Location | Southern Company | Alabama Power | Georgia Power | Mississippi Power | Southern Company Gas |
| | (in millions) |
| Energy-related derivatives: | | | | | |
| Other regulatory assets, current | $ | (19 | ) | $ | (3 | ) | $ | (6 | ) | $ | (2 | ) | $ | (8 | ) |
| Other regulatory assets, deferred | (16 | ) | (3 | ) | (9 | ) | (4 | ) | — |
|
| Assets held for sale, current | (6 | ) | — |
| — |
| — |
| — |
|
| Other regulatory liabilities, current | 1 |
| — |
| — |
| — |
| 1 |
|
| Total energy-related derivative gains (losses) | $ | (40 | ) | $ | (6 | ) | $ | (15 | ) | $ | (6 | ) | $ | (7 | ) |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | |
| Regulatory Hedge Unrealized Gain (Loss) Recognized in the Balance Sheet at December 31, 2017 |
Derivative Category and Balance Sheet Location | Southern Company(*) | Alabama Power | Georgia Power | Gulf Power | Mississippi Power | Southern Company Gas(*) |
| | (in millions) | |
| Energy-related derivatives: | | | | | | |
| Other regulatory assets, current | $ | (34 | ) | $ | (4 | ) | $ | (7 | ) | $ | (14 | ) | $ | (5 | ) | $ | (4 | ) |
| Other regulatory assets, deferred | (18 | ) | (3 | ) | (6 | ) | (7 | ) | (2 | ) | — |
|
| Other regulatory liabilities, current | 7 |
| — |
| — |
| — |
| — |
| 7 |
|
| Other regulatory liabilities, deferred | 1 |
| 1 |
| — |
| — |
| — |
| — |
|
| Total energy-related derivative gains (losses) | $ | (44 | ) | $ | (6 | ) | $ | (13 | ) | $ | (21 | ) | $ | (7 | ) | $ | 3 |
|
| |
(*) | Fair value gains and losses recorded in regulatory assets and liabilities include cash collateral held on deposit in broker margin accounts of $6 million at December 31, 2017. |
For the three months ended March 31, 20182019 and 2017,2018, the pre-tax effects of cash flow hedge accounting on accumulated OCI were as follows:
| | Derivatives in Cash Flow Hedging Relationships | Gain (Loss) Recognized in OCI on Derivative
| | Gain (Loss) Reclassified from Accumulated OCI into Income | |
| | Statements of Income Location | Amount | |
| | 2018 | | 2017 | | 2018 | | 2017 | |
| Gain (Loss) Recognized in OCI on Derivative | | For the Three Months
Ended March 31, |
| 2019 | 2018 |
| | (in millions) | | (in millions) | (in millions) |
| Southern Company | | | | | | | | |
| Energy-related derivatives | $ | 12 |
| | $ | (11 | ) | | Depreciation and amortization | $ | 1 |
| | $ | (4 | ) | $ | — |
| $ | 12 |
|
| | | | | | Cost of natural gas | (2 | ) | | — |
| |
| Interest rate derivatives | (2 | ) | | 1 |
| | Interest expense, net of amounts capitalized | (5 | ) | | (5 | ) | — |
| (2 | ) |
| Foreign currency derivatives | 53 |
| | (4 | ) | | Interest expense, net of amounts capitalized | (5 | ) | | (6 | ) | (39 | ) | 53 |
|
| | | | | | Other income (expense), net(*) | 36 |
| | 17 |
| |
| Total | $ | 63 |
| | $ | (14 | ) | | $ | 25 |
| | $ | 2 |
| $ | (39 | ) | $ | 63 |
|
| Southern Power | | | | | | | | |
| Energy-related derivatives | $ | 11 |
| | $ | (8 | ) | | Depreciation and amortization | $ | 1 |
| | $ | (4 | ) | $ | — |
| $ | 11 |
|
| Foreign currency derivatives | 53 |
| | (4 | ) | | Interest expense, net of amounts capitalized | (5 | ) | | (6 | ) | (39 | ) | 53 |
|
| | | | | | Other income (expense), net(*) | 36 |
| | 17 |
| |
| Total | $ | 64 |
| | $ | (12 | ) | | $ | 32 |
| | $ | 7 |
| $ | (39 | ) | $ | 64 |
|
For the three months ended March 31, 2019 and 2018, the pre-tax effects of energy-related derivatives and interest rate derivatives designated as cash flow hedging instruments on accumulated OCI were immaterial for the other registrants.
For the three months ended March 31, 2019 and 2018, the pre-tax effects of cash flow and fair value hedge accounting on income were as follows: |
| | | | | | | |
| | Location and Amount of Gain (Loss) Recognized in Income on Cash Flow and Fair Value Hedging Relationships | For the Three Months
Ended March 31, |
| |
| | 2019 | 2018 |
| | | (in millions) |
| | Southern Company | | |
| | Total depreciation and amortization | $ | 751 |
| $ | 769 |
|
| | Gain (loss) on energy-related cash flow hedges(a) | (3 | ) | 1 |
|
| | Total interest expense, net of amounts capitalized | (430 | ) | (458 | ) |
| | Gain (loss) on interest rate cash flow hedges(a) | (5 | ) | (5 | ) |
| | Gain (loss) on foreign currency cash flow hedges(a) | (6 | ) | (5 | ) |
| | Gain (loss) on interest rate fair value hedges(b) | 14 |
| (24 | ) |
| | Total other income (expense), net | 78 |
| 60 |
|
| | Gain (loss) on foreign currency cash flow hedges(a)(c) | (24 | ) | 36 |
|
| | Southern Power | | |
| | Total depreciation and amortization | $ | 119 |
| $ | 114 |
|
| | Gain (loss) on energy-related cash flow hedges(a) | (3 | ) | 1 |
|
| | Total interest expense, net of amounts capitalized | (44 | ) | (47 | ) |
| | Gain (loss) on foreign currency cash flow hedges(a) | (6 | ) | (5 | ) |
| | Total other income (expense), net | 2 |
| 3 |
|
| | Gain (loss) on foreign currency cash flow hedges(a)(c) | (24 | ) | 36 |
|
| |
(*)(a) | Reclassified from accumulated OCI into earnings. |
| |
| (b) | For fair value hedges, changes in the fair value of the derivative contracts are generally equal to changes in the fair value of the underlying debt and have no material impact on income. |
| |
| (c) | The reclassification from accumulated OCI into other income (expense), net completely offsets currency gains and losses arising from changes in the U.S. currency exchange rates used to record the euro-denominated notes. |
For the three months ended March 31, 2018 and 2017, the pre-tax effects
For the three months ended March 31, 2017, there was no material ineffectiveness recorded in earnings for any registrant. Upon the adoption of ASU 2017-12, beginning in 2018, ineffectiveness was no longer separately measured and recorded in earnings. See Note (A) for additional information.Contents
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
For the three months ended March 31, 20182019 and 2017, the pre-tax effects of cash flow and fair value hedge accounting on income were as follows:
|
| | | | | | | | |
| | Location and Amount of Gain (Loss) Recognized in Income on Cash Flow and Fair Value Hedging Relationships | For the Three Months
Ended March 31, |
| |
| | 2018 | | 2017 |
| | | (in millions) |
| | Southern Company | | | |
| | Depreciation and amortization | $ | 769 |
| | $ | 716 |
|
| | Gain (loss) on cash flow hedges | | | |
| | Energy-related derivatives | 1 |
| | (4 | ) |
| | Interest expense, net of amounts capitalized | (458 | ) | | (416 | ) |
| | Gain (loss) on cash flow hedges | �� | | |
| | Interest rate derivatives | (5 | ) | | (5 | ) |
| | Foreign currency derivatives | (5 | ) | | (6 | ) |
| | Gain (loss) on fair value hedges(a) | | | |
| | Interest rate derivatives | (24 | ) | | (8 | ) |
| | Other income (expense), net | 60 |
| | 48 |
|
| | Gain (loss) on cash flow hedges(b) | | | |
| | Foreign currency derivatives | 36 |
| | 17 |
|
| | Southern Power | | | |
| | Depreciation and amortization | $ | 114 |
| | $ | 119 |
|
| | Gain (loss) on cash flow hedges | | | |
| | Energy-related derivatives | 1 |
| | (4 | ) |
| | Interest expense, net of amounts capitalized | (47 | ) | | (50 | ) |
| | Gain (loss) on cash flow hedges | | | |
| | Foreign currency derivatives | (5 | ) | | (6 | ) |
| | Other income (expense), net | 3 |
| | (1 | ) |
| | Gain (loss) on cash flow hedges(b) | | | |
| | Foreign currency derivatives | 36 |
| | 17 |
|
| | | | | |
| |
(a) | For fair value hedges presented above, changes in the fair value of the derivative contracts are equal to changes in the fair value of the underlying debt and have no impact on income. |
| |
(b) | The reclassification from accumulated OCI into other income (expense), net completely offsets currency gains and losses arising from changes in the U.S. currency exchange rates used to record the euro-denominated notes. |
For the three months ended March 31, 2018, and 2017, the pre-tax effects of cash flow and fair value hedge accounting on income for energy-related derivatives and interest rate derivatives were immaterial for the traditional electric operating companies and Southern Company Gas.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
As of March 31, 20182019 and December 31, 2017,2018, the following amounts were recorded on the balance sheets related to cumulative basis adjustments for fair value hedges:
| | | | Carrying Amount of the Hedged Item | | Cumulative Amount of Fair Value Hedging Adjustment included in Carrying Amount of the Hedged Item | Carrying Amount of the Hedged Item | | Cumulative Amount of Fair Value Hedging Adjustment included in Carrying Amount of the Hedged Item |
| Balance Sheet Location of Hedged Items | As of March 31, 2018 | As of December 31, 2017 | | As of March 31, 2018 | As of December 31, 2017 | As of March 31, 2019 | As of December 31, 2018 |
| As of March 31, 2019 | As of December 31, 2018 |
| | (in millions) | | (in millions) | (in millions) | | (in millions) |
| Southern Company | | | | | | |
| Securities due within one year | $ | (745 | ) | $ | (746 | ) | | $ | 4 |
| $ | 3 |
| $ | (499 | ) | $ | (498 | ) | | $ | 1 |
| $ | 2 |
|
| Long-term Debt | (2,533 | ) | (2,553 | ) | | 57 |
| 35 |
| |
| Long-term debt | | (2,065 | ) | (2,052 | ) | | 28 |
| 41 |
|
| | | | | | | |
| Georgia Power | | | | | | |
| Securities due within one year | $ | (745 | ) | $ | (746 | ) | | $ | 4 |
| $ | 3 |
| $ | (499 | ) | $ | (498 | ) | | $ | 1 |
| $ | 2 |
|
| Long-term Debt | (497 | ) | (498 | ) | | 2 |
| 1 |
| |
| Long-term debt | | — |
| — |
| | — |
| — |
|
For the three months ended March 31, 20182019 and 2017,2018, the pre-tax effects of energy-related derivatives not designated as hedging instruments on the statements of income of Southern Company and Southern Company Gas were as follows:
| | | | | Gain (Loss) | | Gain (Loss) |
| | | Three Months Ended March 31, | | Three Months Ended March 31, |
| Derivatives in Non-Designated Hedging Relationships | Statements of Income Location | 2018 | 2017 | Statements of Income Location | 2019 | 2018 |
| | | (in millions) | | (in millions) |
| Southern Company | | | |
| Energy-related derivatives: | Natural gas revenues(*) | $ | (15 | ) | $ | 50 |
| Natural gas revenues(*) | $ | 33 |
| $ | (15 | ) |
| | Cost of natural gas | 2 |
| (3 | ) | Cost of natural gas | 8 |
| 2 |
|
| Total derivatives in non-designated hedging relationships | Total derivatives in non-designated hedging relationships | $ | (13 | ) | $ | 47 |
| Total derivatives in non-designated hedging relationships | $ | 41 |
| $ | (13 | ) |
| Southern Company Gas | | | |
| Energy-related derivatives: | Natural gas revenues(*) | $ | (15 | ) | $ | 50 |
| |
| | Cost of natural gas | 2 |
| (3 | ) | |
| Total derivatives in non-designated hedging relationships | $ | (13 | ) | $ | 47 |
| |
| |
| (*) | Excludes immaterial gains (losses) recorded in natural gas revenues associated with weather derivatives of an immaterial amount and $14 million for the three months ended March 31, 20182019 and 2017, respectively.2018. |
For the three months ended March 31, 20182019 and 2017,2018, the pre-tax effects of energy-related derivatives and interest rate derivatives not designated as hedging instruments were iimmaterial fmmaterial foror the traditional electric operating companies and Southern Power.
Contingent Features
Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas do not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain derivatives that could require collateral, but not accelerated payment, in the event of various credit rating changes of certain Southern Company subsidiaries. At March 31, 2018,2019, the registrants had no collateral posted with derivative counterparties to satisfy these arrangements.
For the registrants with interest rate derivatives at March 31, 2018,2019, the fair value of interest rate derivative liabilities with contingent features and the maximum potential collateral requirements arising from the credit-risk-related contingent features, at a rating below BBB- and/or Baa3, was immaterial. At March 31, 2018,2019, the fair value of
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
energy-related derivative liabilities with contingent features and the maximum potential collateral requirements arising from the credit-risk-related contingent features, at a rating below BBB- and/or Baa3, were immaterial for all
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
registrants. The maximum potential collateral requirements arising from the credit-risk-related contingent features for the traditional electric operating companies and Southern Power include certain agreements that could require collateral in the event that one or more Southern Company power pool participants has a credit rating change to below investment grade. Following the sale of Gulf Power to NextEra Energy, Gulf Power is continuing to participate in the Southern Company power pool for a defined transition period that, subject to certain potential adjustments, is scheduled to end on January 1, 2024.
Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. If collateral is required, fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral are not offset against fair value amounts recognized for derivatives executed with the same counterparty.
Alabama Power and Southern Power maintain accounts with certain regional transmission organizations to facilitate financial derivative transactions. Based on the value of the positions in these accounts and the associated margin requirements, Alabama Power and Southern Power may be required to post collateral. At March 31, 2018,2019, cash collateral posted in these accounts was immaterial. Southern Company Gas maintains accounts with brokers or the clearing houses of certain exchanges to facilitate financial derivative transactions. Based on the value of the positions in these accounts and the associated margin requirements, Southern Company Gas may be required to deposit cash into these accounts. At March 31, 2018,2019, cash collateral held on deposit in broker margin accounts was $223$190 million.
Southern Company, the traditional electric operating companies, Southern Power, and Southern Company GasThe registrants are exposed to losses related to financial instruments in the event of counterparties' nonperformance. Southern Company, the traditional electric operating companies, Southern Power, and Southern Company GasThe registrants only enter into agreements and material transactions with counterparties that have investment grade credit ratings by Moody's and S&P or with counterparties who have posted collateral to cover potential credit exposure. Southern Company, the traditional electric operating companies, Southern Power, and Southern Company GasThe registrants have also established risk management policies and controls to determine and monitor the creditworthiness of counterparties in order to mitigate Southern Company's, the traditional electric operating companies', Southern Power's, and Southern Company Gas'their exposure to counterparty credit risk. Prior to entering into a physical transaction, Southern Company Gas assigns physical wholesale counterparties an internal credit rating and credit limit based on the counterparties' Moody's, S&P, and Fitch Ratings Inc. ratings, commercially available credit reports, and audited financial statements. Southern Company Gas may require counterparties to pledge additional collateral when deemed necessary.
In addition, Southern Company Gas conducts credit evaluations and obtains appropriate internal approvals for the counterparty's line of credit before any transaction with the counterparty is executed. In most cases, the counterparty must have an investment grade rating, which includes a minimum long-term debt rating of Baa3 from Moody's and BBB- from S&P. Generally, Southern Company Gas requires credit enhancements by way of a guaranty, cash deposit, or letter of credit for transaction counterparties that do not have investment grade ratings.
Southern Company Gas also utilizes master netting agreements whenever possible to mitigate exposure to counterparty credit risk. When Southern Company Gas is engaged in more than one outstanding derivative transaction with the same counterparty and it also has a legally enforceable netting agreement with that counterparty, the "net" mark-to-market exposure represents the netting of the positive and negative exposures with that counterparty and a reasonable measure of Southern Company Gas' credit risk. Southern Company Gas also uses other netting agreements with certain counterparties with whom it conducts significant transactions. Master netting agreements enable Southern Company Gas to net certain assets and liabilities by counterparty. Southern Company Gas also nets across product lines and against cash collateral provided the master netting and cash collateral agreements include such provisions. Southern Company Gas may require counterparties to pledge additional collateral when deemed necessary.
Southern Company, the traditional electric operating companies, Southern Power, and Southern Company GasThe registrants do not anticipate a material adverse effect on thetheir respective financial statements as a result of counterparty nonperformance.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
| |
(J) | (K) ACQUISITIONS AND DISPOSITIONS |
Southern Power
See Note 1115 to the financial statements of Southern Power and Note 12 to the financial statements of Southern Company under "Southern Power" in Item 8 of the Form 10-K for additional information.
Southern Company
On January 1, 2019, Southern Company completed the Three Months Endedsale of all of the capital stock of Gulf Power to 700 Universe, LLC, a wholly-owned subsidiary of NextEra Energy, for an aggregate cash purchase price of approximately $5.8 billion (less $1.3 billion of indebtedness assumed), subject to customary working capital adjustments. The preliminary gain associated with the sale of Gulf Power totaled $2.5 billion pre-tax ($1.3 billion after tax). The assets and liabilities of Gulf Power were classified as assets held for sale and liabilities held for sale on Southern Company's balance sheet as of December 31, 2018.
Management has started the process to sell one of PowerSecure's business units; therefore, the related assets and liabilities have been reclassified as held for sale on Southern Company's balance sheet as of March 31, 20182019. The ultimate outcome of this matter cannot be determined at this time; however, any related gain or loss on the potential sale is not expected to have a material effect on Southern Company's financial statements.
During the three months ended March 31, 2018, one of Southern Power's wholly-owned subsidiaries acquired and completed construction of the Gaskell West 1 solar facility. Acquisition-related costs were expensed as incurred and were not material.See "Assets Held for Sale" herein for additional information.
|
| | | | | | | | |
Project Facility | Resource | Seller; Acquisition Date | Approximate Nameplate Capacity (MW)
| Location | Southern Power Percentage Ownership | Actual COD | PPA Contract Period |
Gaskell West 1 | Solar | Recurrent Energy Development Holdings, LLC January 26, 2018 | 20 | Kern County, CA | 100% of Class B | (*) | March 2018 | 20 years |
| |
(*) | Southern Power owns 100% of the class B membership interests under a tax equity partnership agreement. |
The Gaskell West 1 facility did not have operating revenues or activities prior to completion of construction and the assets being placed in service during March 2018.
Construction Projects Completed and in Progress
During the three months ended March 31, 2018,2019, Southern Power continued construction of the projects set forth in the table below. Total aggregate construction costs, excluding the acquisition costs, are expected to be between $370$575 million and $415$640 million for the Plant Mankato expansion and Cactus Flatsthe Wildhorse Mountain and Reading facilities. At March 31, 2018,2019, total costs of construction costsincurred for these projects were $347 million and are included in CWIP, related to these projects totaled $273 million.except for the Plant Mankato expansion, which is included in assets held for sale in the financial statements. The ultimate outcome of these matters cannot be determined at this time.
|
| | | | | |
| Project Facility | Resource | Approximate Nameplate Capacity (MW) | Location | Actual/Expected COD | PPA Contract Period |
Projects Under Construction as of March 31, 2018Mankato expansion(a) | Natural Gas | 385 | Mankato, MN | May 2019 | 20 years |
Cactus FlatsWildhorse Mountain(*)(b)
| Wind | 148100 | ConchoPushmataha County, TXOK | ThirdFourth quarter 20182019 | 12-1520 years |
MankatoReading(c) | Natural GasWind | 345200 | Mankato, MNOsage and Lyon Counties, KS | Second quarter 20192020 | 2012 years |
| |
(*)(a) | In July 2017,November 2018, Southern Power entered into an agreement to sell all of its equity interests in Plant Mankato, including this expansion currently under construction. This transaction is subject to FERC and state commission approvals and is expected to close mid-2019. The ultimate outcome of this matter cannot be determined at this time. See "Sales of Natural Gas and Biomass Plants" below. |
| |
| (b) | In May 2018, Southern Power purchased 100% of the Cactus Flats facility and commenced construction. Upon placing the facility in service,Wildhorse Mountain facility. Southern Power expects to close onmay enter into a tax equity partnership, agreement, subject to various customary conditions at closing, and willin which case it would then own 100% of the class B membership interests. The ultimate outcome of this matter cannot be determined at this time. |
| |
| (c) | In August 2018, Southern Power purchased 100% of the membership interests of the Reading facility from the joint development arrangement with Renewable Energy Systems Americas, Inc. described below. Southern Power may enter into a tax equity partnership, in which case it would then own 100% of the class B membership interests. The ultimate outcome of this matter cannot be determined at this time. |
Development Projects
During 2017, as part of its renewable development strategy, Southern Power purchasedcontinues to evaluate and refine the deployment of the wind turbine equipment from Siemens Gamesa Renewable Energy Inc.purchased in 2016 and Vestas-American Wind Technology, Inc.2017 to be used for variouspotential joint development and construction projects. Any wind projects reaching commercial operation by 2021 are expected to qualify for 80% PTCs.
During 2016, Southern Power entered into a joint development agreement with Renewable Energy Systems Americas, Inc. to develop and construct wind projects. In addition, in 2016, Southern Power purchased wind turbine equipment from Siemens Wind Power, Inc. and Vestas-American Wind Technology, Inc.as well as the amount of MW capacity to be usedconstructed. During the three months ended March 31, 2019, approximately $53 million of equipment was marketed for constructionsale and, subsequent to March 31, 2019, was sold. At March 31, 2019, the equipment was classified as held for
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
sale on Southern Company's and Southern Power's balance sheets. See "Assets Held for 100% PTCs.Sale" herein for additional information.
The ultimate outcome of these matters cannot be determined at this time.
Sales of Natural Gas and Biomass Plants
In November 2018, Southern Power entered into an agreement with Northern States Power to sell all of its equity interests in Plant Mankato (including the 385-MW expansion currently under construction) for an aggregate purchase price of approximately $650 million. The completion of the disposition is subject to the expansion unit reaching commercial operation as well as various other customary conditions to closing, including working capital and timing adjustments. This transaction is subject to FERC and state commission approvals. The assets and liabilities of Plant Mankato are classified as assets held for sale and liabilities held for sale on Southern Company's and Southern Power's balance sheets as of March 31, 2019 and December 31, 2018. See "Assets Held for Sale" herein for additional information.
On April 17, 2019, Southern Power entered into an agreement to sell all of its equity interests in the Nacogdoches biomass-fueled facility to Austin Energy for an aggregate purchase price of $460 million, subject to customary closing conditions and working capital adjustments.
Each of these sales is expected to close in mid-2019; however, the ultimate outcome of these matters cannot be determined at this time.
Assets Subject to Lien
Under the terms of the PPA and the expansion PPA for Plant Mankato, approximately $538 million of assets, primarily related to property, plant, and equipment, are subject to lien at March 31, 2019.
Assets Held for Sale
As discussed above, Southern Company and Southern Power each have assets and liabilities held for sale on their balance sheets at March 31, 2019 and December 31, 2018. Assets and liabilities held for sale have been classified separately on each company's balance sheet at the lower of carrying value or fair value less costs to sell at the time the criteria for held-for-sale classification were met. For assets and liabilities held for sale recorded at fair value on a nonrecurring basis, the fair value of assets held for sale is based primarily on unobservable inputs (Level 3), which includes the agreed upon sales prices in executed sales agreements.
Upon classification as held for sale in November 2018 for Plant Mankato, Southern Power ceased recognizing depreciation and amortization on the long-lived assets to be sold.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
The following table provides Southern Company's and Southern Power's major classes of assets and liabilities classified as held for sale at March 31, 2019 and December 31, 2018:
|
| | | | | | |
| | Southern Company | Southern Power |
| | (in millions) |
| At March 31, 2019 | | |
| Assets Held for Sale: | | |
| Current assets | $ | 55 |
| $ | 11 |
|
| Total property, plant, and equipment | 637 |
| 604 |
|
| Goodwill and other intangible assets | 82 |
| 40 |
|
| Other non-current assets | 44 |
| — |
|
| Total Assets Held for Sale | $ | 818 |
| $ | 655 |
|
| | | |
| Liabilities Held for Sale: | | |
| Current liabilities | $ | 38 |
| $ | 9 |
|
| Other non-current liabilities | 39 |
| — |
|
| Total Liabilities Held for Sale | $ | 77 |
| $ | 9 |
|
| | | |
| At December 31, 2018 | | |
| Assets Held for Sale: | | |
| Current assets | $ | 393 |
| $ | 8 |
|
| Total property, plant, and equipment | 4,583 |
| 536 |
|
| Goodwill and other intangible assets | 40 |
| 40 |
|
| Other non-current assets | 727 |
| — |
|
| Total Assets Held for Sale | $ | 5,743 |
| $ | 584 |
|
| | | |
| Liabilities Held for Sale: | | |
| Current liabilities | $ | 425 |
| $ | 15 |
|
| Long-term debt | 1,286 |
| — |
|
| Accumulated deferred income taxes | 618 |
| — |
|
| Other non-current liabilities | 932 |
| — |
|
| Total Liabilities Held for Sale | $ | 3,261 |
| $ | 15 |
|
Southern Company Gas
Proposed Sale of Elizabethtown Gas and Elkton Gas
In October 2017, a Southern Company Gas subsidiary, Pivotal Utility Holdings, entered into agreements forPower each concluded that the sale of their assets, both individually and combined, did not represent a strategic shift in operations that has, or is expected to have, a major effect on its operations and financial results; therefore, none of the assets related to the sales have been classified as discontinued operations for any of twothe periods presented.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Gulf Power and Elkton Gas,Southern Power's equity interests in Plant Oleander and Plant Stanton Unit A (together, the Florida Plants) represented individually significant components of Southern Company and Southern Power, respectively; therefore, pre-tax profit for these components for the three months ended March 31, 2018 is presented below:
|
| | | |
| | For the Three Months
Ended March 31, 2018 |
| | (in millions) |
| Earnings before income taxes: | |
| Gulf Power | $ | 55 |
|
| Southern Power's Florida Plants | $ | 8 |
|
(L) LEASES
On January 1, 2019, the registrants adopted the provisions of FASB ASC Topic 842 (as amended), Leases (ASC 842), which require lessees to South Jersey Industries, Inc. forrecognize leases with a total cash purchase priceterm of $1.7 billion. The completiongreater than 12 months on the balance sheet as lease obligations, representing the discounted future fixed payments due, along with right-of-use (ROU) assets that will be amortized over the term of each asset sale is subjectlease.
The registrants elected the transition methodology provided by ASC 842, whereby the applicable requirements are applied on a prospective basis as of the adoption date of January 1, 2019, without restating prior periods. The registrants also elected the package of practical expedients provided by ASC 842 that allows prior determinations of whether existing contracts are, or contain, leases and the classification of existing leases to continue without reassessment. Additionally, the satisfaction or waiverregistrants applied the use-of-hindsight practical expedient in determining lease terms as of the date of adoption and elected the practical expedient that allows existing land easements not previously accounted for as leases not to be reassessed.
Lessee
As lessee, the registrants lease certain conditions, including, amongelectric generating units (including renewable energy facilities), real estate/land, communication towers, railcars, and other customary closing conditions, the receiptequipment and vehicles. The major categories of required regulatory approvals, including the FERC, the New Jersey BPU,lease obligations are as follows:
|
| | | | | | | | | | | | | | | | | | |
| | As of March 31, 2019 |
| | Southern Company | Alabama Power | Georgia Power | Mississippi Power | Southern Power | Southern Company Gas |
| | (in millions) |
| Electric generating units | $ | 1,094 |
| $ | 159 |
| $ | 1,606 |
| $ | — |
| $ | — |
| $ | — |
|
| Real estate/land | 803 |
| 3 |
| 63 |
| 2 |
| 393 |
| 83 |
|
| Communication towers | 131 |
| 1 |
| 3 |
| — |
| — |
| — |
|
| Railcars | 55 |
| 25 |
| 26 |
| 3 |
| — |
| — |
|
| Other | 153 |
| 10 |
| 16 |
| 3 |
| — |
| 1 |
|
| Total | $ | 2,236 |
| $ | 198 |
| $ | 1,714 |
| $ | 8 |
| $ | 393 |
| $ | 84 |
|
Real estate/land leases primarily consist of commercial real estate leases at Southern Company, Georgia Power, and with respect to the sale of Elkton Gas, the Maryland PSC. Southern Company Gas and South Jersey Industries, Inc. made joint filingsvarious land leases primarily associated with renewable energy facilities at Southern Power. The commercial real estate leases have remaining terms of up to 25 years while the land leases have remaining terms of up to 48 years, including renewal periods.
Communication towers are leased for the installation of equipment to provide cellular phone service to customers and to support the automated meter infrastructure programs at the traditional electric operating companies. Communication tower leases have terms of up to 10 years with options to renew for periods up to 20 years.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
While renewal options exist in December 2017many of the leases, other than for land leases associated with renewable energy facilities, the expected term used in calculating the lease obligation generally reflects only the noncancelable period of the lease as it is not considered reasonably certain that the lease will be extended. The expected term of land leases associated with renewable energy facilities includes renewal periods reasonably certain of exercise resulting in an expected lease term at least equal to the expected life of the renewable energy facilities.
Contracts that Contain a Lease
While not specifically structured as a lease, some of the PPAs at Alabama Power and Georgia Power are deemed to represent a lease of the underlying electric generating units when the terms of the PPA convey the right to control the use of the underlying assets. Amounts recorded for leases of electric generating units are generally based on January 16, 2018the amount of scheduled capacity payments due over the remaining term of the affiliate PPA, which varies between four and 18 years. Georgia Power has several PPAs with Southern Power that Georgia Power accounts for as leases with a lease obligation of approximately $670 million at March 31, 2019. The amount paid for energy under these affiliate PPAs reflects a price that would be paid in an arm's-length transaction as those amounts have been reviewed and approved by the New Jersey BPUGeorgia PSC.
Short-term Leases
Leases with an initial term of 12 months or less are not recorded on the balance sheet; the registrants generally recognize lease expense for these leases on a straight-line basis over the lease term.
Residual Value Guarantees
Residual value guarantees exist primarily in railcar leases at Alabama Power and Georgia Power and the Maryland PSC, respectively, requesting regulatory approval. The asset salesamounts probable of being paid under those guarantees are expected to be completed byincluded in the end of the third quarter 2018. The ultimate outcome of these matters cannot be determined at this time.
Proposed Sale of Pivotal Home Solutions
On April 11, 2018, Southern Company Gas and its subsidiary Pivotal Home Solutions entered into a stock purchase agreement with American Water Enterprises LLC for the sale of Pivotal Home Solutions for a purchase price of approximately $365 million, including estimated working capital. In contemplation of the transaction, a goodwill impairment charge of $42 million was recordedlease payments. All such amounts are immaterial as of March 31, 2018. The remaining goodwill2019.
Lease and Nonlease Components
For all asset categories, with the exception of $242 million is not deductibleelectric generating units, gas pipelines, and real estate leases, the registrants combine lease payments and any nonlease components, such as asset maintenance, for tax purposes and, as a result, a deferred tax liability has not been provided. The completion of this transaction is subject tocalculating the satisfaction or waiver of certain conditions, including, among other customary closing conditions, approval from the Florida Office of Insurance Regulationlease obligation and the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The transaction is expected to be completed by the end of the second quarter 2018. The ultimate outcome of this matter cannot be determined at this time.right-of-use asset.
Balance sheet amounts recorded for operating and finance leases are as follows: |
| | | | | | | | | | | | | | | | | | |
| | As of March 31, 2019 |
| | Southern Company(*) | Alabama Power | Georgia Power | Mississippi Power | Southern Power | Southern Company Gas |
| | (in millions) |
| Operating Leases | | | | | | |
| Operating lease ROU assets, net | $ | 1,926 |
| $ | 160 |
| $ | 1,519 |
| $ | 8 |
| $ | 372 |
| $ | 86 |
|
| | | | | | | |
| Operating lease obligations - current | $ | 239 |
| $ | 47 |
| $ | 139 |
| $ | 3 |
| $ | 22 |
| $ | 13 |
|
| Operating lease obligations - non current | 1,752 |
| 147 |
| 1,404 |
| 5 |
| 371 |
| 71 |
|
| Total operating lease obligations | $ | 1,991 |
| $ | 194 |
| $ | 1,543 |
| $ | 8 |
| $ | 393 |
| $ | 84 |
|
| | | | | | | |
| Finance Leases | | | | | | |
| Finance lease ROU assets, net | $ | 242 |
| $ | 4 |
| $ | 145 |
| $ | — |
| $ | — |
| $ | — |
|
| | | | | | | |
| Finance lease obligations - current | $ | 38 |
| $ | 1 |
| $ | 10 |
| $ | — |
| $ | — |
| $ | — |
|
| Finance lease obligations - noncurrent | 207 |
| 3 |
| 161 |
| — |
| — |
| — |
|
| Total finance lease obligations | $ | 245 |
| $ | 4 |
| $ | 171 |
| $ | — |
| $ | — |
| $ | — |
|
| |
(K)(*) | JOINT OWNERSHIP AGREEMENTSIncludes operating lease ROU assets, net and operating lease obligations classified as held for sale. |
Southern Company Gas
See Note 4 to the financial statements190
Equity Method Investments
The carrying amounts of Southern Company Gas' equity method investments as of March 31, 2018 and December 31, 2017 and related income from those investmentsNOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Lease costs for the three-month periodsthree months ended March 31, 20182019, which includes both amounts recognized as operations and March 31, 2017 weremaintenance expense and amounts capitalized as part of the cost of another asset, are as follows:
|
| | | | | | |
| Balance Sheet Information | March 31, 2018 | December 31, 2017 |
| | (in millions) |
| SNG | $ | 1,274 |
| $ | 1,262 |
|
| Atlantic Coast Pipeline | 49 |
| 41 |
|
| PennEast Pipeline | 62 |
| 57 |
|
| Triton | 42 |
| 42 |
|
| Pivotal JAX LNG, LLC | 45 |
| 44 |
|
| Horizon Pipeline | 31 |
| 30 |
|
| Other | 1 |
| 1 |
|
| Total | $ | 1,504 |
| $ | 1,477 |
|
|
| | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, 2019 |
| | Southern Company | Alabama Power | Georgia Power | Mississippi Power | Southern Power | Southern Company Gas |
| | (in millions) |
| Lease cost | | | | | | |
| Operating lease cost | $ | 69 |
| $ | 7 |
| $ | 49 |
| $ | 1 |
| $ | 7 |
| $ | 4 |
|
| Finance lease cost: | | | | | | |
| Amortization of ROU assets | 7 |
| — |
| 4 |
| — |
| — |
| — |
|
| Interest on lease obligations | 3 |
| — |
| 4 |
| — |
| — |
| — |
|
| Total finance lease cost | 10 |
| — |
| 8 |
| — |
| — |
| — |
|
| Short-term lease costs | 14 |
| 5 |
| 3 |
| — |
| — |
| — |
|
| Variable lease cost | 19 |
| — |
| 16 |
| — |
| 1 |
| — |
|
| Sublease income | — |
| — |
| — |
| — |
| — |
| — |
|
| Total lease cost | $ | 112 |
| $ | 12 |
| $ | 76 |
| $ | 1 |
| $ | 8 |
| $ | 4 |
|
Georgia Power has variable lease payments that are based on the amount of energy produced by certain renewable generating facilities subject to PPAs.
Other information with respect to cash and noncash activities related to leases, as well as weighted-average lease terms and discount rates, is as follows:
|
| | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, 2019 |
| | Southern Company | Alabama Power | Georgia Power | Mississippi Power | Southern Power | Southern Company Gas |
| | (in millions) |
| Other information | | | | | | |
| Cash paid for amounts included in the measurements of lease obligations: | | | | | | |
| Operating cash flows from operating leases | $ | 74 |
| $ | 13 |
| $ | 32 |
| $ | 1 |
| $ | 7 |
| $ | 4 |
|
| Operating cash flows from finance leases | 6 |
| — |
| 13 |
| — |
| — |
| — |
|
| Financing cash flows from finance leases | 8 |
| — |
| 2 |
| — |
| — |
| — |
|
| ROU assets obtained in exchange for new operating lease obligations | 15 |
| 2 |
| 4 |
| — |
| — |
| — |
|
| ROU assets obtained in exchange for new finance lease obligations | 29 |
| — |
| 28 |
| — |
| — |
| — |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
|
| | | | | | |
| Income Statement Information | Three Months Ended March 31, 2018 | Three Months Ended March 31, 2017 |
| | (in millions) |
| SNG | $ | 39 |
| $ | 34 |
|
| PennEast Pipeline | 1 |
| 3 |
|
| Atlantic Coast Pipeline | 1 |
| 1 |
|
| Triton | 1 |
| — |
|
| Horizon Pipeline | — |
| 1 |
|
| Total | $ | 42 |
| $ | 39 |
|
|
| | | | | | | | | | | | |
| | As of March 31, 2019 |
| | Southern Company | Alabama Power | Georgia Power | Mississippi Power | Southern Power | Southern Company Gas |
| Weighted-average remaining lease term in years: | | | | | | |
| Operating leases | 13.5 |
| 3.8 |
| 10.1 |
| 6.8 |
| 33.7 |
| 9.0 |
|
| Finance leases | 18.5 |
| 14.8 |
| 11.3 |
| — |
| — |
| — |
|
| Weighted-average discount rate: | | | | | | |
| Operating leases | 4.49 | % | 3.33 | % | 4.42 | % | 4.03 | % | 5.68 | % | 3.70 | % |
| Finance leases | 5.00 | % | 3.75 | % | 10.68 | % | — | % | — | % | — | % |
Maturities of lease liabilities are as follows:
|
| | | | | | | | | | | | | | | | | | |
| | As of March 31, 2019 |
| | Southern Company | Alabama Power | Georgia Power | Mississippi Power | Southern Power | Southern Company Gas |
| | (in millions) |
| Maturity Analysis | | | | | | |
| Operating leases: | | | | | | |
| 2019 (remaining) | $ | 253 |
| $ | 46 |
| $ | 182 |
| $ | 2 |
| $ | 17 |
| $ | 12 |
|
| 2020 | 291 |
| 53 |
| 202 |
| 2 |
| 22 |
| 16 |
|
| 2021 | 274 |
| 52 |
| 197 |
| 1 |
| 23 |
| 16 |
|
| 2022 | 263 |
| 52 |
| 195 |
| 1 |
| 23 |
| 12 |
|
| 2023 | 198 |
| 3 |
| 196 |
| 1 |
| 24 |
| 10 |
|
| Thereafter | 1,637 |
| 1 |
| 984 |
| 2 |
| 848 |
| 36 |
|
| Total | 2,916 |
| 207 |
| 1,956 |
| 9 |
| 957 |
| 102 |
|
| Less: Present value discount | 925 |
| 13 |
| 413 |
| 1 |
| 564 |
| 18 |
|
| Operating lease obligations | $ | 1,991 |
| $ | 194 |
| $ | 1,543 |
| $ | 8 |
| $ | 393 |
| $ | 84 |
|
| Finance leases: | | | | | | |
| 2019 (remaining) | $ | 24 |
| $ | 1 |
| $ | 22 |
| $ | — |
| $ | — |
| $ | — |
|
| 2020 | 32 |
| 1 |
| 28 |
| — |
| — |
| — |
|
| 2021 | 26 |
| 1 |
| 25 |
| — |
| — |
| — |
|
| 2022 | 22 |
| 1 |
| 25 |
| — |
| — |
| — |
|
| 2023 | 18 |
| 1 |
| 25 |
| — |
| — |
| — |
|
| Thereafter | 273 |
| — |
| 165 |
| — |
| — |
| — |
|
| Total | 395 |
| 5 |
| 290 |
| — |
| — |
| — |
|
| Less: Present value discount | 150 |
| 1 |
| 119 |
| — |
| — |
| — |
|
| Finance lease obligations | $ | 245 |
| $ | 4 |
| $ | 171 |
| $ | — |
| $ | — |
| $ | — |
|
Payments made under PPAs at Georgia Power for energy generated from certain renewable energy facilities accounted for as operating and finance leases are considered variable lease costs and are therefore not reflected in the above maturity analysis. As of March 31, 2019, Southern NaturalCompany and Southern Power have additional operating leases, primarily for land, that have not yet commenced. These operating leases are expected to commence during the remainder of 2019 through 2021, with lease terms of up to 30 years, and have estimated total obligations of $77 million.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
For additional information on each registrant's operating lease obligations at December 31, 2018, see Note 9 to the financial statements in Item 8 of the Form 10-K.
Lessor
With the exception of Southern Company Gas, the registrants are each considered lessors in various arrangements that have been determined to contain a lease due to the customer's ability to control the use of the underlying asset owned by the applicable registrant. For the traditional electric operating companies, these arrangements consist of outdoor lighting contracts accounted for as operating leases with initial terms of up to five years, after which the contracts renew on a month-to-month basis at the customer's option. For Mississippi Power, these arrangements also include tolling arrangements related to electric generating units accounted for as sales-type leases with terms of up to 20 years. For Southern Power, these arrangements consist of PPAs related to electric generating units, including renewable energy facilities, accounted for as operating leases with terms of up to 28 years. For Southern Company, these arrangements also include PPAs related to fuel cells accounted for as operating leases with terms of up to 15 years. Southern Company Gas is the lessor in operating leases related to gas pipelines with remaining terms of up to 24 years.
Selected financial information of SNGLease income for the three months ended March 31, 2018 and March 31, 20172019 is as follows:
|
| | | | | | |
| Income Statement Information | Three Months Ended March 31, 2018 | Three Months Ended March 31, 2017 |
| | (in millions) |
| Revenues | $ | 160 |
| $ | 155 |
|
| Operating income | $ | 99 |
| $ | 84 |
|
| Net income | $ | 78 |
| $ | 66 |
|
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, 2019 |
| | Southern Company | Georgia Power | Mississippi Power | Southern Power | Southern Company Gas |
| | (in millions) |
| Lease income - interest income on sales-type leases | $ | 2 |
| $ | — |
| $ | 2 |
| $ | — |
| $ | — |
|
| Lease income - operating leases | 71 |
| 19 |
| — |
| 41 |
| 9 |
|
| Variable lease income | 66 |
| — |
| — |
| 72 |
| — |
|
| Total lease income | $ | 139 |
| $ | 19 |
| $ | 2 |
| $ | 113 |
| $ | 9 |
|
No profit or loss was recognized by Mississippi Power upon commencement of a sales-type lease during the first quarter 2019.
Lease income for Southern Power is included in wholesale revenues. Lease payments received under tolling arrangements and PPAs consist of either scheduled payments or variable payments based on the amount of energy produced by the underlying electric generating units. Scheduled payments to be received under outdoor lighting contracts, tolling arrangements, and PPAs accounted for as leases are presented in the following maturity analyses.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
The undiscounted cash flows to be received under tolling arrangements accounted for as sales-type leases are as follows:
|
| | | | | | |
| | As of March 31, 2019 |
| | Southern Company | Mississippi Power |
| | (in millions) |
| 2019 (remaining) | $ | 11 |
| $ | 11 |
|
| 2020 | 14 |
| 14 |
|
| 2021 | 14 |
| 14 |
|
| 2022 | 13 |
| 13 |
|
| 2023 | 12 |
| 12 |
|
| Thereafter | 135 |
| 135 |
|
| Total undiscounted cash flows | $ | 199 |
| $ | 199 |
|
| Lease receivable | 108 |
| 108 |
|
| Difference between undiscounted cash flows and discounted cash flows | $ | 91 |
| $ | 91 |
|
The undiscounted cash flows to be received under operating leases and contracts accounted for as operating leases (adjusted for intercompany eliminations) are as follows:
|
| | | | | | | | | | | | |
| | As of March 31, 2019 |
| | Southern Company | Georgia Power | Southern Power | Southern Company Gas |
| | (in millions) |
| 2019 (remaining) | $ | 163 |
| $ | 20 |
| $ | 123 |
| $ | 26 |
|
| 2020 | 188 |
| 26 |
| 128 |
| 34 |
|
| 2021 | 183 |
| 18 |
| 131 |
| 34 |
|
| 2022 | 174 |
| 8 |
| 134 |
| 34 |
|
| 2023 | 171 |
| 2 |
| 137 |
| 34 |
|
| Thereafter | 1,809 |
| — |
| 1,017 |
| 498 |
|
| Total | $ | 2,688 |
| $ | 74 |
| $ | 1,670 |
| $ | 660 |
|
Southern Power receives payments for renewable energy under PPAs accounted for as operating leases that are considered contingent rents and are therefore not reflected in the table above. Southern Power allocates revenue to the nonlease components of PPAs based on the stand-alone selling price of capacity and energy. The undiscounted cash flows to be received under outdoor lighting contracts accounted for as operating leases at Alabama Power and Mississippi Power are immaterial.
(L)(M) SEGMENT AND RELATED INFORMATION
Southern Company
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. The four traditional electric operating companies – Alabama Power, Georgia Power, Gulf Power, and Mississippi Power – are vertically integrated utilities providing electric service in fourthree Southeastern states. Southern Power develops, constructs, acquires, owns, and manages power generation assets, including renewable energy projects, and sells electricity at market-based rates in the wholesale market. Southern Company Gas distributes natural gas through the sevenits natural gas distribution utilities in seven states and is involved in several other complementary businesses including gas marketing services,pipeline investments, wholesale gas services, and gas midstream operations.marketing services.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Southern Company's reportable business segments are the sale of electricity by the four traditional electric operating companies, the sale of electricity in the competitive wholesale market by Southern Power, and the sale of natural gas and other complementary products and services by Southern Company Gas. Revenues from sales by Southern Power to the traditional electric operating companies were $83 million and $100$87 million for the three months ended March 31, 20182019 and 2017, respectively.$83 million for the three months ended March 31, 2018. Revenues from sales of natural gas from Southern Company Gas to the traditional electric operating companies were immaterial for each of the three months ended March 31, 2019 and 2018. Revenues from sales of natural gas from Southern Company Gas to Southern Power were $36 million and $23$17 million for the three months ended March 31, 20182019 and 2017, respectively.$36 million for the three months ended March 31, 2018. The "All Other" column includes the Southern Company parent entity, which does not allocate operating expenses to business segments. Also, this category includes segments below the quantitative threshold for separate disclosure. These segments include providing energy technologies and services to electric utilities and large industrial, commercial, institutional, and municipal customers;customers, as well as investments in telecommunications and leveraged lease projects. All other inter-segment revenues are not material.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Financial data for business segments and products and services for the three months ended March 31, 20182019 and 20172018 was as follows:
| | | | Electric Utilities | | Electric Utilities | |
| | Traditional Electric Operating Companies | Southern Power | Eliminations | Total | Southern Company Gas | All Other | Eliminations | Consolidated | Traditional Electric Operating Companies | Southern Power | Eliminations | Total | Southern Company Gas | All Other | Eliminations | Consolidated |
| | (in millions) | (in millions) |
| Three Months Ended March 31, 2019: | | Three Months Ended March 31, 2019: | |
|
| |
| Operating revenues | | $ | 3,445 |
| $ | 443 |
| $ | (93 | ) | $ | 3,795 |
| $ | 1,474 |
| $ | 182 |
| $ | (39 | ) | $ | 5,412 |
|
Segment net income (loss)(a)(b)(c) | | 565 |
| 56 |
| — |
| 621 |
| 270 |
| 1,195 |
| (2 | ) | 2,084 |
|
| At March 31, 2019: | | |
| Goodwill | | $ | — |
| $ | 2 |
| $ | — |
| $ | 2 |
| $ | 5,015 |
| $ | 268 |
| $ | (1 | ) | $ | 5,284 |
|
| Total assets | | 76,798 |
| 15,104 |
| (779 | ) | 91,123 |
| 20,952 |
| 3,391 |
| (1,370 | ) | 114,096 |
|
| Three Months Ended March 31, 2018: | Three Months Ended March 31, 2018: | | Three Months Ended March 31, 2018: | |
| Operating revenues | $ | 3,979 |
| $ | 509 |
| $ | (106 | ) | $ | 4,382 |
| $ | 1,639 |
| $ | 401 |
| $ | (50 | ) | $ | 6,372 |
| $ | 3,979 |
| $ | 509 |
| $ | (106 | ) | $ | 4,382 |
| $ | 1,639 |
| $ | 401 |
| $ | (50 | ) | $ | 6,372 |
|
Segment net income (loss)(a)(b)(c) | 612 |
| 121 |
| — |
| 733 |
| 279 |
| (74 | ) | — |
| 938 |
| |
| Total assets at March 31, 2018 | $ | 72,893 |
| $ | 15,182 |
| $ | (262 | ) | $ | 87,813 |
| $ | 22,568 |
| $ | 2,733 |
| $ | (1,547 | ) | $ | 111,567 |
| |
| Three Months Ended March 31, 2017: | | |
| Operating revenues | $ | 3,786 |
| $ | 450 |
| $ | (105 | ) | $ | 4,131 |
| $ | 1,560 |
| $ | 123 |
| $ | (43 | ) | $ | 5,771 |
| |
Segment net income (loss)(a)(b)(d) | 432 |
| 70 |
| — |
| 502 |
| 239 |
| (84 | ) | 1 |
| 658 |
| 612 |
| 121 |
| — |
| 733 |
| 279 |
| (74 | ) | — |
| 938 |
|
| Total assets at December 31, 2017 | $ | 72,204 |
| $ | 15,206 |
| $ | (325 | ) | $ | 87,085 |
| $ | 22,987 |
| $ | 2,552 |
| $ | (1,619 | ) | $ | 111,005 |
| |
| At December 31, 2018: | | |
| Goodwill | | $ | — |
| $ | 2 |
| $ | — |
| $ | 2 |
| $ | 5,015 |
| $ | 298 |
| $ | — |
| $ | 5,315 |
|
| Total assets | | 79,382 |
| 14,883 |
| (306 | ) | 93,959 |
| 21,448 |
| 3,285 |
| (1,778 | ) | 116,914 |
|
| |
| (a) | Attributable to Southern Company. |
| |
| (b) | Segment net income (loss) for the traditional electric operating companies includes pre-tax charges for estimated losses on the Kemper IGCCplants under construction of $44$2 million ($331 million after tax) and $108$44 million ($6733 million after tax) for the three months ended March 31, 20182019 and 2017,2018, respectively. See Note 32 to the financial statements of Southern Company under "Kemper County Energy Facility" in Item 8 of the Form 10-K and Note (B) under "Kemper"Mississippi Power – Kemper County Energy Facility"Facility" for additional information. |
| |
| (c) | Segment net income (loss) for the "All Other" column includes the preliminary pre-tax gain associated with the sale of Gulf Power of $2.5 billion ($1.3 billion after tax) for the three months ended March 31, 2019. See Note (K) under "Southern Company" for additional information. |
| |
| (d) | Segment net income (loss) for Southern Company Gas includes a goodwill impairment charge of $42 million for the three months ended March 31, 2018 in contemplation ofrelated to the sale of Pivotal Home Solutions. See Note (J)15 to the financial statements in Item 8 of the Form 10-K under "Southern Company Gas – Proposed Sale of Pivotal Home Solutions"Gas" for additional information. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Products and Services
|
| | | | | | | | | | | | |
| | Electric Utilities' Revenues |
| | Retail | Wholesale | Other | Total |
| | (in millions) |
| Three Months Ended March 31, 2019 | $ | 3,084 |
| $ | 499 |
| $ | 212 |
| $ | 3,795 |
|
| Three Months Ended March 31, 2018 | 3,568 |
| 623 |
| 191 |
| 4,382 |
|
|
| | | | | | | | | | | | |
| | Southern Company Gas' Revenues |
| | Gas
Distribution
Operations(a) | Gas
Marketing
Services(b) | Other | Total |
| | (in millions) |
| Three Months Ended March 31, 2019 | $ | 1,161 |
| $ | 229 |
| $ | 84 |
| $ | 1,474 |
|
| Three Months Ended March 31, 2018 | 1,200 |
| 271 |
| 168 |
| 1,639 |
|
| |
(d)(a) | Segment net income (loss)Operating revenues for the traditional electric operating companies also includes a pre-tax charge for the write-down of Gulf Power's ownership of Plant Scherer Unit 3 of $33three gas distribution operations dispositions were $167 million ($20 million after tax) for the three months ended March 31, 2017. See Note 3 to2018. |
| |
| (b) | Operating revenues for Pivotal Home Solutions were $32 million for the financial statements of Southern Company under "Regulatory Matters – Gulf Power – Retail Base Rate Cases" in Item 8 of the Form 10-K for additional information.three months ended March 31, 2018. |
Products and Services
|
| | | | | | | | | | | | | | | | |
| | | Electric Utilities' Revenues |
| Period | | Retail | | Wholesale | | Other | | Total |
| | | (in millions) |
| Three Months Ended March 31, 2018 | | $ | 3,568 |
| | $ | 619 |
| | $ | 195 |
| | $ | 4,382 |
|
| Three Months Ended March 31, 2017 | | 3,394 |
| | 531 |
| | 206 |
| | 4,131 |
|
|
| | | | | | | | | | | | |
| | Southern Company Gas' Revenues |
| Period | Gas
Distribution
Operations | Gas
Marketing
Services | Other | Total |
| | (in millions) |
| Three Months Ended March 31, 2018 | $ | 1,200 |
| $ | 271 |
| $ | 168 |
| $ | 1,639 |
|
| Three Months Ended March 31, 2017 | 1,132 |
| 288 |
| 140 |
| 1,560 |
|
Southern Company Gas
Southern Company Gas manages its business through four reportable segments – gas distribution operations, gas marketing services,pipeline investments, wholesale gas services, and gas midstream operations.marketing services. The non-reportable segments are combined and presented as all other.
Gas distribution operations is the largest component of Southern Company Gas' business and includes natural gas local distribution utilities that construct, manage, and maintain intrastate natural gas pipelines and gas distribution
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
facilities in sevenfour states.
Gas marketing services includespipeline investments consists of joint ventures in natural gas marketingpipeline investments including a 50% interest in SNG, two significant pipeline construction projects, and a 50% joint ownership interest in the Dalton Pipeline. These natural gas pipelines enable the provision of diverse sources of natural gas supplies to end-usethe customers primarily in Georgia and Illinois. Additionally, gas marketing services provides home equipment protection products and services. of Southern Company Gas.
Wholesale gas services provides natural gas asset management and/or related logistics services for each of Southern Company Gas' utilities except Nicor Gas as well as for non-affiliated companies. Additionally, wholesale gas services engages in natural gas storage and gas pipeline arbitrage and related activities.
Gas midstream operationsmarketing services provides natural gas marketing to end-use customers primarily consists of Southern Company Gas' pipeline investments, with storagein Georgia and fuel operations also aggregated into this segment. Illinois through SouthStar Energy Services, LLC.
The all other column includes segments below the quantitative threshold for separate disclosure, including the storage and fuels operations, and the other subsidiaries that fall below the quantitative threshold for separate disclosure.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Business segment financial data for the three months ended March 31, 20182019 and 20172018 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Gas Distribution Operations | Gas Marketing Services(a) | Wholesale Gas Services(b) | Gas Midstream Operations | Total | All Other | Eliminations | Consolidated |
| | (in millions) |
| Three Months Ended March 31, 2018: | | | | | | |
| Operating revenues | $ | 1,212 |
| $ | 271 |
| $ | 166 |
| $ | 22 |
| $ | 1,671 |
| $ | 1 |
| $ | (33 | ) | $ | 1,639 |
|
| Segment net income | 149 |
| 13 |
| 104 |
| 23 |
| 289 |
| (10 | ) | — |
| 279 |
|
| Total assets at March 31, 2018: | 18,332 |
| 2,144 |
| 903 |
| 2,263 |
| 23,642 |
| 11,839 |
| (12,913 | ) | 22,568 |
|
| Three Months Ended March 31, 2017: | | | | | | |
| Operating revenues | $ | 1,180 |
| $ | 288 |
| $ | 131 |
| $ | 25 |
| $ | 1,624 |
| $ | 2 |
| $ | (66 | ) | $ | 1,560 |
|
| Segment net income | 117 |
| 31 |
| 68 |
| 15 |
| 231 |
| 8 |
| — |
| 239 |
|
| Total assets at December 31, 2017: | 19,358 |
| 2,147 |
| 1,096 |
| 2,241 |
| 24,842 |
| 12,184 |
| (14,039 | ) | 22,987 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Gas Distribution Operations(a) | Gas Pipeline Investments | Wholesale Gas Services(b) | Gas Marketing Services(c)(d) | Total | All Other | Eliminations | Consolidated |
| | (in millions) |
| Three Months Ended March 31, 2019: | | | | | | |
| Operating revenues | $ | 1,172 |
| $ | 8 |
| $ | 86 |
| $ | 229 |
| $ | 1,495 |
| $ | 11 |
| $ | (32 | ) | $ | 1,474 |
|
| Segment net income (loss) | 133 |
| 32 |
| 47 |
| 61 |
| 273 |
| (3 | ) | — |
| 270 |
|
| Total assets at March 31, 2019: | 17,379 |
| 1,781 |
| 821 |
| 1,611 |
| 21,592 |
| 10,900 |
| (11,540 | ) | 20,952 |
|
| Three Months Ended March 31, 2018: | | | | | | | |
| Operating revenues | $ | 1,212 |
| $ | 8 |
| $ | 166 |
| $ | 271 |
| $ | 1,657 |
| $ | 15 |
| $ | (33 | ) | $ | 1,639 |
|
| Segment net income (loss) | 149 |
| 27 |
| 104 |
| 13 |
| 293 |
| (14 | ) | — |
| 279 |
|
| Total assets at December 31, 2018: | 17,266 |
| 1,763 |
| 1,302 |
| 1,587 |
| 21,918 |
| 11,112 |
| (11,582 | ) | $ | 21,448 |
|
| |
| (a) | Segment net incomeOperating revenues for the three gas marketing services includes a goodwill impairment charge of $42distribution operations dispositions were $167 million for the three months ended March 31, 20182018. See Note 15 to the financial statements in contemplationItem 8 of the sale of Pivotal Home Solutions. See Note (J)Form 10-K under "Southern Company Gas – Proposed Sale of Pivotal Home Solutions"Gas" for additional information. |
| |
| (b) | The revenues for wholesale gas services are netted with costs associated with its energy and risk management activities. A reconciliation of operating revenues and intercompany revenues is shown in the following table. |
| | | | Third Party Gross Revenues | | Intercompany Revenues | | Total Gross Revenues | | Less Gross Gas Costs | | Operating Revenues | Third Party Gross Revenues | Intercompany Revenues | Total Gross Revenues | Less Gross Gas Costs | Operating Revenues |
| | (in millions) | (in millions) |
| Three Months Ended March 31, 2019 | | $ | 1,926 |
| $ | 88 |
| $ | 2,014 |
| $ | 1,928 |
| $ | 86 |
|
| Three Months Ended March 31, 2018 | $ | 1,938 |
| | $ | 167 |
| | $ | 2,105 |
| | $ | 1,939 |
| | $ | 166 |
| 1,938 |
| 167 |
| 2,105 |
| 1,939 |
| 166 |
|
| Three Months Ended March 31, 2017 | $ | 1,839 |
| | $ | 136 |
| | $ | 1,975 |
| | $ | 1,844 |
| | $ | 131 |
| |
| |
| (c) | Operating revenues for the gas marketing services disposition were $32 million for the three months ended March 31, 2018. See Note 15 to the financial statements in Item 8 of the Form 10-K under "Southern Company Gas" for additional information. |
| |
| (d) | Segment net income (loss) for gas marketing services includes a goodwill impairment charge of $42 million for the three months ended March 31, 2018 related to the sale of Pivotal Home Solutions. See Note 15 to the financial statements in Item 8 of the Form 10-K under "Southern Company Gas" for additional information. |
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
See the Notes to the Condensed Financial Statements herein for information regarding certain legal and administrative proceedings in which the registrants are involved.
Item 1A. Risk Factors.
See RISK FACTORS in Item 1A of the Form 10-K for a discussion of the risk factors of the registrants. There have been no material changes to these risk factors from those previously disclosed in the Form 10-K.
Item 6. Exhibits.
The exhibits below with an asterisk (*) preceding the exhibit number are filed herewith. The remaining exhibits have previously been filed with the SEC and are incorporated herein by reference. The exhibits marked with a pound sign (#) are management contracts or compensatory plans or arrangements.
|
| | | | |
| | | (4) Instruments Describing Rights of Security Holders, Including Indentures |
| | | | | |
| | | MississippiGeorgia Power |
| | | | | |
| | | (e)(c)1 | - | Fourteenth Supplemental Indenture to Senior Note Indenture,Amended and Restated Loan Guarantee Agreement, dated as of March 27, 2018, providing for22, 2019, between Georgia Power and the issuance of the Series 2018A Floating Rate Senior Notes due March 27, 2020.DOE. (Designated in Form 8-K dated March 22, 2018,2019, File No. 001-11229,1-6468, as Exhibit 4.2(a).4.1.) |
| | | | | |
| | | (e)(c)2 | - | Fifteenth Supplemental Indenture to Senior Note Indenture,Purchase Agreement, dated as of March 27, 2018, providing for22, 2019, between Georgia Power, the issuance ofDOE, and the Series 2018B 3.95% Senior Notes due March 30, 2028.FFB. (Designated in Form 8-K dated March 22, 2018,2019, File No. 001-11229,1-6468, as Exhibit 4.2(b).4.2.) |
| | | | |
| | (c)3 | - | |
| | | | |
| | (c)4 | - | Amended and Restated Deed to Secure Debt, Security Agreement and Fixture Filing, dated as of March 22, 2019, by Georgia Power to PNC Bank, National Association, doing business as Midland Loan Services, Inc., a division of PNC Bank, National Association. (Designated in Form 8-K dated March 22, 2019, File No. 1-6468, as Exhibit 4.4.) |
| | | | |
| | (c)5 | - | Amended and Restated Owners Consent to Assignment and Direct Agreement and Amendment to Plant Alvin W. Vogtle Additional Units Ownership Participation Agreement, dated as of March 22, 2019, among Georgia Power, the other Vogtle Owners, the DOE, and PNC Bank, National Association, doing business as Midland Loan Services, Inc., a division of PNC Bank, National Association. (Designated in Form 8-K dated March 22, 2019, File No. 1-6468, as Exhibit 4.5.) |
| | | | | |
| | | (10) Material Contracts |
| | | |
| | | Southern Company |
| | | | | |
| # | * | (a)1 | - | |
| | | | | |
| # | * | (a)2 | - | |
| | | | | |
| # | * | (a)3 | - | |
| | | | | |
|
| | | | |
| | | Alabama Power |
| | | | | |
| # | | (b)1 | - | Third Amendment to TheForm of Terms for 2018 Named Executive Officer Equity Awards granted under the Southern Company Supplemental Executive Retirement Plan effective April 1, 2018. See Exhibit 10(a)1 herein. |
| | | | |
| | (b)2 | - | Third Amendment to The Southern Company Supplemental Benefit Plan effective April 1, 2018. See Exhibit 10(a)2 herein. |
| | | | |
| | (b)3 | - | First Amendment to Amended and Restated Southern Company Change in Control Benefits Protection Plan, effective March 1, 2018. See Exhibit 10(a)3 herein. |
| | |
| | Mississippi Power |
| | | | |
| | (e)1 | - | Third Amendment to The Southern Company Supplemental Executive Retirement Plan effective April 1, 2018. See Exhibit 10(a)1 herein. |
| | | | |
| | (e)2 | - | Third Amendment to The Southern Company Supplemental Benefit Plan effective April 1, 2018. See Exhibit 10(a)2 herein. |
| | | | |
| | (e)3 | - | First Amendment to Amended and Restated Southern Company Change in Control Benefits Protection Plan, effective March 1, 2018.2011 Omnibus Incentive Compensation Plan. See Exhibit 10(a)3 herein. |
| | | | | |
|
| | | | |
| | | (24) Power of Attorney and Resolutions |
| | | | | |
| | | Southern Company |
| | | | | |
| | | (a) | - | |
| | | | | |
| | | Alabama Power |
| | | | | |
| | | (b) | - | |
| | | | | |
| | | Georgia Power |
| | | | | |
| | | (c)1 | - | |
| | | | | |
| | | GulfMississippi Power |
| | | | | |
| | | (d)1 | - | |
| | | | | |
| | | MississippiSouthern Power |
| | | | | |
| | | (e) | - | |
| | | | | |
| | | Southern PowerCompany Gas |
| | | | | |
| | | (f)1 | - | |
| | | | |
| * | (f)2 | - | |
| | | | | |
| | | Southern Company Gas |
| | | | |
| | (g)(f)2 | - | |
| | | | | |
| | | (31) Section 302 Certifications |
| | | | | |
| | | Southern Company |
| | | | | |
| | * | (a)1 | - | |
| | | | | |
| | * | (a)2 | - | |
| | | | | |
| | | Alabama Power |
| | | | | |
| | * | (b)1 | - | |
| | | | | |
| | * | (b)2 | - | |
| | | | | |
|
| | | | |
| | | Georgia Power |
| | | | | |
| | * | (c)1 | - | |
| | | | | |
| | * | (c)2 | - | |
|
| | | | |
| | | | |
| | Gulf Power |
| | | | |
| * | (d)1 | - | |
| | | | |
| * | (d)2 | - | |
| | | | | |
| | | Mississippi Power |
| | | | | |
| | * | (e)(d)1 | - | |
| | | | | |
| | * | (e)(d)2 | - | |
| | | | | |
| | | Southern Power |
| | | | | |
| | * | (f)(e)1 | - | |
| | | | | |
| | * | (f)(e)2 | - | |
| | | | | |
| | | Southern Company Gas |
| | | | | |
| | * | (g)(f)1 | - | |
| | | | | |
| | * | (g)(f)2 | - | |
| | | | | |
| | | (32) Section 906 Certifications |
| | | | | |
| | | Southern Company |
| | | | | |
| | * | (a) | - | |
| | | | | |
| | | Alabama Power |
| | | | | |
| | * | (b) | - | |
| | | | | |
| | | Georgia Power |
| | | | | |
| | * | (c) | - | |
| | | | | |
| | | GulfMississippi Power |
| | | | | |
| | * | (d) | - | |
| | | | |
| | Mississippi Power |
| | | | |
| * | (e) | - | |
| | | | | |
| | | Southern Power |
| | | | | |
| | * | (f)(e) | - | |
| | | | | |
|
| | | | |
| | | Southern Company Gas |
| | | | | |
| | * | (g)(f) | - | |
| | | | | |
|
| | | | |
| | | (101) Interactive Data Files |
| | | | | |
| | * | INS | - | XBRL Instance Document |
| | * | SCH | - | XBRL Taxonomy Extension Schema Document |
| | * | CAL | - | XBRL Taxonomy Calculation Linkbase Document |
| | * | DEF | - | XBRL Definition Linkbase Document |
| | * | LAB | - | XBRL Taxonomy Label Linkbase Document |
| | * | PRE | - | XBRL Taxonomy Presentation Linkbase Document |
THE SOUTHERN COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof included in such company's report.
|
| | | |
| | | THE SOUTHERN COMPANY |
| | | | |
| By | | Thomas A. Fanning |
| | | Chairman, President, and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | | |
| By | | Art P. BeattieAndrew W. Evans |
| | | Executive Vice President and Chief Financial Officer |
| | | (Principal Financial Officer) |
| | | | |
| By | | /s/ Melissa K. Caen | |
| | | (Melissa K. Caen, Attorney-in-fact) | |
Date: May 1, 2018April 30, 2019
ALABAMA POWER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof included in such company's report.
|
| | | |
| | | ALABAMA POWER COMPANY |
| | | | |
| By | | Mark A. Crosswhite | |
| | | Chairman, President, and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | | |
| By | | Philip C. Raymond |
| | | Executive Vice President, Chief Financial Officer, and Treasurer |
| | | (Principal Financial Officer) |
| | | | |
| By | | /s/ Melissa K. Caen | |
| | | (Melissa K. Caen, Attorney-in-fact) | |
Date: May 1, 2018April 30, 2019
GEORGIA POWER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof included in such company's report.
|
| | | |
| | | GEORGIA POWER COMPANY |
| | | | |
| By | | W. Paul Bowers |
| | | Chairman, President, and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | | |
| By | | Xia LiuDavid P. Poroch |
| | | Executive Vice President, Chief Financial Officer, Treasurer, and TreasurerComptroller |
| | | (Principal Financial Officer) |
| | | | |
| By | | /s/ Melissa K. Caen | |
| | | (Melissa K. Caen, Attorney-in-fact) | |
Date: May 1, 2018April 30, 2019
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof included in such company's report.
|
| | | |
| | GULF POWER COMPANY |
| | | |
By | | S. W. Connally, Jr. |
| | Chairman, President and Chief Executive Officer |
| | (Principal Executive Officer) |
| | | |
By | | Robin B. Boren |
| | Vice President, Chief Financial Officer, and Treasurer |
| | (Principal Financial Officer) |
| | | |
By | | /s/ Melissa K. Caen | |
| | (Melissa K. Caen, Attorney-in-fact) | |
Date: May 1, 2018
MISSISSIPPI POWER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof included in such company's report.
|
| | | |
| | | MISSISSIPPI POWER COMPANY |
| | | | |
| By | | Anthony L. Wilson |
| | | Chairman, President, and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | | |
| By | | Moses H. Feagin |
| | | Vice President, Chief Financial Officer, and Treasurer |
| | | (Principal Financial Officer) |
| | | | |
| By | | /s/ Melissa K. Caen | |
| | | (Melissa K. Caen, Attorney-in-fact) | |
Date: May 1, 2018April 30, 2019
SOUTHERN POWER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof included in such company's report.
|
| | | |
| | | SOUTHERN POWER COMPANY |
| | | | |
| By | | Mark S. Lantrip |
| | | Chairman, President, and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | | |
| By | | William C. Grantham |
| | | Senior Vice President, Chief Financial Officer, and Treasurer |
| | | (Principal Financial Officer) |
| | | | |
| By | | /s/ Melissa K. Caen | |
| | | (Melissa K. Caen, Attorney-in-fact) | |
Date: May 1, 2018April 30, 2019
SOUTHERN COMPANY GAS
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof included in such company's report.
|
| | | |
| | | SOUTHERN COMPANY GAS |
| | | | |
| By | | Andrew W. EvansKimberly S. Greene |
| | | Chairman, President, and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | | |
| By | | Elizabeth W. ReeseDaniel S. Tucker |
| | | Executive Vice President, Chief Financial Officer, and Treasurer |
| | | (Principal Financial Officer) |
| | | | |
| By | | /s/ Melissa K. Caen | |
| | | (Melissa K. Caen, Attorney-in-fact) | |
Date: May 1, 2018April 30, 2019